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GLOBAL LIFE SCIENCES

The agricultural and food value chain: Entering a new era of cooperation

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Executive summary 2

Introduction 4

Part 1: Characterizing the agribusiness value chain 6

• Volatility 6• Complexity 12• Scrutiny 24

Part 2: Implications for stakeholders 28• Inputcompanies 28• Farmers 29• Traders 31• Foodcompanies 32• Retailers 34

Conclusion: A new era of collaboration? 36

_________________________________________________

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Contents


Executive summary

“Opportunitiestotakeadvantage of a rapidly changingagribusinesslandscapeabound”.

Chris Stirling

2|Theagriculturalandfoodvaluechain:Enteringaneweraof cooperation


Theagricultureandfoodsectorremainsoneofthefewbrightspotsinanotherwisetroubledglobaleconomy.Withstrongunderlyinggrowthdriverssuchaspopulation,urbanization,andtheriseofthemiddleclasses,itis

expectedtoremainso.Notonlyaretheeconomicfundamentalsstrong,butsoisthelevelofpoliticalsupportasfoodsecuritytopsgovernmentagendas.

At the same time, the sector is facing challenges driven by climate change, rapid technologicalinnovationandnewdemandsforbiofuelsandaccesstoinformation.Theseforcesaremanifestingthemselvesthroughincreasedvolatility,complexityandscrutinythroughoutthevaluechain.

Furthermore,recentfoodcontroversiesintheUK,suchastheongoinghorsemeatscandalandthesupplierofhalalfoodfoundtocontaintracesofpork,furtherdrivetransparencyandfoodsecurityupthepoliticalagenda.Theseissuesarenotnew,butashistoryshows,canhavedireconsequences,includingthedeathsofsix babieslinkedtothe2008Chinesemilkscandalwheremilkandbabyformulawereadulteratedwithmelanine.Thousandsdiedorwereseriouslyinjuredordisabledafterthe1981Spanish‘cookingoil’disaster,whereyearslateritwasdeterminedthatthecontaminationwasmostlikelycausedbyfarmers’overuse of chemicals and pesticides rather than the cooking oil itself.

Toovercomethesechallengesandhelppreventfuturetragedies,greatercollaborationandcooperationbothup-anddown-streamwillberequiredbetweenvariousplayersinthevaluechain.Theextentandstructureofthatcollaborationwillbeaveryimportantstrategicdecision.Optionsmayincludeverticalintegrationatoneendofthespectrumrightthroughtorelativelylooserelationshipsattheother end. In addition to seeing greater cooperation between private players from differentindustries,wearewitnessingmorecollaborationbetweentheprivate andpublicsectors.

Opportunitiesaboundforplayersatallstagesofthevaluechain,butimprovementstobusinessintelligence,agility,andriskmanagementstrategiesmustfirstberealized.

Chris Stirling Global Head of Life Sciences KPMG International

Theagriculturalandfoodvaluechain:Enteringaneweraof cooperation|3


Thegoaloftheglobalagribusinessvaluechain,whichspansinputcompaniesthroughtothefinalconsumer1andhasatotalvalueofaroundUS$5trillion,istoprovidesustainableaccesstoaffordablefood,feed,fibreand,more

recently,fuel.However,thisgoalisgettinghardertoachieveeveryyearduetoseveral prominent challenges.

Onthedemandside,thegrowingglobalpopulationandeconomicgrowthcombinetogeneratemoreneedforincreasedlevelsofcropandfoodproduction.Policiespromotingbiofuelshavealsoaddedasignificantnewsourceofdemandtotheequation.Apartfromsuchconsiderationsaffectingthequantityofdemand,therearealsodriversaffectingitsqualityasthefoodchainandconsumersincreasinglyconsidertheenvironmentalandsocialdimensionsofhowfoodisproduced.Onthesupplyside,thereisconcernaboutdeclininglevelsofyieldgain,whetherduetothelawsofdiminishingreturnsortheeffectsofwatershortagesandglobalwarming.

Theagribusinesssector’scomplexvaluechainspansinputcompanies,farmers,traders,foodcompaniesandretailers,allofwhommustultimatelysatisfythevaryingdemandsoftheconsumerinasustainablemanner.Thesectorencompasseshugediversityandvarietyateachstage,fromR&D-basedinputcompaniestogenericmanufacturers,subsistencefarmerstohightechagroholdings,biotechboutiquesandsmallandmedium-sizedenterprises(SMEs)tomultinationalcorporations.

Ontheoppositepage,Figure1mapsthiswhileTable1providesprofitabilitymetricsforthemajorsectorsinthechain.Whilemostreportsonthesectortendtofocusonspecificpartsofthevaluechain,theapproachtakenhereistolookacrossthewholevaluechain,thusreflectingthetendencyforittobecomeincreasinglyintegrated.TheparticipantsofthisvaluechaincontributetoatotalprofitpoolofaroundUS$600 billion.Agribusinessiscurrentlyoneofthefewbrightspotsintheglobaleconomy,withhigh croppricessustainingtheincomeoffarmersandbusinesseswhichsellto them,andhighlevelsofR&Dinvestmentincertainsectorsindicativeoffaithinitsfuture.

Introduction

1KPMG International, 2013



Figure 1: The agriculture and food value chain

• Crops• Meat• Dairy

• Seeds• Fertilizer• Crop protection• Animal health and nutrition• Crop insurance• Food ingredients

Food companies

Retailers

Consumers

Traders

Farmers

Inputcompanies

• Urban• Rural

• Hypermarkets• Supermarket• Corner shops

• Bakery• Meat• Dairy• Snacks• Beverages

• Crops• Meat• Oils/meal• Biofuels

Table 1: Key profitability metrics for the agribusiness value chain

Sector Input Farmers Traders Food companies Retailers

5,400Sales:US$bn 400 3,000 1,000 3,500(approx.)

Numberofplayers 100s 450million Tens Thousands Millions

EBIT % 15% Variable 2–5% 10–20% 5%

R&D % sales <1%(fertilizers)– 0% <1% 1–2% <1%10% (seeds)

R&Dspend:US$bn 10 – Low 8 Low

Composition/ •Seed •Grains •Handling •Bakery •MultiplesSub-sectors •Fertilizer •Fruitand •Primaryprocessing •Meat •Discounters

•Cropprotection vegetables •Secondary •Dairy •Wholesalers•Machinery •Meat processing •Snacks •Independents•Animalhealthand •Dairy •Readymealsnutrition •Beverages

•Cropinsurance•Foodingredients

Range R&D-based Smallholders to Global SMEs to Corner shops to majorstogeneric agroholdings agribusinessesto multinationals hypermarketsmanufacturers local middlemen

Source:KPMGInternational,2013



PART

Characterizingtheagribusinessvaluechain01

VolatilityTheagribusinessenvironmentisbecomingincreasinglyvolatile.Thisvolatilitystemsfromseveraldifferentsources:thechangingclimate,politicalactionsandsocialchanges.Theweatherhasbeenresponsibleforfluctuatingyieldsandasupplyshortfallwhichhasputpressureoncropprices.Thiswaswhatsparkedthe2006foodcrisiswhendroughtinAustralialedtoagreatlyreducedwheatcropwhichthenhadknock-oneffectsaroundtheworldandonothercrops.Historically,whiledemandtendstoberelativelysmoothandpredictable,supplyismuchmoreerratic,duemainlytotheweather(seebelow).

Figure 2: Global supply versus demand for major grains and oilseeds*

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2002

/200

3

2003

/200

4

2004

/200

5

2005

/200

6

2006

/200

7

2007

/200

8

2008

/200

9

2009

/201

0

2010

/201

1

2011

/201

2

2012

/201

3

Consumption Production

Source: USDA PSD database, February 2013*Maize, wheat, rice, soybeans, rapeseed, sunflowers, barley, rye, sorghum, oats

Bill

ion

met

ric

ton

nes

It is now generally accepted that with the advent of global warming we can expectmoreweather-drivenvolatilityinthefutureasaveragetemperaturesandrainfall increase.Despitetheextentoftheseextremes,assessingthetimingandimpactofglobalwarmingonagricultureisstillverymuchadevelopingfield.

Onthepoliticalfront,volatilitystemsfromgovernmentactions,forexamplethepushtowardsbiofuelswhichhashadamajordestabilizingeffectonworldmarketssince2005.Whilegrowthindemandforfoodismodest(1-2percentCAGRoverthelast20years)limitedbypopulationandeconomicgrowth,growthindemandforbiofuelshasbeenmuchgreaterandcouldintheorycontinuetogrowatthishigherlevel,althoughitiscurrentlyshowingsignsoflevelingoff.



Global warmingTheimpactofglobalwarmingonagricultureisthesubjectofmuchresearchanddebate.ThecurrentconventionalwisdomisthatcropproductionwillmovetowardsthepoleswithcountriessuchasCanadaandRussiabenefitingfromthecombinedimpactofincreasedtemperatures,greaterprecipitationandthecarbonfertilizationeffect.Meanwhile,countriesclosertotheequator,suchasIndiaandAfrica,couldbehittheworstashighertemperaturesreducecropyields.Theeffect,however,willvarysignificantlybycropassomearemoresusceptibletotemperatureincreasesthanothers.Overall,theimpactonglobalcropproductionisuncertain.Wheat,forexample,is already geographically constrained as it cannot be grown in tropical climates, is morevulnerablethancorn.Anysignificanteffectsarelikelytoleadtomajorchangestothelocationofproductionaswellasglobaltradingpatterns.

