Reviewing the Institutional investment landscape in global agriculture while taking a closer look at the value chain

  Over the past century, there are several forces of which include industrialisation, globalisation, corporatisation and financialisation that have influenced the development of the global food system in ways that have built upon and reinforced each other. As the system has grown under these global economic influences, new agricultural landscapes have been brought into the industrial agricultural model, producing goods for global value chains that is heavily influenced by transnational corporations and funded by large-scale financial investors. These developments have been the key factors of change over time in the global food system.

These developments within the global food system were each initially promoted by individual nation states and the private sector as bringing advantages for the agricultural sector but also for consumers because they promised efficiency benefits. The spread of industrial agricultural production methods under the Green Revolution, to give an example, seeks to make food production better efficient by increasing productivity and addressing the difficulty in relation to hunger and food shortages. Organisations often argued that they bring benefits to the system with their coordination of food storage, processing and distribution in processes which eliminate inefficiencies and capitalize on synchronizing between their different functions. Financial actors have also been seen by several economists to be major actors in enabling more efficient management of risk through financial tools and markets. (Editor’s Note: A case which can be easily debatable to thoroughly view the effectiveness and contributions of financial actors, in order to fully evaluate their role in the value chain across the global food system.)

So, essentially this article seeks to uncover relevant analysis in relation to characterising the global agribusiness value chain, via it’s volatility, complexity, and the scrutiny of the value chain across the global food system while identifying and discussing the relevance of different actors along the value chain. To add, this article seeks to put clarity to the implications for stakeholders operating across the global food system, this will include: suppliers, farmers, traders, Food companies etc. In order to now conclude, this article will seek to wrap up by shedding light on new ways of collaboration across the entire value chain within the global food system.

Volatility:

 The global agribusiness environment is increasingly becoming volatile. Such volatility transcends from multiple different sources including: the changing climate, social changes, political changes and geo-economical changes. The weather has been heavily responsible for fluctuating yields and a supply shortage which has heavily pressured crop product prices. There has been many cases of droughts and food scarcity/crisis across the World, particularly in underdeveloped part of the World where there is lack of information to anticipate weather adversity and also sometimes this is also the case in more advanced part of World. The only difference is that in the advanced part of the World things are picking up gradually with technological developments, that helps predicts weather forecast which allows and helps farmers react a lot quicker to weather adversities in comparison to the underdeveloped part of World. Historically, while demand normally tends to be normally stable and predictable, supply is slightly more unsteady, usually due to weather and other factors including lack of financial power to facilitate relevant resources for planting and harvesting, very poor transportation and infrastructure to name a few.

Now it is broadly accepted that with the dawn of global warming it is expected that more weather-driven volatility in the future as average rainfall and temperature increase (and decrease even). In spite the extent of these extremes, assessing the impact and timing of global warming on global agriculture is still very much a developing area.

On the political front, volatility transcend from the central government actions, for example the push towards biofuels which has had a major destabilising effect on global markets since mid-2000s. While growth in demand for food is rather slow (according to research the annual growth rate remains only between 1-2 percent over the past 20 years) with limited population and economic growth, growth in demand for biofuels has been much better and could in theory progress at this higher rate, although it is showing signs of slowing down.

It is without a doubt that politics does play an increasingly vital role in agricultural development and, due to its inherently unpredictable nature, more political difficulty means potential increase in volatility.

Regarding social factors, consumer reactions to food fears, such as the recent horsemeat scandal in the European market (particularly in the UK), can be sudden and adverse and have a huge impact on demand for the food produce involved.

Amidst all this sort of volatility it has now become the accepted truth that crop prices will remain high and well above their previous historic levels – a continuation of the so-called commodity ‘cycle’.

High crop prices will in fact impact different actors at different stages of the value chain in various ways. While farmers and those who supply them with seeds, crop protection, machinery and fertilizers, generally benefit the companies that purchase their outputs, food companies and retailers alike will find their costs becoming ever higher and will need to adopt strategies to increase efficiency and spread the price increases, etc. However, meat companies for which the costs of crop feed-stocks make up the highest proportion of their costs, are incredibly vulnerable. The impact on traders, who remain in the middle of the chain is slightly more complex and will depend on the different business model they have integrated in their corporate strategy.

