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Part 1
The Food Production
Chains Environment
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Chapter 1
Environmental Changes Affecting
Food and Agribusiness:
What Are the Trends?*
The objective of this chapter is to share some important changes in the macro-environmental variables that may affect more companies operating in food and agribusiness industry.
I will use the traditional PEST analysis to summarize the major thoughts. The PEST (or STEP) analysis is a traditional tool to understand macro-environmental changes where “P” represents the political–legal environment (institutional environment), “E” refers to economic and natural environments, “S” is for the socio-cultural environment and finally, “T” is for the technological environment. These four environments help to organize the macro-environmental variables and are the first and very important “step” in strategic planning processes.
Starting with the political–legal environment, we may say that instabilities in Iran and other Middle East countries, North Korea and Northern African countries are affecting oil prices, together with the growth in oil consumption from emerging economies. This will help to leverage the biofuel industry even more, since high oil prices would boost investments in finding alternate resources and stimulate government policy of blending biofuels into gasoline thus resulting in economic and environmental benefits.
Lower interest rates in Europe are driving enormous flow of resources to emerging economies which are suffering with the valuation of their currencies, eroding their competitiveness. Also, some expected reforms are not progressing in important food/ agribusiness producing countries resulting in increase in costs of several commodities.
Developing countries’ tax management policies are confusing with newer protections and market access limitations. We face increasing risks of interference (regulation), some examples being the limitations exercised in food advertisements to kids and regulation toward foreign investments in land. In developed economies, we see shorter federal budgets as an argument to remove support for some less efficient agribusiness industries and even farmer support programs.
The economic and natural environment shows that in this decade, economic growth would probably be coming mostly from emerging countries (it was expected that in 2012, 5.5% average of GDP growth would be achieved by developing economies compared to 1.5% growth in developed economies) due to larger pace of income distribution in populated emerging economies.
Exchange rate policies are being used often thus affecting competitiveness of regions. Flow of capital and investment in food and agriculture brings a new environment of capital availability and increasing risks.
Since there is an increasing influence of weather in some regions, we see a shift in the production regions. Such shifts are also influenced by land prices and labor. New agricultural frontiers are being developed by local and international companies following governmental incentives for value capturing in producing regions (more processing than others). Also, in the economic environment, bigger environmental pressure will increase production costs and we see more initiatives of buyers increasing coordination over suppliers (farmers).
The socio-cultural environment shows some interesting changes. Migration and urbanization are leveraging the growth of processed food, the protest and mobilization movements are increasing pressure over inclusion, thus signalizing to the companies that such trends could be an opportunity within the supply chain. The companies face growing risks from consumer movements. The demographic trends of reduction on family size and people living alone continue to boost food service and ready to eat markets. There is also an increasing concern about food waste, and we see growing debates in this field.
Consumers are also demanding more information — whether the production treats its suppliers, i.e., farmers with fairness, consumers prefer to encourage direct trade and value what is “local.” Natural and health-linked food movements continue strong thus creating an awareness and increase in the demand for certifications of products, companies and food chains. Finally, there is a larger acceptance of biotechnology, with focus over genetically modified products.
Another important point is an increasing pressure thrust by society and buyers against protection of some industries. For example, several sugar buyers in the US are protesting against high import taxes and other support programs for local sugar industry that have led to higher costs than international markets.
Finally, as we enter the era of commodities, there is an increasing pressure over natural resources within the technological environment. A lot of investments are taking place in the development of biotechnology and nanotechnologies, and in the communication side, we can see the rapid transformation of society with digital world and new media improving the speed of communication. Availability and speed of information is facilitating in identify product sources and other relevant information quickly. Technologies that allow to recycle and reuse have higher value than before.
Table 1.1.
This chapter highlights some of the changes that emerged from recent discussions with business managers and executives. These are facts that will bring specific impacts to the industries and food chain participants that are desiring newer strategies, or improvements in their planning processes, respectively.
Discussion question
How will all these facts impact your business?
* First published in China Daily (March 31, 2012).