Inadditiontotheimpactontheoveralllevelofagriculturalproduction,globalwarmingisalsolikelytoresultinmoreextremeweatherpatterns,withmoredroughtsandfloodswhichcouldleadtoincreasedvolatilityincropproductionandmarkets.

TheupcomingfifthreportonthetopicfromtheIntergovernmentalPanelonClimateChange(IPCC),duein2014willhopefullyshedmorelightontheissue.Inthemeantime,variousregionalstudiesarebeingconducted,includingstudiesonIndiaandCentralAmericawhichbothpointtosignificantlyreducedproductionineachregion.Additionally,aninterimreviewcommissionedbytheWorldBankandpublishedin20122 paintsamoreworryingpicturethansomepreviousassessments.

Figure 3: Climate change impact on agriculture

Impactonagriculturalproductivitywithcarbonfertilization(percent)

n.a.<-25-25 to -15-15 to -5-5 to 00 to 55 to 1515 to 25> 25

2WorldBankreportNov2012‘TurnDowntheHeat’:https://openknowledge.worldbank.org/handle/10986/11860

Source:GlobalWarmingandAgriculture:WilliamCline,PetersonInstituteforInternationalEconomics,2007



https://openknowledge.worldbank.org/handle/10986/11860

https://openknowledge.worldbank.org/handle/10986/11860

Globalwarmingwillpresentdifferentchallengesandopportunitiestodifferentpartsofthevaluechain,someofwhicharesummarizedinthetablebelow.

Challenges and opportunities presented by global warming along the value chain

Seeds companies

Fertilizer companies

Farmers TradersFood companies

Retailers

Mitigation Research Increase Choice of crops, Changing Carbon labeling Carbon labelingand targets:e.g. nitrogenuse carbon credits productionandadaptation stress and heat efficiency trade patternsopportunities tolerant crops



Concernovergreenhousegas(GHG)emissionsalsofiguresprominentlyinagribusinesscompanies’environmentalstrategies,afocuswhichisslightlysurprisinggiventhatothersectorsemitGHGsfarmoreintensivelyandagricultureis notincludedintheUN’sCleanDevelopmentMechanism.


BiofuelsBiofuelsfirstbecameasignificantfactorinthetransportmarketwhenBrazilstartedproducingbioethanolfromsugarcaneinthe1970sinordertoreducedependenceonimportedoilandsupporttheagriculturalsector.TherateofgrowthfurtheracceleratedwhentheUSgovernmentandtheEUbothincreasedtheirsupportforbiofuelswithmandatesandsubsidiesintheearly2000sinordertoreducecarbonemissions.IntheUS,therewereadditionalmotivationstoincreaseenergyindependenceandsupportruraleconomies.By2011,bioethanolproductionaccountedfor40percentofUSmaizeproductionandbiodieselproductionforaround30percentofEUrapeseedoilproduction.

Since2010however,biofuelproductionhasstagnated(seetablebelow).

World ethanol fuel production (million litres)

2006 2007 2008 2009 2010 2011 2012

Europe 1,627 1,882 2,855 3,645 4,254 4,429 4,973

Africa 0 55 65 100 130 150 235

North and Central America 18,716 25,271 35,946 42,141 51,584 54,765 54,580

SouthAmerica 16,969 20,275 24,456 24,275 25,964 21,637 21,335

Asia/Pacific

World

1,940

39,252

2,142

49,625

2,753

66,075

2,927

73,088

3,115

85,047

3,520

84,501

3,965

85,088

Source:F.O.Licht

ThisislargelybecauseUSproductionfromcorngrainhasapproachedtheceilingimposedbytheauthoritiesalthoughitalsoreflectsadownturninBrazilianproduction.

Asfarasthefutureisconcerned,prospectsforbiofuelswhichusefoodcropsasafeedstockarenotasbrightastheyusedtobe.Inrecentyearsthecaseforbiofuelshasbeenquestionedongroundsofbothfoodsecurityandenvironmentalimpact.Theyhavebeenblamedforcontributingtothehighlevelsoffoodprices,andinthecaseofbiofuelsderivedfrompalmoilinAsia,forleadingtolossofbiodiversity.Theoriginalclaimsabouttheircarbonfootprinthavebeenchallenged.Theyhavealsofacedeconomicproblemsas,inthecaseofcornforexample,thecropfeedstockaccountsforaround70 percentofcostofgoodssold(COGS),sowhen crop prices rise, depending on the relative price of oil, margins can become very thin and even negative.



Inturn,thesedoubtsarereflectedinareductioninsupportforbiofuelsbothintheUS,wheresubsidiesandtax-breakshavebeenreduced,andintheEU,whichhasreduceditstargetfortheamountoftransportfuelprovidedbyrenewableenergyfrom10 percentto5 percentby2020.OnlyinBrazil,wheretheproductioneconomicsaremorefavorable,doesthefutureofbiofuellookoptimistic.Someforecastersseethisdrivingthesugarcaneareafromitscurrentlevelof6millionhectarestoover9 millionby2015.

ApartfromBrazil,significantfuturegrowthinbioethanolispredicatedonthedevelopmentofcellulosicbioethanol,derivedfromcropresiduesafterharvestrather than grain. Progress towards this goal has been slower than originally anticipatedaslargescale,commerciallyviableproductionhasyettobeachieved.Thereareseveralso-called‘secondgenerationplants’underconstructionduetocomeonstreamin2013and2014,buttheamountstheywillproducearesmallandtheir commercial viability has yet to be proven.



nsumerreactionstodscarescanbesudden

d severe and have a ge impact on demand for foodstuffsinvolved.

Politicalinfluencesonsupplyanddemandmanifestwhengovernmentstakeactionstosubsidizeproduction,astheyhavetoalargedegreeintheEUandUSinthepast,ortoinfluencetrade,forexamplebybanningexportswhenthereareconcernsaboutdomesticsuppliesasRussiahasbeenknowntodo.ThecollapseoftheDoharoundoftheWorldTradeOrganization(WTO)tradenegotiationsincreasesthelikelihoodthatsuchactionswilltakeplaceinthefuture.Atthesametime,itopensthe way for more bilateral trade agreements.

AnothersignificantpoliticalinfluencecouldcomefromChina.Todate,Chinahashadapolicyofnear(95 percent)self-sufficiencyforitsmajorcrops:rice,wheatandmaize.Thenotableexceptionissoybeans,whereChinahashadtoincreaseimportstosatisfygrowingdemandforanimalfeed.Ifthisweretoberelaxed,itwouldhavedestabilizingimpactsonworldmarkets.

Thereisnodoubtthatpoliticsplayanincreasinglyimportantroleinagricultureand,duetoitsinherentlyunpredictablenature,morepoliticalcomplexitymeansmorepotential volatility.

Wheresocialforcesareconcerned,consumerreactionstofoodscares,suchastherecenthorsemeatissueinEurope,canbesuddenandsevereandhavealargeimpactondemandforthefoodstuffsinvolved.

Amid all this volatility it has now become the conventional wisdom that crop prices willremainhighandwellabovetheirlongtermhistoriclevels–thecontinuationoftheso-calledcommodity‘supercycle’.

Highcroppriceswillimpactplayersatdifferentstagesofthevaluechaininvariousways.Whilefarmersandthosewhosupplythemwithseeds,cropprotection,fertilizersandmachinery,generallybenefitthecompanieswhichpurchasetheiroutputs,foodcompaniesandretailersfindtheircostseverhigherandmustadoptstrategies to increase efficiency and pass on price increases, etc. Meat companies, forwhichthecostsofcropfeed-stocksmakeupthegreatestproportionoftheircosts,areparticularlyvulnerable.Theimpactontraders,whositinthemiddleofthechainismorecomplexandwilldependontheirparticularbusinessmodel.

Theimpactofandpossiblereactionstovolatilityateachstageofthevaluechainareexaminedinmoredetailinthefollowingsection.However,certainstrategiescanbeusedtomitigateoradapttovolatilityatallstagesofthevaluechain:

• Bemoreagile–ifthefutureishardertopredict,youmustbebetterabletorespondrapidlywhenchangesoccur.Thisapproachhasimplicationsfororganizationalstructure.

• Improvebusinessintelligenceandenvironmentalscanning.Forewarnedisforearmed.Lookbeyondyourownsectortodevelopmentsupanddownthevaluechaintogainagreaterunderstandingofpossibleexternaldriversandemergentdisruptivetechnologiesasthechainbecomesmoreintegrated.

• Diversify,thoughgoingtoofarbeyondthe‘core’introducesrisksofanothernature.‘Adjacency’mightbethebestapproach.

Cofooanlarthe



ComplexityTheagribusinesschainisalreadyhighlycomplex,butvariousdriversareconspiring to make it even more so. There are many different crops and food types,eachwithitsowndistinctiveandoftenfragmentedsupplychain.Thereisalsohugevarietywithineachcropintermsofhowandwhereitisproduced,and bywhom.Environmentalfactorsplayanimportantpartinproductionandvary byregionandbyyear.