Some of the key impact of and potential reactions to volatility at each stage of the value chain are examined in more detail in the following section. However, certain strategies can be used to reduce and or adapt to volatility at all stages of the value chain:

(i) As an actor in the agribusiness value chain: get access to improved business intelligence and environmental scanning. To be forewarned is to be forearmed, predictability and preparation is key. Seek knowledge beyond your own sector to developments up and down the value chain to increase your understanding of possible external factors and emergent disruptive technologies as the chain becomes more concentrated.

(ii) Be more agile – suppose the future is more difficult to predict, actors must be better able to respond rapidly when changes happen. This approach has implications for organisational structure.

(iii) Diversify, perhaps extending a bit too far beyond the ‘core’ introduces risks of another nature. Diversifying within close proximity might be the best approach.

Complexity:

The agribusiness chain is already highly complex, but various factors constantly dominant to make it even more so. There are several different food and crop types, each with its own unique and commonly fragmented supply chain. There is also big variety within each crop in terms of how and where it is produced, and by whom. Environmental factors play a vital part in production and will vary by region and on a yearly basis.

New objectives:

New objectives for agriculture have been introduced: whereas the main purpose was to provide food, feed and fibre, the sector is now being instructed to increase the supplies of biofuels, contribute to rural development and provide amenity to name a few. In this jargon, agriculture is shifting to becoming more ‘multi-functional’. On another note, a major factor for change is the increasing emphasis being put on the health dynamics of food as more people in the world now suffer from malnourishment and overweight problems. Governments are making efforts of intervening in the food chain to reduce this trend while the development of nutritional foods is becoming an integral part of many food company’s corporate strategies.

New solutions:

Technological advances, particularly in IT (i.e.: drones) and a bunch of other new innovation are creating all sorts of new avenues for agriculture.

An increase in private sector investment in agriculture is reflected by what has been happening in the public sector, with governments, especially those within emerging markets, significantly increasing their investment in recent years. To give example, China, in particular, has greatly increased its investment in agricultural R&D. To add, collaboration between public and private sectors is growing, with several new ways been introduced to increase the level of public-private partnerships in agriculture.

New developments in IT are driving the growth of precision agriculture and transforming both the way in which information flows along the value chain and how transactions are made. IT presents new avenues and possibilities for farmers, but also changes the dynamic of food company and retailer interactions with consumers, particularly via social media.

New markets:

New customer segments are opening up: the growth of the emerging markets in both economic and population terms creates the level and composition of demand for agricultural and food products. The main factors of such demand include Africa, due mainly to growth in population, and Asia, due to both growth in population and GDP.

A relatable GDP-driven trend is the growth in demand for value-added, often processed food products which meet the need for ease and new tastes, creating beneficial avenues for the food manufacturing sector. Several major food companies have predominantly targeted the emerging markets for growth.

In as much as affecting the quantity and composition of demand, economic growth will bring with it new demands in the area of how the food is produced – more information and traceability.

These demand increase trends then trigger the question: who will supply the demand? This is more difficult to anticipate as it will depend on less predictable (than demand) supply factors. To give an example, several African countries and perhaps Russia amongst others have the capability to increase their agricultural production and the level to which they do so will impact global trade patterns. It will pan out differently at different stage of the value chain and each of these will consequently need to be addressed separately. For instance, the EU is a net importer of primary products and subsequent exporter of manufactured food produce. However, a common/universal theme across the value chain is the growing importance of the emerging economies as both markets for international and domestic companies and potential supply and R&D bases for both.

As an outcome of the considerable and growing complexity of the agri-food chain companies are faced with ever more strategic choices in terms of:

(i) How far in reach to engage with emerging markets. It is without doubt that most growth is within emerging markets but there are multiple risks attached.

(ii) Which crops to engage with and at what range to cover. Technology (traits/complexities) and politics (e.g. regarding global warming) are opening up new opportunities.

(iii) How far in reach to use emerging markets as a resource reservoir.

(iv) Which options to address:

      -How far do they want to deter from their core business?

      -Are there any collaborations?

(Editor’s note: There other factors that could be considered under this section but due to simplicity the points will be limited to those few discussed above).

Scrutiny:

Multiple factors are increasing pressure on the traceability of and information about the food we consumed.

Firstly, there are concerns over food safety flagged up event/s like E coli in German beansprouts as mentioned in other analysis and, very recently, the horsemeat scandal of beef across Europe. These have led to the formation of bodies like the European Food Safety Authority, but also provide avenues for First World companies to apply their knowledge and expertise in emerging markets. Consequently, this is affirmed by the increasing interest in the nutritional and health agendas of the food we eat.

