Forget Pork Bellies – Bugs are the next Hot Agricultural Commodity

By Steven Klein, July 29, 2018, Originally posted on LinkedIn.
Steven Klein
Trading in pork bellies, the iconic commodity of the future’s market, and often the brunt of financial industry jokes, began in 1961 on the Chicago Mercantile Exchange (CME). This allowed meat packers to hedge the volatile pig market, however, pork bellies were dropped in 2011 on the CME and supplanted with “lean hog” futures contracts.

Today, commodity trading takes place with what are called soft and hard commodities. Hard commodities are natural resources that are mined or extracted, such as rubber, gold, oil and platinum; whereas soft commodities are agricultural or livestock products like corn, coffee, soybeans, pork and feed such as fishmeal. You will not find a futures market at this time for bugs but my goal is to get you thinking about the possibilities both as an investor and as someone who includes protein in their diet and also appreciates products that are produced using environmentally sustainable methods.

If you eat pork, chicken or farm raised fish and aquatic arthropods (shrimp, crab & lobster), then the availability, quality and price of fishmeal and soybeans, which are livestock feed, should be of importance to you. Most consumers do not give any thought to what their meat eats before it lands on their plate. Farm raised animals must consume protein in their feed in order to grow and make it to your grocery basket. Fishmeal feed is produced mainly from small pelagic species such as anchovy or menhaden. South America is the leading supplier of the fish that make up fishmeal. It is also important to note that there are rising concerns about the amount of heavy metals and other global pollutants that can be found in aquatic species. Fishing will continue to be a highly uncertain activity due not only to changing regulations and climate but also the long-term sustainability of fish populations. Virtually all fish commodity experts predict continued rising prices and availability concerns for fishmeal feed going forward.

The main alternative to fishmeal-based livestock feed is vegetable meals, such as soymeal. Soybeans are a cultivated seed harvested once a year. Although the production can be forecasted it cannot be produced year-round. Also, soymeal and other vegetable proteins have inherent antinutritional factors which create limits on how much can be used in livestock feed because they can negatively impact the metabolism of nutrients in fish and poultry. Scientific-formulated additives and processing methods are used today to reduce this negative impact but it adds more cost and uncertainty to the farmer. Even with antinutritional additives, a soymeal diet does not mimic the natural diet of many animals, which can also make it necessary to add antibiotics in order to keep the livestock healthy. This practice, while necessary, can also negatively impact the legitimacy and ability of the supplier to market the ultimate animal product as “naturally raised”.

Feeding billions of people worldwide with a sustainable and nutritionally sufficient diet will require incredible innovations to grow twice as much protein as we do today. We are overfishing the oceans and using critical farmland to raise soybeans to supplement fishmeal feed, however, as discussed previously, soymeal has its own inherent limitations. Exploring the application of proteins made from farmed insects and algae or seaweeds provide a promising and logical opportunity to find new and better feed alternatives. The primary challenge at this time is that these potential alternative protein feed sources are essentially still in the beta stage and are not yet producing the industrial scale volumes necessary for the feed industry to feel comfortable with full adoption and associated dependence. My own personal feeling is that while algae and seaweed will play some role it is more likely that insects will ultimately emerge as the major new alternative in supporting the ever growing need globally for more protein rich feed.

The emerging insect farming start-up community must effectively apply new technology coupled with innovative manufacturing systems for large industrial scale production in much the same way as Henry Ford did for the automobile and Elon Musk is attempting to do with energy storage. Automation will play a key role in supporting reliable manufacturing processes that can consistently produce high volumes of quality protein at competitive prices. I am seeing some encouraging progress in the insect farming sector that I believe should justify putting bugs on your investment radar.

It is interesting to note that the US Food & Drug Administration currently allows certain acceptable levels of inadvertent bugs in everyday foods such as fruit juices, canned vegetables, peanut butter, spices, coffee beans and chocolate. These bugs crawl, fly or fall into the foods during the processing and it would be very costly and difficult to remove them, especially since they are benign and cause no real problems. It may surprise you to learn that you are already eating a small amount of bug protein directly in your everyday diet but apparently you can’t detect them in your Frosted Flakes. An acceptable level of insects is also allowed to be in hops so ponder that the next time you drink a hoppy micro-brewed IPA. If the thought of bugs in your pasta and wine is getting you down you need to realize that a little added unintentional insect protein is much better than consuming pesticides.