New objectives

Newobjectivesforagriculturehavebeenintroduced:whereastheprimarypurposewas to provide food, feed and fibre, the sector is now being asked to provide increasingsuppliesofbiofuels,contributetoruraldevelopmentandprovideamenitand‘ecosystemservices’.Thereisalsotalkofagricultureprovidingbio-materialstounderpinthe‘bio-economy’ofthe21stcentury.Inthejargon,agricultureisbecomingincreasingly‘multi-functional’.Anotherdriverforchangeistheincreasingemphasisbeingputonthehealthdimensionoffoodasmorepeopleintheworldnowsufferfromobesitythanmalnutrition.Governmentsareconsideringwaysof intervening in the food chain to mitigate this trend while the development of functionalfoodsisbecominganintegralpartofmanyfoodcompanystrategies.

New solutions

Technologicaladvances,particularlyinplantgenomicsandITarecreatingallsortsofnewpossibilitiesforagriculture.TherehasbeenaconsistentlyhighlevelofR&Dinvestmentacrossthevaluechain(seebelow)whichhasresultedinacontinuousstream of innovation.

Table 2: Private R&D spend in the agriculture and food chain

y

SectorR&D spend 1994: US$m

R&D spend 2010*: US$m

CAGR %R&D % sales

2009*

Crop protection 2,296 3,116 2.1% 6.4%

Seeds and biotech 1,130 3,726 8.3% 10.5%

Machinery 920 2,394 6.6% 2.7%

Fertilizer 61 100 3.4% <1%

Animal health 664 941 2.4% 8.6%

Animal breeding and genetics

196 339 3.7% 7.3%(in2006/7)

Animalnutrition 314 410 1.8% n/a

Total crop and animalinputs

5,581 11,026 4.6% n/a

Foodmanufacturing 6,016 11,480(in2007) 5.5% 1-2%

*UnlessotherwisespecifiedSource:‘ResearchInvestmentsandMarketStructureintheFoodProcessing,AgriculturalInputandBiofuelsIndustriesWorldwide’;USDA,Dec2011

Theagribusinesschainisalreadyhighlycomplex,butvariousdriversareconspiring to make it even more so.



Anincreaseinprivatesectorinvestmentinagricultureismirroredbywhathasbeenhappeninginthepublicsector,withgovernments,especiallythoseinemergingmarkets,significantlyboostingtheirinvestmentinrecentyears.China,inparticular,hasgreatlyincreaseditsinvestmentinagriculturalR&DandnowspendsalmostasmuchastheUS.Moreover,collaborationbetweenthepublicandprivatesectorsisgrowing,withseveralinitiativestoincreasethelevelofpublic-privatepartnershipsinagriculture.Gonearethedayswhentheprivatesectorwasdistrustedbydonors,academicsandNGOsasthepublicsectorandsocietyrecognizethattheirobjectivescanonlyberealizedwithprivatesectorresourcesandskills.

Figure 4: Public sector spend on agricultural R&D

0

2

4

6

8

*Note: Dotted lines for Brazil (2009–11), China (2009–10) India (2009–10) indicate preliminary estimates

Source: ‘ASTI Global Assessment of Agricultural R&D spending’; Nientke Beinteme et. al; IFPRI, 2012

Biotechnology,whetherbasedongeneticmodificationor‘nativetraits’,isproducingastreamofnewtraitsandexpandingthepossibilitiesofwhatcanbeachieved.AdvancesinITaredrivingthegrowthofprecisionagricultureandtransformingboththewayinwhichinformationflowsalongthevaluechainandhowtransactionsareconducted.Thesetechnologicaldrivershaveramificationsthroughoutthevaluechain:biotechnologypresentsthefarmerswithnewtoolsandchoicesanddrivestheneedforincreasedtraceability.ITpresentsnewoptionsandopportunitiesforfarmers,butalsochangesthenatureoffoodcompanyandretailerinteractionswithconsumers,particularlythroughsocialmedia.

New markets

Newcustomersegmentsareemerging:thegrowthoftheemergingmarketsinbothpopulationandeconomictermsdrivesthelevelandcompositionofdemandforagriculturalandfoodproducts.ThelatestFoodandAgricultureOrganization(FAO)forecastspredictthatoverallfooddemandwillincreaseby1.1 percentayearbetween2006and2050,orby70 percentofthewholeperiod.TheprimarydriversofthisdemandareAfrica,duemainlytopopulationgrowth,andAsia,duetobothpopulationandGDPgrowth.

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Brazil ChinaIndia

Brazil estimate China estimateOther middle income (98)India estimate

2005

PP

P d

olla

rs (

US

$ m

illio

ns)

China,inparticular,has greatly increased its investment in agriculturalR&Dandnow spends almost as muchastheUS.



BiotechnologyBiotechnolgyisanumbrellatermwhichcoversbothgeneticmodification(GM)ofcrops,wherenewgenesareintroducedwhichcouldnotoccurnaturally,andadvancedbreedingtechniquessuchasmarker-assistedselection,whichacceleratthedevelopmentofnaturallyoccurringgenes,or‘nativetraits’.WhereasGMwastinitialfocusofthebiotechnologyrevolution,increasingemphasishasrecentlybeenaccorded to the native traits approach.

DespiteoppositionfromsomequarterswhichcontinuestoexcludesignificantGMpenetrationintheEU,theformerSovietUnionandAfrica,theriseofGMhasbeenrapid(seebelow).GMcropsnowaccountfor82 percentoftheglobalcottonarea(herbicidetoleranceandinsectresistance),75 percentofsoybeans(herbicidetolerance),32 percentofmaize(herbicidetoleranceandinsectresistance),and26 percentofrapeseed/canola(herbicidetolerance).

Figure 5: GM crop areas

ehe

0

20

40

60

80

100

120

140

160

180

M hectares

USA Brazil Argentina India Canada

OthersChina Paraguay South Africa

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: ISAAA, 2012

GM’srateofgrowthshowsnosignofabating:

• Therearemanymarketswhereexistingtraitshaveyettobelaunchedbutthenecessarypoliticaland/orregulatoryframeworkdoesnotyetexist.

• TheindustrypipelineisfullofnewtraitsandthelevelofR&Dinvestment(over10 percentofsales)remainshigherthananyothersectorapartfrompharmaceuticals.

WhereasGMwastheinitialfocusofthe biotechnology revolution,increasingemphasis has recently been accorded to the ‘nativetraits’approach.



• Fundamentalresearchintocropgenomicsisresultinginaneverincreasingnumberofcropshavingtheirgenomesmapped–around20atthelastcount–andprovidingthebasisofunderstandinguponwhichfurthernewtraitscanbedeveloped.

The main barriers to an even faster rate of GM crop penetration are the absence of bio-safetyregimesinsomecountries–forexamplemostcountriesinAfrica–andthecontinuedoppositionfrommanyNGOs.Inseveralcountries,thenecessarybio-safetyevaluationsystemsareinplaceandGMcropshavebeenapprovedassafetoplantbutintroductionshavebeendelayedbypoliticalopposition.

Sofar,noGMtraithasbeenintroducedintoamajorfoodcrop.[Maize,soybeansandcanolaareusedmainlyforanimalfeed].However,traitsforricealreadyexistandareawaiting approval, while wheat is increasingly becoming a research target.

OneconsequenceofthecontinuingconcernoverGMcropsisthatitisencouragingthespreadofidentity-preservedchannels.Inordertoextractvaluefromtheirnewconsumertraits,suchasenhancedoilqualityinoilseeds,inputcompaniesarehavingtosetupproductioncontractswithfarmersandtraders.In the EU,GM cropsmustbelabeled,creatinganeedfortrackingandtraceability.In the US,aproposaltolabelGMtraitsinCalifornia(Proposition37)was rejectedin 2012.

Figure 6: GM trait introductions since 1995

0

50

100

150

200

250

300

350

400

RR CanolaRR Soybean

Bollgard CottonRR CottonLL Maize

YieldGard MaizeRR/Bollgard Cotton

RR Maize

RR/YieldGard Maize

Herculex I MaizeCorn Rootworm Maize

Bollgard II Cotton

RR/Bollgard II CottonLL Cotton

WideStrike cotton

RR/YieldGard Plus MaizeHerculex RW MaizeAgrisure GT Maize

Agrisure RW MaizeYieldGard VT Triple Maize

RR Sugarbeet

Planted area of GM crops (Acres m.)

RR Flex CottonHerculex XTRA Maize

RR Flex/Bollgard II Cotton

LL Canola

Agrisure 3000GT

Liberty Link soybeanRR2 Yield soybean

Genuity VT Double ProGenuity VT Triple ProGenuity SmartStax/SmartStax

Optimum AcreMax 1Optimum AcreMax RWAgrisure Viptera 3110Agrisure Viptera 3111Optimum Intrasect

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Phillips McDougall, 2012

IntheEU,GMcropsmustbelabeled,creating a need for tracking and traceability. IntheUS,aproposalto label GM traits in Californiawasrejectedin 2012.