Secondly, consumers always want to know not just about the content and safety of their food, but also how they are produced and which type of environmental and social impacts therein. As people climb the economic ladder their requirements in this regard will become ever more demanding. This has resulted in the introduction of voluntary satisfactory schemes including ‘Fairtrade’ and the like. Increasingly food companies are adopting such schemes and making commitments to improve other sustainability and ethics of their sourcing and operations.

Accommodation of the above pressures is facilitated by developments in technology and the supply chain. The constant increase in entry by large retailers brings with it more sophisticated and efficient supply chains that permit ever improved traceability and information access. Simultaneously new lifecycle analysis tools and methodologies are being developed which improve the accuracy and detail of information regarding the environmental and social impacts for food production.

Despite these developments, penetration of voluntary standards is still considerably low. For instance, it is argued that schemes including Fairtrade and the Rainforest Alliance account for much less than 1 percent of global consumption, despite growing fast. More important in terms of impact are some of the mandatory policies and directives which have been introduced, especially in Europe, where for instance, the nitrogen directive has led to increased reductions on the amount of fertilizer overuse and pollution, while farmer subsidies are being made increasingly conditional based on environmental compliance.

There are choices which are common to different stages in the value chain:

1. If agribusiness organisations and other related entities buy into existing schemes which they choose? To some extent the choice normally depends on individual business profile, product range and environmental impact, but there will still be considerable discretion within these constraints.
2. ‘Make or buy’: should organisations adopt existing standards and certification schemes or develop their own. Many organisations elect for the former although some of the larger players develop their standards.
3. What reporting format should they follow: for instance, having a separate corporate social responsibility report or integrating one into the annual report?

Such considerations are extremely important as they can influence the attraction of an organisation to investors, customers, potential employees and as a potential merger and acquisition target.

The sustainability dynamics is not only a matter of managing reputational threat but can possibly lead to identification of new business opportunities and lead to better business efficiency. Specifically, the process of lifecycle discussion can in itself lead to a better understanding of product and organisation processes.

Implications for stakeholders:

1. Input companies

The input sector spreads across a wide range of product segments which can be viewed as setting the genetic possibility of crops and animals: providing them with nutrition; pests and weeds, protecting them against diseases, improving the efficiency with which they can be cultivated and harvested, while providing services to farmers, including credit and or insurance.

Generally, this section of the value chain has performed fairly well over recent years, benefiting from the high level of crop prices and farmer incomes, and exploiting the new opportunities offered by technology.

Nearly all sectors have been increasing their involvement with emerging markets that are growing in importance as a fraction of sales.

Overall, it is an interesting time for the input industry with large numbers of new opportunities and a strong political engagement provided by the food security policies. The challenge is to have a clear view of the agribusiness landscape that can provide the background against which to enable and implement strategies.

 2.      Farmers

There are roughly over 400 million farmers around the World. The sector is very diverse and can be broken down by farm size, crops grown, animals reared and level of complexity. Farm sizes can vary with clear reason from an average of less than 1 hectare in Uganda to hundreds of thousands of hectares in India or Brazil. There are multiple million smallholders, with an area less than 2 hectares. On average, each of these farms support a family of 4 to 5, which estimates to around a couple billion. Therefore, farming represents the largest employment sector globally. Developing these small farms in emerging economies is fundamental to the overarching progress of economic development in a process referred to as ‘agricultural transformation’.

Farming is considered the riskiest activity along the value chain, subject as it is to the adversities of the weather (complimented by global warming) and market vulnerability. However, in favourable years it is also considered the most profitable.

Not till recently farming was the most heavily subsidized industry globally, with farmer support in OECD countries totalling well over US$200 billion. That said, there has been slow reduction in OECD subsidies, as a result of continuing influence from the WTO, nevertheless subsidies in emerging economies have been increasing in recent times.

The farming sector is however subject to specific inevitable demographic factors. In every region (except from Africa) the rural population is declining as several people migrate to the cities. This leads to a proceed of farm consolidation while simultaneously reducing the labour available in the rural area which contributes toward greater labour productivity.

Despite the thought of what was referred to as somewhat of a ‘lagged’ business during the mid to late ‘90s, farming is now considered an attractive growth industry, reignited by new technology and thoughts around food security.