While some worldwide cultures have traditionally accepted and consumed bugs as a great source of protein in their diets, many parts of the world still look unfavorably at insects on their dinner plate. Most American’s gag when they watch Andrew Zimmern eat whole bugs on his cable TV program, Bizarre Foods, but they don’t typically question what their poultry and fish ate before landing on their plate. The US and world-wide consumption of animal protein continues to grow and it is forecasted that the majority of the future supply of meat protein will come from poultry and we all know that chickens love bugs.  With increased animal protein production there will be increased demand for feed and, in particular, a demand for ingredients high in protein and energy, therefore, bugs can be part of the solution. The bottom line is that insects can begin to immediately play a valuable role as a quality protein in wholesale livestock feed for animals but it will take some time for people in industrialized nations such as the United State, to overcome their cultural and societal objections to directly consuming bugs.

Animal feeds are the foundational element in the global food industry because they are the key ingredient that ensures that we have safe, plentiful and reasonably priced animal proteins. Animal feed is a $450 billion global industry that continues to grow and has significant need and capacity for new and cost-effective sources of protein. Major feed manufacturers and suppliers have a very strong interest in alternatives to soy and fish meals and are beginning to pay attention to, and in some cases, strategically investing in insect farming start-ups. Especially those that have developed legitimate IP validated technologies and are successfully demonstrating their ability to produce an ever-increasing volume of quality insect protein year-round at prices that are trending down towards that of fishmeal. The farmers who purchase the livestock feed for their poultry or aquaculture farms want quality feed that can produce healthy animals at the lowest production cost possible and it can be an added benefit if sustainably raised insects can allow them to market their animals as organic and certified as environmentally friendly.

Bugs as a source of protein in livestock feed is a subject that is gaining more and more momentum. The Food and Agriculture Organization of the U.N. (FAO) published a report in 2013 that suggested that a bug-based diet will produce bigger and stronger livestock. The report relied on several studies on fish and poultry. Ground crickets were used to replace up to 50 percent of the fish meal in their feed and the fish raised on insect meals outperformed similar fish raised on traditional commercial fishmeal. The fish in this study also showed higher growth rates and produced more eggs. Other studies have found that certain insect-based feed could be a sustainable and commercially viable substitute for fish and soy meals.

While it is estimated that there are approximately 50 companies attempting to establish themselves as industrial scale insect farming operations there are only a handful of them that have progressed to actually produce insect protein as feed and have received a consequential amount of venture capital funding. The following is a listing of these leading insect farming startups, their location and funding levels: Fair Insects (previously Protix) – Netherlands ($75M), AgriProtein – South Africa ($30M), Ynsect – France ($40M), Next Protein – France ($1.5M), Enterra Feed – Canada ($6M), EnviroFlight – Ohio/USA (purchased in 2016 by Intrexon and Darling Ingredients who funded a new $32M plant in Kentucky), and Beta Hatch – Seattle/USA ($3M). There are other notable insect related startups such as Tiny Farms and Exo but their focus is not on bugs for livestock feed but in insect flour and protein bars for direct human consumption. Over the past several years, insect farming operations with a focus on livestock feed have raised approximately $120 million, whereas $4.5 million has gone to companies who market products directly for human consumption.

The stereotypical Wall Street investor thinks of agriculture as a slow-to-change routine industry that does not focus much effort on technological innovation. This mindset could not be further from the truth. One obvious example, besides insect farming, that also falls under the category of “Novel” farming systems is what is referred to as “vertical” farming. Many food industry futurists are of the opinion that these high-tech vertical farming operations are the future of crop agriculture. Vertical farms are located indoors in buildings and warehouses near urban centers and, unlike traditional soil-based environments, they can naturally protect against pests, disease causing organisms, and poor climate conditions. These highly engineered and artificially concentrated crop farms can also deliver fresh year-round locally produced vegetable products of high-quality with a low carbon footprint. New technology will play a major role in how we will sustainably feed a growing world population while reducing waste and avoiding the negative consequences of long-haul transportation.