The impact of ITAsinothersectors,ITishavinganincreasinglyimportantimpactthroughouttheagribusinessvaluechain.Forinputsuppliers,itiscreatingnewinnovationplatforms,aswithbioinformaticsandseedsorprecisionagriculture.Forfarmerstheexplosionof mobile phone ownership facilitates access to better market and agronomic informationoncroppricesandweatherconditions,andfinancialresourcesandproductssuchascreditandinsurance.Itishavinganespeciallystrongimpactwith small farmers where IT is redressing some of the information asymmetries theysufferedfrominthepast,allowingthemtoimprovetheefficiencyoftheirtransactions. In the case of food companies and retailers, social media has become anintegralpartoftheirmarketingstrategiesandengagementwithcustomers.ITnotonlyimpactsindividualstagesinthevaluechainbutalsohelpsintegratethembytrackingtheprogressofcropsandfoodstuffsfromproductiontoconsumption,providing the information needed for traceability.



Value chain Input FarmersTraders Food companies Retailers

segment companiesPlanting Growing Selling

• ITapplications • Bioinformatics/ • Credit • Agronomic • Cropprices • Traceability • Socialmedia/engagingwithand benefits crop genetics advice • Combiningwith customers

• Weather other growers • Traceabilityinformation • Identifyingbuyers

• MarketaccessPrecisionagriculture

• Cropinsurance

WhilethebenefitsofITarebeingfeltthroughouttheagri-foodchain,thewayinwhichITisbeingusedisbecomingincreasinglysophisticated,movingfromgenerapplicationscenteringaroundtheprovisionofinformation,suchascroppricesandtheweather,tomorecustomizedandtransactionaltypesofuse,suchas cropinsurance,asshownbelow.

Figure 7: Type of IT intervention in agriculture

al

National Local/customized

Transactional

Cropinsurance

Mobile banking/Credit

Cropprices

Weather

Extension/Pest identification

Farmer – specific recommendations

Cropmarketing

Complexity

Informational

IT not only impacts individualstagesinthevaluechain,butalsohelps integrate them by tracking the progress ofcropsandfoodstuffsfromproductiontoconsumption,providingthe information needed for traceability.




Figure 8: Growth in food demand: 2006-2050

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

SSA Sth Asia NE/NA Latam E Asia DC’s

CAGR: 1.1%

CAGR: 0.8%

CAGR: 0.3%

Source: N Alexandratos and J Bruinsma, 2012, World Agriculture Towards 2030/50: the 2012 revision, ESA Working Paper No. 12-03, Rome, FAO

WithGDPgrowthcomesanincreaseinthelevelofurbanizationandtheriseofthe middle classes. Both of these drive accompanying changes to the composition ofdemand,withsomecropsandfoodstuffsincreasingtheirshare,notablymeat,dairyproductsandvegetableoils,andothers,suchasstaplecerealcropslosingout(Fig. 9).Thefactthatin2012Chinaproducedmorecornthanriceisillustrativeof this and represents a significant milestone. There is also a slow trend towards diversification of diets (Fig. 10).

Figure 9: Diets diversifying, but slowly

Contributionstototaldietaryenergysupplies(kcal)

CA

GR

: 200

6–20

50

Population Per capita consumption Total growth

Other

Source: FAO, WFP and IFAD, 2012. The State of Food Insecurity in the World 2012.Economic growth is necessary but not sufficient to accelerate reduction of hunger and malnutrition, Rome, FAO

Sugars Fats and oils Animal-source foods Fruits and vegetablesPulses Roots and tubers Cereals

3500

3000

2500

2000

1500

1000

500

01990-92 2007-09

Asia1990-92 2007-09Developed countries

1990-92 2007-09Latin America

and the Caribbean

1990-92 2007-09North Africa

1990-92 2007-09Oceania

1990-92 2007-09Sub-Saharan Africa



ArelatedGDP-driventrendisthegrowthindemandforvalue-added,oftenprocessedfoodproductswhichmeettheneedforconvenienceandnewtastes,creatingopportunitiesforthefoodmanufacturingsector.Mostmajorfoodcompanies have already targeted the emerging markets for growth.

Aswellasaffectingthequantityandcompositionofdemand,economicgrowthwillbringwithitnewdemandsintheareaofhowthefoodisproduced–moreinformationandtraceability.Thisisaddressedinthenextsection.

Thesedemandtrendsthenbegthequestion:whowillsupplythedemand?Thisismoredifficulttoanticipateasitwilldependonlesspredictable(thandemand)supplyfactors.Russia,theUkraineandmanyAfricancountrieshavethepotentialtoincreasetheiragriculturalproductionandtheextenttowhichtheydosowillhaveimplicationsforglobaltradepatterns.Itwillalsoplayoutdifferentlyateachstageofthevaluechainandeachofthesethereforeneedstobeaddressedseparately.Forexample,theEUisanetimporterofprimaryproductsandnextexporterofmanufacturedfood.Howeveronecommon/universalthemeacrossthevaluechainistheincreasingimportanceofthe emerging economies as both markets for foreign and domestic companies and possiblesupplyandR&Dbasesforboth.

The growth in demand forproductswhichmeet the need for convenience and new tastes is creating opportunitiesforthefoodmanufacturingsector.



Africa: the sleeping giantAfricanagriculturehasbeenthesubjectofagreatdealofinterest,politicalattentionandrecently,optimism.In2009theWorldBankissueditsbook‘AwakeningAfrica’sSleepingGiant’3whichcomparedAfrica’sagriculturalpotentialfavorablywiththatofBrazilandThailand.Thereisnoquestionthatwithover50 percentofthepopulationstilllivinginthecountryside,developmentoftheagriculturalsectorisfundamentaltobothAfrica’soveralleconomicdevelopmentandpovertyreduction.Ithasbeenestimateda1 percentincreaseincropyieldsresultsina0.5-0.8 percentreductionin poverty.Thequestioniswhetherthesehighexpectationscanbemet.

ThechallengesandobstacleswhichhaveheldAfricanagriculturebackareconsiderable:yieldsarethelowestintheworldandhavebeengrowingrelativelyslowly.Asaresultimportsforstaplessuchaswheatandricehavebeenrisingsteadily.Thereasonsaremanyandcomplex:lackoflandrights;limitedcreditavailability;lowlevelsofinvestmentandinputusage,whetherinqualityseed,fertilizers,cropprotectionproducts,irrigationormachinery;poorlydevelopedinfrastructureandsupplychains;andlowlevelsofinter-regionaltrade,hamperedbybureaucraticbarriers.

Atthesametime,therearemanyreasonsforoptimism:thebusinessclimateisimproving;thereishugepoliticalcommitment(e.g.fromtheG20);Africaleadstheworldinthemobilephonerevolutionwhichcanbeneficiallyimpactagriculture atvariouspointsinthevaluechain;thecontinenthasthelargestlandbank,over200 mhectaresofcurrentlyunusedland,anestimated60 percentoftheglobaltotal,whichcouldbeturnedtoagriculture.Thissurfeitoflandalsopartlyexplainswhymostproductionincreaseshavecomefromincreasedarea,ratherthanyields.

Bymappingthevariousinitiativeswhicharebeingtakenandpositivedevelopmentsagainsttheabove-mentionedconstraintsitispossibletoseethatmanyofthefactorswhichhavehistoricallyheldbackAfricanagricultureareindeedbeingaddressed.Whiletheconstraintsshouldnotbeunderestimatedorbelittled,thereisindeedmuchscopeforoptimism.

However,evenifAfricanagriculturalproductivitydoesshowanuptick,suchistherateofgrowthindemand,drivenbybothpopulationandGDPgrowth,thatitislikelyAfricawillcontinuetoimportanincreasingamountofitsfood.Inthisscenariothereareopportunitiesforlocalfarmersandcompaniestoincreasethelevelofdomesticproduction andforexportersandtraderstobenefits,fromnewopportunitiesregarding Africa.

3 ‘AwakeningAfrica’sSleepingGiant:ProspectsforCommercialAgricultureintheGuineaSavannahZoneandBeyond’,WorldBank,2009

WhileAfica’sconstraintsshouldnot beunderestimatedor belittled, there is indeedmuchscopeforoptimism.