3.      Traders

Traders occupy an important role in the agribusiness value chain and to certain extent their productivity can be seen as indicative of the sector as a whole. Traders appear in several different ways and sizes with regard to business agendas, regional presence, degree of vertical inclusion and ownership. A handful have significant food processing operations.

Traders have a key role to play in provision of the infrastructure required to meet the growing production in and demand from emerging markets.

As a result of the combined impact of global warming on the distribution of crop production and economically or politically driven regional changes in supply and demand, overall production has the potential to take off and move towards multiple different patterns from those of nowadays. Traders would play key role in ensuring such change is facilitated.

4.      Food companies

Most of the value added in the food chain happens at this end of the stage and margins are usually along the range of 10 to 20 percent, thereabouts. In the food processing sector there are many distinct subsectors with its own individual characteristics, for instance dairy, meat, sugar, beverages. Food and snack service. Organisations may vary in size from big multinationals, many of which employ 50, 000 and or more people, and some of which can trace their roots to the 19th century, SMEs.

 Though First World companies are still dominant, emerging market companies are gradually rising up the leader board. As crop and livestock prices accounts for the major element of compound interest, profit will come under constraints of changes in price.

Health and wellness is also becoming an increasingly important factor. Various factors; including concern over costs, security of supply and traceability, are bringing organisations ever closer towards links with suppliers.

5.  Retailers

In relation to other stages of the agri-food value chain, retailers can vary largely in their characteristics, size and format. Food on average accounts for roughly 50 percent of retailer’s sales. Margins are expected to be low and supply chain efficiency is imperative.

Retailer penetration varies largely by region, with the developed markets almost consumed with the big few retailers (not more than five) dominating and grabbing roughly 80 percent of food sales. Their penetration in the more developed emerging markets is considerably over 50 percent, yet it is only just the beginning to take off in the least developed markets, driven by urbanisation and GDP growth.

The rapid growth of retailers in emerging markets will lead to more efficient supply chains, including less waste, cheaper prices for consumers and ethical food. The recent opening up of India amongst others to international retailers could bring about fairly improved supply chain there. Although several retailers are expanding internationally and will always do, while others will remain local and developing on the back of their domestic markets.

Depending on the type of food, retailers can source produce from any of the three steps in the value chain: traders, food companies and farmers. As the main interface with the consumer, in addition to responding to consumer choices, retailers can play a vital role in influencing them, particularly in areas regarding healthy eating and sustainability.

Conclusion:

Developing more sustainable food systems and agricultural landscapes requires not only a focus on developing and scaling up small-scale and region-based sustainable agriculture initiatives. It also requires a deeper understanding of global economic factors that influence the global food system.

All the way through, this article has outlined strategies for analysing the increased volatility, scrutiny and complexity of the agribusiness value chain. Some will be applicable to all stages along the value chain: the requirement for improved business intelligence to better predict volatility and understand complexity, the agile approach to react quickly to volatility, with risk management approaches to protect against volatility. Other approaches are more particular to specific parts of the value chain. Rapidly, several require an element of collaboration with other actors within and excluding each link in the value chain, not only between private organisations but also between the public and private sectors. Collaboration has common advantages including:

1. It provides greater visibility, and in certain instances foresight along the supply chain.
2. It gives access to new skills and resources and promote innovation.
3. It creates access to afford greater influence over factors previously beyond an organisation’s control, while providing greater security and potentially reducing costs.

Collaboration can take multiple forms. For instance, at one extreme, it can mean mergers and or acquisitions between companies, either in view to diversify the product/service range or vertically integrate and obtain more control over downstream and or upstream activities. At the other extreme, it may be a loose and non-exclusive collaboration between different entities to gather complimentary resources or asset.

Several collaborations are already happening across sectors as well as within them, all signs of a gradual trend towards greater integration. In the near future it is almost sure that organisations will need to rapidly gear both their scanning activities and collaborative efforts beyond their operating sectors to external sectors and further up and or down the value chain.

In the future, ways to achieve successful collaboration will include key skills including: (i) Identification of suitable partners. (ii) Identification of which parts of company strategy are better served through collaborations. (iii) Choice of the right form of collaboration. This will be the right place to start moving forwards in regard to collaboration in order to capture the best value along the agribusiness chain.