I believe these vertical farms have a lot in common with how insect farms are likely to develop when it comes to the technologies and concentrated manufacturing processes necessary to automate what previously took place outdoors over vast amounts of acreage. It is also the case for both insect and vertical farms that it takes substantial capital investment to engineer, equip and automate each industrial scale production facility. This is, and will continue to be, a hurdle for those startups wishing to enter into this business.  It is also my opinion that insect farming has some inherent features that will make it easier to scale, automate and consistently produce its products versus the more difficult challenges that will need to be overcome by the vertical crop farm industry. Needless to say, there is some heavy venture capital going into vertical farming and one prime example is the company Plenty, which recently raised $200 million and is in the process of expanding its warehouse footprint in the Seattle area. The high cost to launch, operate, and scale up an insect or vertical farming operation means both industries are becoming highly leveraged, and each new farm or expansion will require substantial investor capital before it can proceed.

Commodities are a necessity of life and demand for them continues to grow as the world population increases and third world countries become more prosperous. You can invest indirectly in products such as livestock, feed or crops by purchasing market index funds or exchange traded funds that have a focus on commodity related companies. You can also be more direct by buying into a risky commodity futures contract on the Chicago Mercantile Exchange. Finally, you can invest directly in commodities by taking an equity position in a business that produces or utilizes a particular commodity. I am not a licensed or certified investment advisor so I am not trying to get you to invest in a particular financial instrument. But I am a vested participant in the insect industry and as this article demonstrates, I have spent a considerable amount of time learning about and researching various commodities, especially bug protein. While I do not have a specific investment tip, my hope is that I have got you thinking about the role that insects will play in the global food market, especially in feed.

It is my belief that while companies focusing on insects for human consumption get the lion’s share of the media’s attention, the real “meat” of the potential market is in the feed industry.  Beta Hatch insect farming entrepreneur, Virginia Emery said it best, “We love the edible insect space, but ultimately there are many millions to be made in insects as food but there are billions to be made in insects as feed.”

There is no doubt that the world will demand more protein and the feed industry knows that. Limits to fish and soy meals are causing the feed industry to look for new and better alternatives or at least, something to supplement the traditional protein components. The current protein components are getting too expensive and supply limited. It is my belief that insects are the logical solution to a significant global problem. But it will not be easy because, as I have pointed out, the manufacturing processes and new technologies necessary to enable insects to be effectively produced at large volumes are still in the early stages.

The point of all this is that insects can be the solution and an investment opportunity. But it is fair to ask if the emerging insect farming industry will be able to meet all the requirements as a viable protein feed alternative in a reasonable timeframe? I believe the answer is yes, but there will be winners and losers, as with most emerging business opportunities. The losers will likely be those insect farming companies that run out of capital before they attain the essential high level of manufacturing reliability and capacity.

My goal with this article was to get insect farming on your radar and help you to understand how important a role it can play in supporting the protein demands of a growing global population. My secondary goal was to educate you as to the more economically viable near-term utilization of insects as an additive to livestock and aquatic feed as opposed to the more challenging and less lucrative prospect of direct human consumption. With that basic knowledge, it will be up to the reader to discern the time and venue to invest.

The good news is that the global market for feed is so large and growing that most insect farmers today do not fear but instead welcome new fellow competitors because it helps raise the awareness of insect protein as well as helps to stimulate shared best practices and innovation. I believe the global market opportunities are exceedingly robust for any insect farming company that can reliably produce large quantities of quality protein at a reasonable price point. The global feed companies are closely watching the insect farming industry. Many of the early startup insect farming companies will be acquired by major feed manufacturers and suppliers the minute they demonstrate a consistent record of success. Join me in following insect farming startups to see who the winners will be in this important and interesting innovation in the agricultural industry.

Note: Steve Klein is a retired Electric Utility Executive who is a recognized leader in the research and development of clean energy technologies and is currently a Principle with Klein Tech Advisors Group. Mr. Klein is also the recent past Chairman of the Board of the Clean Tech Alliance and a Member of the nonprofit Hotrock Energy Research Organization (HERO). Mr. Klein is also an active angel investor and served as the Lead Investor for funding the insect farming company, Beta Hatch, and currently sits on the Beta Hatch Board of Directors.