Table 3: Reasons to be cheerful about African agriculture

Value chain link Constraint Current situation Initiatives/trendsSupply Land ownership Land rights poorly defined

• Microcreditschemes

Credit availability Lack of availability• WarehouseReceiptsPrograms(e.g.of

WorldFoodProgram)

• Mobilephoneuseforfinancialtransactions

IrrigationOnly4percentarablelandirrigated:lowest level of any continent

• ‘Corridor‘projects

• ForeignDirectInvestment

SeedsPoorlydevelopedprivatemarkets:lowestlevelofuseofcommercialseed

• AGRA’sseedsprogram(PASS)

• AGRA’sagro-dealernetworks

FertilizerLowestuse/highestprices/limitedlocalindustry

• AGRA’ssoilhealthprogram

• AGRA’sagro-dealernetworks

Crop protection Lowusage • AGRA’sagro-dealernetworks

Machinery Lowestincidenceoftractoruse• Increasinginterestfrommachinery

companies (e.g. AGCO)

• UseofmobilephonestogiveadviceExtension Lowprovision;poorlydeveloped IncreasingPublicPrivatePartnerships

(PPP’s)withanextensioncomponent

R&D Low levels of R&D • CAADP4

Someofthemajorcropsareofrelatively • PPPslimited interest to the rest of world and privatesector,sothereislimited‘spin-off’potentialfromR&Dconductedelsewhere

• Foundations(e.g.BMGF;SFSA)

• South-Southcooperation(e.g.EMBRAPAprogram in Africa)

• NetincreaseinpublicspendingonR&Din‘Noughties’(IFPRI)

Demand/market Poorly developed Roads, rail, ports, storage • ForeignDirectInvestment,particularlybyChinaaccess infrastructure • Corridors

• Growthincertificationschemes

Supplychain Lowest level of retailer penetration in the • GrowthofmiddleclassesandGDP/capitaworld • Increasingeaseofdoingbusiness

• Growthincertificationschemes,suchas‘Fairtrade’,integratingsmallfarmersintovaluechainsandimprovingtheirremuneration

Storage Inadequatestoragefacilities: • ‘Triplebagging’forcowpeas

largepost-harvestlosses • USAIDguidetostorage

Lowlevelinter-regional Lowestintheworld:12percenttotaltrade • Reductionintradebarrierstrade • Varioustradegroupings(e.g.EAC)

Poorly developed local • PPPstoencourageSMEsprocessingindustry

Source:Prognoz,2012

4ComprehensiveAfricaAgricultureDevelopmentProgram



The level of FDI in CISagricultureisincreasing with western companies investing acrossallsectors:seeds, machinery, food processing.

CIS: eastern promiseAsinthecaseofAfrica(seepreviouspages),thoughonalesserscale,RussiaandothercountriesoftheCommonwealthofIndependentStates(CIS)alsosufferfromaconsiderableyieldgapcomparedtoothercountriesinspiteofasurplusofagriculturalland.Manyofthereasonsforlowproductivityarealsosimilar–poorinfrastructureandlackofaccesstoqualityinputs.ThemaindifferenceisthatRussiaandtheCIScountriescanandhaveproducedlargeexportsurpluses,particularlyofwheat.OnmorethanoneoccasiontheUSDepartmentofAgriculturehasidentifiedthesignificantpotentialofCIScountriestoincreasetheirwheatexportstolevelsof50-60mmt.Thiswouldintroduceamajornewsourceofsupplyintotheworldmarketandcouldpotentiallybeverydestabilizing.However,themarketcouldaccommodatethisextraproductionifRussiawerebothtotakesharefromotherexporters,suchastheUSwherewheatproductionhasbeenonadownwardtrend,andtakethelion’sshareofthedemandgrowthinAfrica,theMiddleEastandAsia.

Therearemanyencouragingsigns:

• Portcapacity,amajorconstraint,isbeingexpanded.

• ThelevelofFDIinagricultureisincreasingwithwesterncompaniesinvestingacrossallsectors:seeds,machineryandfoodprocessing.

• Organizationoflocalindustryisbeingimprovedwiththeestablishmentoflargeagro-holdingsandgovernmentsupportintheformofsubsidiesandthecreationofstate-ownedgraincompanies.

Together,thesefactorsbodewellforCISexportprospects,andcouldcontributetoacontinuingshiftinglobaltradepatterns.

Amajorrisk,however,isinterventionbythegovernmenttobanorotherwisecontrolexportsinyearswhenproductionisreduced,asthisunderminesRussia’scredibilityasareliablesupplier.



Asaresultoftheconsiderableandincreasingcomplexityoftheagri-foodchaincompaniesarefacedwithevermorestrategicchoicesintermsof:

• Whichcropstoengagewithandhowgreatarangetocover.Technology(traits)andpolitics(e.g.regardingbiofuels)areopeningupnewopportunities.

• Whichsectorstoaddress:

– Howfardotheywanttostrayfromtheircorebusiness?

– Arethereanysynergies?

• Howfartoengagewithemergingmarkets.Thereisnodoubtthatmostgrowth istherebuttherearerisksattached.

• Howfartouseemergingmarketsasaresourcebase.

• Howseriouslytotakeemergingmarketcompaniesasasourceofcompetitionin their home markets and abroad. Most of the largest companies in all sectors remainbasedinthedevelopedworld–only6ofthetop100foodcompaniesarebased in the emerging markets and only one of the top 100 retailers. Emerging market companies however, are growing rapidly and becoming more involved with overseas markets. Having long been significant investors in African agriculture,theChinesethearenowincreasinglyturningtheirattentiontotheEuropeanfoodsector.

• Howfartoverticallyintegrate.



ScrutinyVariousdriversarecreatingpressuretoincreasethetraceabilityofandinformationaboutthefoodweeat.

First, concerns over food safety have been fanned by events like the BSE crisis, melamineinChinesemilk,EcoliinGermanbeansproutsand,mostrecently,horsemeacontaminationofbeefinEurope.ThesehavebeenbehindtheformationofbodiesliketEuropeanFoodSafetyAuthority,andalsoprovideopportunitiesforWesterncompaniestoapplytheirknowledgeandexpertiseinemergingmarkets.Thisisreinforcedbyincreasinginterestinthenutritionalandhealthpropertiesofthefoodweeat.

Second, the rapid rise of GM crops, which have achieved significant penetration in somecountriesandcrops,hasresultedinlabelingrequirementsinaround40 countrieparticularlyinEurope,butalsoinChinaandRussia.AsthecropswhereGMhassofarachievedsignificantpenetrationarecommoditycrops,thiscreatesnewrequirementsforidentitypreservation,andcanbeabarriertotrade.Havingsaidthat,othercountriesnotablytheUS,arestronglyopposedtolabelingforGMcrops.TheUSpositionwasreaffirmedbytherejectionofGMlabelinginavoteinCaliforniainNovember2012.

Third,consumerswanttoknownotjustaboutthecontentandsafetyoftheirfood,butalsohowitisproducedandwhattheenvironmentalandsocialimpactsare.Aspeopleascendtheeconomicladdertheirrequirementsinthisrespectbecomeevermoredemanding.Thishasresultedintheintroductionofvoluntarycertificationschemessuas‘Fairtrade’and‘TheRainforestAlliance’.Increasinglyfoodcompaniesareadoptingtheseschemesandmakingcommitmentstoimprovethesustainabilityoftheirsourcingandoperations.Therehasbeenaproliferationofsuchschemesoverrecentyears,aswellasadiversityofapproaches.Fig.10givesatimelineforsomeofthemajschemesintroducedoverthelast40years.Theproliferationandvarietyofschemesreflectstheenvironmentalandsocialimpactofagriculturewhichisgreater(andmorecomplex)thanthatofanyothersector.Concernoverthisaspectofagricultureisalsoreflectedinthewidespreadadoptionoftheconceptof‘SustainableCropProductionIntensification’anapproachdesignedtobalancetheneedtoincreaseproductivitywittheneedtominimizenegativeenvironmentalimpacts.ThisispromotedbytheFAOamongothersandwidelysupportedthroughouttheprivateandpublicsectors.

the

s,

,

ch

or

h

Figure 10: Standards and certification timeline for transparency initiatives

1970

1980

1990

2000

2010

IFOAM(Organic,1972)

RainforestAlliance(1987)

Fairtrade(1997) RSPO

(Palm oil,2004)

BCI(Cotton)2010)

GlobalGAP(1997)

Utz Certified(Coffee, 1994)

4C(Coffee,2006)

Source:‘Understandingtheimpactofchangingconsumerdemandandconsumptionpatterns’,JonathanShoham,CropWorld2012

Consumerswanttoknowaboutthecontentand safety of their food,butalsohowitisproducedandwhatthe environmental and social impacts are.



Environmental footprint and sustainabilityAgriculturehasalargerenvironmentalfootprintthananyothersector,havingamajorimpactonwater,land,biodiversityandtheatmosphere:

• Itaccountsforaround70percentoffreshwaterdemandandalsoimpactswaterquality.Waterscarcityanditsimpactonagriculturalproductivityisbecominganincreasingcauseofconcern.5

• Itaccountsforaround38percentofgloballandarea(pasture:26percent;arable: 12percent)andisthemaincauseofsoilerosion.6

• Itaccountsfor14percentofgreenhousegasemissions.7

Environmentalconsiderationsplayamajorpartinstrategiesrelatingtoagriculturewhetherattheleveloftheindividualcompanyorglobalinstitutions.AtthecompanylevelthisisreflectedintherapidadoptionofGRIreportingandimprovementinCSRactivities,withsetting,publicationandmonitoringoftargets.Attheinstitutionallevelgoodenvironmentalpracticeisbecominganincreasinglyintegralpartofagriculturalpolicy.ForexampleintheEUfarmersubsidiesarebeingmadeincreasinglyconditionalupongoodagriculturalpractice.ThepotentialforappropriatepoliciestomitigateadverseenvironmentalimpactsiswellillustratedbythecaseoffertilizerswherelegislationintheEUhasledtomoreefficientandjudicioususeandreducedtheamountoffertilizerusedperunitoutputofcrop.ThiscanbecontrastedwithChina,forexamplewherethefertilizeruseintensitycontinuestoincreaseandisindicativeofhighlyinefficientuseoftheproducts.