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Chapter 2
Let Us Ensure the Seven Billionth
Inhabitant Is Well Fed*
Much ink has been spent on warning us about the future of the planet, scarcity of resources, difficulties in the continuance of present-day lifestyles and consumption, availability of food and land, increased carbon prices and inflation, shortage of water, increase in obesity and other issues that have made us a lot more sensitive to the fundamental changes taking place around us.
What drove this blanket media coverage was the arrival of person number 7,000,000,000 on the planet. By the time you pick up the next issue of the China Daily European Weekly seven days from now, the world will have more than 1.5 million new mouths to feed.
Just to illustrate the scenario, global consumption of wheat is growing (three years average) at 10 million tons a year, corn almost 30 million tons a year and soya 20 million tons a year. The consumption of meat grew almost 20% in nine years. In essence, we have access to food but production is not responding the way it should. Last year alone we had a deficit of 50 million tons of grain.
Asia is creating a huge middle-class income population, with a possibility of almost 1 billion people in the middle class segment. All projections done 10 years ago on production, exports and imports in China are found incomplete, and some are plain wrong. In 1995, China produced and consumed 14 million tons of soybeans. Last year it produced 14 million tons and imported 70 million tons, and these figures exceed what has been projected for 2030!
If China wants to be self-sufficient in soybeans today, over 35 million new ha need to be dedicated to the crop. But this is unnecessary, since there are countries and regions in the world full of areas to supply food to China.
All this will become even more complicated in the coming years, due to the five-year strategic plan of China that focuses on income distribution and better working wages. Thus, we can expect more income for poor people being reflected immediately in higher food consumption.
It is not only in China that food markets are growing at incredible rates. The food market in India is expected to grow from $155 billion (112 billion euros) in 2010 to $260 billion in 2015. In the same period, Thailand’s food market is expected to grow 50% and Indonesia’s from $65 billion to $100 billion. Imagine what could happen in Middle East and Northern African countries, in Africa as a whole and in South America, with the booming economies of Brazil and Argentina representing almost 250 million people.
Food commodities prices rose almost 40% last year. This increase is bringing back inflation, hunger and political disturbances in some developing countries, where people spend between 30% and 50%, and sometimes more, of their incomes on food and are net importers of oil.
Two basic questions need to be answered. The first is: Why do commodity prices keep rising and the price of industrialized products keep falling?
Several factors are putting pressure on food commodities markets, some of which are: the big increase in income and distribution in emerging economies (with no accurate consumption data); urbanization; changing consumption habits; emerging countries’ government family income support programs; high oil prices and the use of grains and agricultural land for biofuels; food production shortages (due to climate, unsustainable water use, plagues and diseases, cost increases and other factors); the devaluation of the US dollar and investment funds speculation. Two of these factors need to be looked at more closely.
An increasing number of industries are using farmland more intensively as the main source for their products. Farms (agricultural lands) were originally “designed” for food production and now they are being occupied to produce fuels for our cars, to feed animals (habits are changing to eating more protein), for generating biofuels and biomass (electricity), bioplastics, paper and pulp. Agricultural land is also diverted for manufacuturing purposes as in pharmaceuticals, beauty products (cosmetics), clothes (cotton), shoes, leather, tires and other rubber products, construction and furniture and so on. Since land does not grow, the pressure mounts on existing land and as a consequence land prices increase dramatically.
The second question relates to the increase in cost for producing commodities. Traditional commodity suppliers are facing huge changes in cost structures, increase in prices of land, labor, water, fertilizers and crop protection. It is a fundamental change.
For example, a glass of orange juice offered at the G20 meeting in Cannes no doubt came from Brazil (about 90% of world market share). This juice is produced from oranges planted in São Paulo state, crushed in modern factories and moved in dedicated trucks and vessels using world-class logistics to Rotterdam. The cost of all this production and operation per ton of juice delivered in Rotterdam was $500 in 2003. Seven years later, the operational cost is about $1,500.
It is an incredible increase, and if consumers want to keep this chain a...