Whereasthereusedtobeapolarizationofviewsbetweenthosewhobelievedintensiveagriculturewastheanswertofeedingtheworldandthosewhosupportedareturntoextensive,organicsystems,therenowappearstobeareconciliationoftheseviewswiththenewwayforwardbeingsustainablecropproductionintensification.Thisrecognizesthathigh-inputsystemsusingcommercialseed,fertilizerandcropprotectionchemicalsarenecessarybutthatatthesametimetheyshouldbeusedjudiciouslywitheveryattemptmadetominimizetheiradverseenvironmentalimpact.

Environmental considerations play a majorpartinstrategiesrelatingtoagriculture,whether at the level of theindividualcompanyorglobalinstitutions.

5‘ChartingOurWaterFuture’,The2030WaterResourcesGroup,20096FAOStat, 20127IPCC,2007



Accommodationoftheabovepressuresisfacilitatedbyadvancesintechnologyandthesupplychain.Therapidincreaseinpenetrationbylargeretailersbringswithitmoresophisticatedandefficientsupplychainswhichpermiteverimprovtraceability and information provision. At the same time new lifecycle analysis toolsandmethodologiesarebeingdevelopedwhichimprovetheaccuracyanddetailofinformationontheenvironmentalandsocialimpactsforfoodproductioAnexampleofthiscanbefoundinthedevelopmentofcarbonlabeling.TheSustainabilityConsortiumintheUSisplayingaleadingroleinthisarea.Table4looksatdriversofandresponsestotheeverincreasingrequirementsforscrutinalongtheagri-foodchain.

Table 4: Causes, effects and potential future developments in the area of scrutiny

ed

n.

y

Driver (examples)

Specifics ResponseCurrent

situation

Potential future

developments

Food scares Food safety EuropeanFood Western Ever increasing (contamination SafetyAuthority companies traceabilityor mislabeling increased testing welcomed into

some EMs becauseoftheir high safety standards

Health concerns Nutritional Regulation(e.g. • Debateof More (obesity) content pesticides) labels schemes government

‘fattaxes’in interventionDenmark

• Banning‘super-size’sugarydrinksinsomeUScities

GM crops • Consumer Labels Identity • Labels in over More labeling, choice preservation 40countries identity

• Value • Mainly preservation

extraction commodity crops

Ethicalconcerns: • Organic; • Cross- • Proliferation • Voluntary

• Environmental Fairtrade compliance of schemes standards

• Social

How food is produced

etc.

• Animalwelfare

Agri-environmental schemes

• Voluntarystandards

• Nitrate

• Voluntaryschemes confined to cash crops and penetration still low

• Penetration

• Scopee.g.Carbon labels

• Rationalization of schemes

directive(EU)

The rapid increase in penetration by large retailers brings with it more sophisticated and efficientsupplychainswhich permit ever improved traceability and information provision.

Source:IFOAM,2013



8GlobalReportingInitiativeoftheUN

Despitethesedevelopments,penetrationofvoluntarystandardsisstillverylow.Organicproductionhasonly1-2percentglobalmarketpenetrationandisfarbetterestablishedinEuropethananywhereelse.OthermorerecentcertificatioschemessuchasFairtradeandtheRainforestAllianceaccountforwellunder1 percentofglobalconsumption,althoughstillgrowingfast.Moresignificantinterms of impact are some of the mandatory directives and policies which have beenintroduced,particularlyinEurope,whereforexample,thenitrogendirectivhasledtosignificantreductionsontheamountoffertilizeroveruseandpollutionandfarmersubsidiesarebeingmadeincreasinglyconditionaluponenvironmentcompliance.

Therearechoiceswhicharecommontodifferentstagesinthevaluechain:

• ‘Makeorbuy’:shouldcompaniesadoptexistingstandardsandcertificationschemesordeveloptheirown.Mostcompanieselectfortheformeralthoughsome of the larger ones also do their own thing.

• Iftheybuyintoexistingschemeswhichshouldtheychoose?Tosomeextentthchoicewilldependupontheirbusinessprofile,productrangeandenvironmentaimpact,buttherewillstillbeconsiderablediscretionwithintheseconstraints.

• Whatreportingformatshouldtheyfollow:forexamplehavingaseparatecorporatesocialresponsibilityreportorintegratingitintotheannualreport?Having said that, GRI8 has become a de facto standard.

Suchconsiderationsareimportantastheycanaffecttheattractivenessofacompanytoinvestors,potentialemployees,customersandasapotentialM&Atarget.Moreovertherapidlyevolvingnatureandcomplexityofthisareaoffersopportunitiesfordifferentiationanddistinctivepositioning.

Thesustainabilitydimensionisnotonlyamatterofmanagingreputationalthreatbutcanalsoleadtoidentificationofnewbusinessopportunitiesandleadtoimprovementsinbusinessefficiency.Theprocessoflifecycleanalysiscaninitselfleadtoabetterunderstandingofproductandbusinessprocesses.

n

e,al

el

Organicproductionhasonly1-2 percentglobalmarket penetration and is far better established inEuropethananywhere else.



PART

Implications for stakeholders02

Input companiesTheinputsectorspansawidevarietyofproductsegmentswhichcanbeseenassettingthegeneticpotentialofcropsandanimals:providingthemwithnutrition;protectingthemagainstdiseases,pestsandweeds;improvingtheefficiencywithwhichtheycanbecultivatedandharvested;andprovidingservicestofarmers,such ascreditorinsurance.

Table 5: Input industry product sectors

Genetic potential

Nutrition ProtectionGrowing and harvesting

Finance and services

Crops Seeds Fertilizers Crop protection products

Machinery Irrigation Equipment

Credit Insurance

Animals Genetics Animal feed Animal health products


Ingeneral,thisstageofthevaluechainhasfaredwelloverrecentyears,benefitingfrom the high level of crop prices and farmer incomes, and taking advantage of the newopportunitiesaffordedbytechnology.

ManysectorsinvestsignificantlyinR&D;seeds/biotechisoneofthemostR&D-intensive sectors. There is increasing R&D collaboration between the private and publicsectors,drivenbythehighproprietybeingaccordedtofoodsecurityissues.

Technologyisleadingtoablurringoftheboundariesbetweensomesectors-forexamplethereisincreasingintegrationofcropprotectionandseeds,drivenpartlyby advances in biotechnology – and a tendency to take an increasingly holistic and ’systems’viewofcropproduction.

Nearly all sectors have been increasing their engagement with emerging markets which are growing in importance as a percentage of sales.



Overall,itisanexcitingtimefortheinputindustrywithlargenumbersofnew opportunitiesandastrongpoliticaltailwindprovidedbythefoodsecurityagenda.Thechallengeistohaveaclearviewoftheagribusinesslandscape,asillustrated below.

Table 6: Implications of volatility, complexity and scrutiny for the input industries

Driver Aspects Forecast Opportunities

Volatility Crop price volatility Strongcontinuedgrowth New demands for crops Global warming oftheseedsectorwillpull adaptedfordrought,

throughotherinputs heat and salt tolerance Insuranceproducts

Complexity New technology • Continuedgrowthin NewproductsandEmerging markets penetrationandnumber businessareasAfricaasanopportunity, of GM crops resourcebase • Reversalofdecliningrateandsourceof of yield gaincompetition • Ablurringofthe

boundariesbetweensome sectors – e.g. seeds andcropprotection;cropprotectionandfertilizers

• Morecollaboration

• Continuedhighrateofinnovation

• Continuedstrongemerging markets growth

Scrutiny Regulatory Ever more stringent Engagewithcustomersrequirements regulationofproducts(crop toensureresponsibleProduct protection;fertilizers) useofproductsstewardship (stewardship)

esh

The challenge is to have a clear view of the agribusinesslandscapewhich provides the backgroundagainstwhich to develop and implement strategies.


Farmers Therearearound450millionfarmersglobally.Thesectorisextremelydiverseandcanbesegmentedbyfarmsize,cropsgrownandlevelofsophistication.Farmsizcanvaryfromanaverageoflessthan1hectareinChinatohundredsofthousandsofhectaresinRussiaorArgentina.Therearearound400 millionsmallholders,witanareaofunder2hectares.Onaverage,eachofthesefarmssupportafamilyof4-5,leadingtoafarmpopulationofaround2billion.Farmingthereforerepresentsthe largest employment sector in the world. Development of these small farms inemergingeconomiesisfundamentaltotheoverallprogressofeconomicdevelopmentinaprocessknownas‘agriculturaltransformation’.



Farmingisthemostriskyactivityinthevaluechain,subjectasitistothevagariesof the weather (amplified by global warming) and market volatility. However, in good years it is also potentially the most profitable.

Untilrecentlyfarmingwasthemostheavilysubsidizedindustryintheworld9, with farmersupportinOECDcountriestotalingaroundUS$280billion.TherehasbeenagradualreductioninOECDsubsidies,asaresultofcontinuingpressurefromtheWTO,althoughsubsidiesinemergingeconomieshavebeenincreasinginrecentyears.

Thefarmingsectorissubjecttocertaininexorabledemographicforces.Inallregions(apartfromAfrica)theruralpopulationisdecliningaspeoplemigratetothecities.Thisleadstoaprocessoffarmconsolidationandalsoreducedlaboravailabilityinthecountrysidewhichstimulatesgreaterlaborproductivity.

Afterbeingthoughtofassomewhatofa‘backwater’businessduringthe1970s,80sand90s,farmingisnowanattractivegrowthindustry,reinvigoratedbynewtechnologyandconcernsoverfoodsecurity.

Thetablebelowlooksathowthetrendstowardsvolatility,complexityandscrutinyaffect farmers.

Table 7: Implications of volatility, complexity and scrutiny for farmers

Driver Aspects Forecasts Opportunities

Volatility Crop prices • Croppricesremainhighand • Bodeswellforvolatile farmer incomes

• Spreadofcommodity • Hedgingexchanges(e.g.inAfrica)

Global warming Adaptationthroughchanging Carbon creditscrop patterns

Complexity • Biotechnology • ContinuedgrowthinGM • Newpotential

• IT crops revenuestreams

• Precision • Spreadofprecision • Reductionin

agriculture

• ‘Multi-functionality’

agriculture

• Betterandmoresourcesof agronomic advice and market information

‘informationasymmetries’between farmers (in DCs and EMs)

Scrutiny • Cross- • Gradualincreasein Premiumpricescompliance cross-compliance

• Standardsand • SpreadofGAP,‘Fairtrade’certification etcencouragedbyfood

companies and retailers

Identity More contract growing Guaranteedmarketspreservation to extractvaluesadded e.g. from new traits

Afterbeingthoughtof as somewhat of a ‘backwater’businessduringthe1970s,80sand90s,farmingisnowan attractive growth industry,reinvigoratedby new technology and concerns over food security.


9Source:‘AgriculturalPoliciesinOECDCountries:AtaGlance’,OECD,2006



TradersTradersoccupyapivotalpositionintheagribusinessvaluechainandtosomeextenttheir performance can be seen as indicative of the sector as a whole. Traders come inmanydifferentshapesandsizeswithrespecttobusinessportfolios,geographicpresence, degree of vertical integration and ownership. Some have significant food processing operations.

Tradershaveavitalroletoplayinprovisionoftheinfrastructureinvestmentrequiredtomeetthegrowingproductioninanddemandfromemergingmarkets.

Duetothecombinedimpactofglobalwarmingonthedistributionofcropproductionandeconomicallyorpoliticallydrivenregionalchangesinsupplyanddemand,overallproductionhasthepotentialtotakeoffandmovetowardsverydifferentpatternsfromthoseoftoday.Traderswouldplayavitalroleinfacilitatingsuchachange.

Table 8: Implications of volatility, complexity and scrutiny for traders

Driver Aspects Forecasts OpportunitiesVolatility Crop prices High and volatile • Superiorbusiness

intelligence

• Hedging

Global warming Movementofproductionfromtheequatortowardsthepoles:shifting trade patterns

Realigninfrastructureto meet new potential tradeflows

Biofuels Slow-downingrowth Re-evaluateinvestmentdecisions

Complexity Emerging market trends

• DecreasingMiddleEast/NorthAfricaself-sufficiency

• Securenewsourcesofsupply

• IncreasingCISexports • Opportunitiestoofferservices to farmers

Bio-materials The‘bio-economy’onlydevelops very slowly

Collaborations with inputcompanies

Move from global trade agreements (WTO)tomoreregional trade agreements (RTAs)

Proliferation of regional trade agreements

New or changing trade flows

Scrutiny GM Growth in GM areas and labelingrequirements

More traceability

Standards and certification

• Spreadof‘GAP’etc.

• ‘Fairtrade’etcopportunities(from low base)

More traceability

Food safety Becoming ever more important and high profile

FDIopportunitiesinemerging markets

Traders come in many different shapes and sizeswithrespecttobusinessportfolios,geographic presence, degree of vertical integration and ownership.




Food companiesMuchofthevalueaddedinthefoodchainhappensatthisstageandmarginsarecommonlyintherangeof10-20percent.Withinthefoodprocessingsectorthereareseveraldistinctsubsectorseachwithitsowncharacteristics,forexamplemeat,dairy,beverages,sugar,snacksandfoodservice.Companiescanvaryinsizefromlargemultinationals,severalofwhichemployover100,000people,someofwhichcantracetheiroriginstothe19thcentury,toSMEs.

Althoughwesterncompaniesstilldominate,emergingmarketcompaniesarerapidlyrisinguptheleaguetable.AscropandlivestockpricesrepresentthemajorelementofCOGS,profitisverysusceptibletochangesinprice.



Healthandwellnessisalsobecomingincreasinglyimportant.The$1billionbrandhasacertain‘caché’withintheindustry.Variousforces–increasingconcernovercosts,securityofsupplyandtraceability–arepushingcompaniestowardsevercloserlinkswithsuppliers.

Theseandotherdevelopmentsareexaminedinthetablebelow:

Table 9: Implications of volatility, complexity and scrutiny for food companies

Driver Aspects ForecastsOpportunities and threats

Volatility High crop Commodity‘super-cycle’ • Highinputpricesmakeprices strong branding and pricing

strategiesofparamountimportance

• Efficientsupplychainmanagement

• Volatile • Increasingvolatility • Diversifysourcesofsupplyprices • FailureofDoharoundof • Engagewithsmallholders

• Securityofsupply

• Climatechange

WTOincreaseschanceofunilateraltradeactionsbycountries

• Hedging

• Getclosertofarmers,e.g. by offering agronomic advice

Complexity Emerging • Mainsourceofgrowth • FDImarkets • Localcompetition • Adaptproductstolocal

tastes

IT Channel fragmentation Useofsocialmediatocommunicatewithcustomers

Lifestyle • Demandforconvenience • Newproductdevelopmentchanges foods • Growthoffunctionalfoods

• Healthandwellnessconsiderations

Scrutiny • Foodsafety Sustainablesourcing • Traceability

• Ethical • Collaborationwithproduction suppliers

• Makevsbuy,forcertification schemes

• Labeling

• Waste/packagingrecycling

Variousforces–increasing concern over costs,securityofsupplyand traceability – are pushingcompaniestowards ever closer links withsuppliers.




RetailersAswiththeotherstagesoftheagri-foodvaluechain,retailerscanvarygreatlyintheircharacteristics,sizeandformat.Foodonaverageaccountsforaround50 percentofretailer’ssales.Marginsarelowandsupplychainefficiencyisparamount.

Retailer penetration varies greatly by region, with the developed markets almost saturatedwiththetopfiveretailerscommonlyaccountingforaround80 percentof food sales. Penetration in the more developed emerging markets is well over 50 percent10,butitisonlyjustbeginningtotakeoffintheleastdevelopedmarkets,drivenbyGDPgrowthandurbanization.

10‘TheRapidRiseofSupermarkets’,WBruceTraill,2006



Therapidgrowthofretailersinemergingmarketswillleadtomoreefficientsupplychains,includinglesswaste,lowerpricesfortheconsumerandsaferfood.TherecentopeningupofIndiatoforeignretailerscouldresultinagreatlyimprovedsupplychainthere.Althoughmanyretailersareexpandinginternationally,othersareprimarilyhome-basedandgrowingrapidlyonthebackoftheirdomesticmarkets:ChinaovertooktheUSastheworld’sleadinggrocerymarketin2011.Thissectorisnotasglobalastheotherstagesinthevaluechain.

Dependingonthefoodtype,retailersmaysourceproductsfromanyofthethreepreviousstepsinthevaluechain:foodcompanies,tradersandfarmers.Astheprimaryinterfacewiththeconsumer,inadditiontorespondingtoconsumerpreferences,retailerscanplayasignificantroleininfluencingthem,especiallyinmattersconcerninghealthyeatingandsustainability.

Thetablebelowexamineshowthevarioustrendsmightinfluenceretailerbehaviorandopportunities.

Table 10: Implications of volatility, complexity and scrutiny for retailers

Trend Aspect Forecast Opportunities

Volatility High crop prices Increase in food as a percentage of disposable income

• Privatelabeldevelopment

• Linkstosuppliers

• Supplychainefficiency

• Longertermagreements

Securityofsupply Changinglocusofproduction

Integrating smallholders intosupplychain

Complexity Lifestyle Growth in demand for convenience foods

Growth in packaged and prepared foods

IT Channel fragmentation • Communicationstrategy

• Onlineshopping

Emerging market growth

Rapid growth in retailer penetration in emerging markets

FDIopportunities

Government healthy eating

Increasing emphasis on nutritionalandhealth

Growthoffunctionalfoods

programs aspects

Scrutiny Food safety • Growthinlabeling • Controlofsupplychain

• Increasedtesting • Auditingofsuppliers

The‘ethicalconsumer’

Backlash against packaging/waste

• Rapidgrowthin adoption of certification schemes

• Educationalrole

Depending on the food type, retailers may sourceproductsfromanyofthethreepreviousstepsinthevaluechain:food companies, traders and farmers.




Conclusion:Aneweraofcollaboration?

Intheprevioussectionsweoutlinedstrategiesforaddressingtheincreasedvolatility,complexityandscrutinyoftheagribusinessvaluechain.Someapplytoallstagesinthevaluechain:theneedforbetterbusinessintelligencetoanticipatevolatilityandunderstandcomplexity;agilitytoreacttovolatility;andriskmanagement strategies to protect against volatility. Others strategies are more specifictoparticularpartsofthevaluechain.Increasingly,manyrequireanelementofcollaborationwithotherplayerswithinandbeyondeachlinkinthevaluechain,notonlybetweenprivatecompaniesbutalsobetweenthepublicandprivatesectors.Collaborationhasthefollowingadvantages:

• Providesgreatervisibility,andinsomecasesforesightalongthesupplychain

• Affordsgreaterinfluenceoverfactorspreviouslybeyondanorganization’scontrol,providinggreatersecurityandpossiblyreducingcosts

• Providesaccesstonewskillsandresourcesandpromoteinnovation

Collaborationcantakemanyforms.Forexample,atoneextreme,itcanmeanmergers between companies, either in order to diversify the portfolio or vertically integrateandobtainmorecontroloverupstreamordownstreamactivities.Attheotherextreme,itmaybealooseandnon-exclusivecollaborationbetweendifferentpartiestopoolcomplimentaryresourcesorproperty.Table11mapsthespectrumofpossible forms of cooperation.

Many collaborations are already taking place between sectors as well as within them,allindicativeofagradualtrendtowardsgreaterintegration(seeTable12).Inthefutureitisalmostcertainthatcompanieswillhavetoincreasinglydirectboththeir scanning activities and collaborative efforts beyond the sectors in which they operatetoadjacentsectorsandfurtherupordownthevaluechain.

Designing successful collaborations

Keyskillsinthefuturearelikelytoinclude

• Identificationofwhichpartsofcompanystrategyarebestservedthroughcollaborations

• Identificationofsuitablepartners

• ChoiceoftheappropriateformofcollaborationTable 11: Types of collaboration

Tight………………………………………………...............................................................................………Loose

Type of M&A Cooperatives Joint ventures Exclusive Non-exclusive Contractscooperation alliances alliances

Reasons/ • Portfolio • Economiesof • Poolingof • Poolingof • Poolingof • Securingbenefits diversification scale complimentary complimentary complimentary supply

• Geographic • Increased skills skills skills • Extractingexpansion bargaining • Cost/risk • Costsharing • Costsharing valueadds

• Verticalintegration power sharing

tosecuresupplies,internalizemargins

• SynergyextractionSource:KPMGInternational,2013



Havingdecidedthatsomeformofcollaborationisneededinordertomeetpre-agreedstrategicgoals,theissuethenbecomesoneofimplementation.Bytheirverynaturecollaborationsarecomplexentitiesinvolvingdiverseorganizationswhichmayhavewidelydifferingcultures.Inordertomaximizetheirprobabilityofsuccesstherearesomecriticalgroundruleswhichneedtobefollowed:

• Theremustbeaclearvalue-addforeachparty,whetherfromincreasedsalesand/orreducedcosts;withoutthisthecollaborationwillnotbesustainable

• Theobjectivesoftheparticipatingorganizationsmustbealigned,or,attheminimum,notcontradictory

• Whilstacollaborationbetweendifferentpartnerscanresultin‘hybridvigour’theremustbesomedegreeofculturalcompatibilitybetweentheparticipants

• Regulatoryandlegalrequirementsmustbesatisfied

• Thecomplexityofcollaborationsmakesitessentialtohavecleargovernanceandstrong leadership

• Ongoing,openandhonestcommunicationbetweenthepartnersisfundamentaltorealizingthecollaboration’sobjectives

• InthecaseofcollaborationsinvolvinganR&Delement,IPissuesmustbeagreedattheoutset,sometimesusinganovelapproach.Forexample,theuseanddevelopment of patent pools is increasingly common

Inthecaseofcollaborationswhichhavebothprivateandpublicsectorparticipants(PPPs),meetingsomeofthesecriteriacanbeparticularlychallenging.Additionally,ifthecollaborationinvolvesGovernment,theremaybeanadditionalrequirementtocreatetherightenablingenvironmentinwhichthecollaborationcansucceed,forexamplebyaddressinganylegalandinfrastructureconstraints,whichmightotherwise hold it back.

Future predictions

Duringthelastdecadesofthe20thcentury,theagricultureandfoodchainremainedrelativelyobscurebythestandardsofmanyotherindustrialsectors.Howeverfromthebeginningofthe21stcenturythathasallbeguntochange.Somefuturetrendsarepredictable:thedriversofpopulationandeconomicgrowthremainthesameandcanbeanticipated,ascantheirconsequencesintermsoftheimpactonurbanizationandfarmdemographics.Likewisethecontinuinggrowthofemergingmarkets is a reliable trend.

Othertrendsaremuchlesspredictable,dueinlargeparttotheforcesexaminedpreviouslyinthisreport:volatility,complexityandscrutiny.Therearesignificant‘wildcards’:globalwarming,biotechnology,andthechangingroleofAfrica,China,andRussia.

Inthefutureitisalmostcertain that companies will have to increasingly direct both their scanning activities and collaborative efforts beyond the sectors in which they operate to adjacentsectorsandfurtherupordownthevaluechain.

Some elements arepredictable:thedriversofpopulationand economic growth remain the same and can be anticipated, as cantheirconsequencesin terms of the impact onurbanizationandfarmdemographics.



Havingsaidthat,evenamongstallthisuncertaintyitispossibletomakesomefurtherpredictionsifonlyofadirectionalnature:

• Agribusinesswillcontinuetobemorevolatilethanithasbeeninthepast

• Itwillbecomesubjecttoevermorescrutinydrivenbyconcernsoverfoodsafety,sustainableproductionandGM,aswellasthegeneralmarchtowardsincreasingsustainability.Therewillbegreaterandmoredetailedtraceabilityandlabelingandacontinuedgrowthincertificationschemes.

• Agriculturaltradewillcontinuetogrowinabsolute,andquitepossiblyalsorelative(tooverallproduction)terms

• Therewillbemorecollaborationacrossdifferentstageswithintheagribusinesschain which will lead to ever more integration. These collaborations will take many different forms. As part of this there will be a tendency to take a longer view

• Africawillincreasinglybeseenasanopportunitybyplayerswithinthevaluechain

• Therateofinnovationwillcontinueatleastatrecenthighlevels

• Companiesbasedinemergingmarketswilloccupyanincreasinglyimportantplaceon the world stage

Whateverhappens,agribusinesswillremainanattractiveandexcitingsectorfortheforeseeablefuture.



Table 12: Examples of specific collaborations within and across sectors

Input industries Farmers TradersFood companies/processors

Retailers ‘Public sector’

Input Bayer/AgraQuest Monsanto’s DuPont/Cargill DSM/Poet(Cellulosic SAGCOTindustries BASF/Becker Integrated (Plenish) ethanol) Syngenta/CGIAR

Underwood(CP) Farming Systems DuPont/ADM DuPont/Brion (Ug99)

Monsanto/BASF (IFS) (Plenish) (Bioenergy) Syngenta/ (GM) BASF/Cargill BASF/Pronovo EMPRAPA

Vilmorin/KWS (Canola oil) Biopharma Arcadia/USAID(corn traits) Syngenta/Bonanza

Syngenta/Deere Bioenergy

(Plene) BayerFreshproducealliances(240)

DuPont/JapanTobacco

Farmers Farmer ‘Outgrower Unileverhas3millioncooperatives schemes’ farmersinsupply

Marubeni/ chain

Sinograin Oils/ShandongLiuheGroup(Animalfeed)

Traders ADM/Wilmar Cargill/Provimi Olam PPPs

Marubeni/Gavilon Olam/Rusmolco Cargill PPPs

ADM/GrainCorp Unilever/Cargill(sustainableverifiedrapeseed oil)

Food PepsiCo/Unilever ASDA/Forza UnileverPPPscompanies Ardent Mills (Cargill, Morrisons/ Collaborations

ConAgra/CHS) Farmer’sBoy with certification organizationslike Fairtrade/Rainforest Alliance (e.g.Unilever,Mars)

Retailers USAID

Colour coding: M&A; Co-operatives; JVs;Exclusivealliances; Non-exclusivealliances; ContractsSource:KPMGInternational,2013



Contact us

Global

Chris Stirling Global Head of Life Sciences KPMG International T: +44 20 73118512 E: [email protected]

Willy Kruh Global Chair, Consumer Markets KPMG International T: +1 416 777 8710 E: [email protected]

Ian Proudfoot Global Head of Agribusiness KPMG in New Zealand T: +64 936 75882 E: [email protected]

UK

Liz Claydon Partner, UK Head of Consumer Markets KPMG in the UK T: +44 20 76943483 E: [email protected]

Chris Stott UK Head of Agribusiness KPMG in the UK T: +44 113 2313825 E: [email protected]

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Designed by Evalueserve. Publication name: Agriculture and food: A new era of collaborationPublication number: 130055 Publication date: May 2013

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