The agricultural and food value chain - Entering a new era of cooperation
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Transcript of The agricultural and food value chain - Entering a new era of cooperation
GLOBAL LIFE SCIENCES
The agricultural and food value chain: Entering a new era of cooperation
kpmg.com
KPMG INTERNATIONAL
© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
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
_________________________________________________
Ifyouwouldliketodiscussanyoftheideasinthisreportor how they can be implemented, please contact any of ourKPMGteamslistedattheendofthereport.
Contents
© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Executive summary
“Opportunitiestotakeadvantage of a rapidly changingagribusinesslandscapeabound”.
Chris Stirling
2|Theagriculturalandfoodvaluechain:Enteringaneweraof cooperation
© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
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
© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Introduction
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$600 billion.Agribusinessiscurrentlyoneofthefewbrightspotsintheglobaleconomy,withhigh croppricessustainingtheincomeoffarmersandbusinesseswhichsellto them,andhighlevelsofR&Dinvestmentincertainsectorsindicativeoffaithinitsfuture.
1KPMG International, 2013
4|Theagriculturalandfoodvaluechain:Enteringaneweraof cooperation
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Figure 1: The agriculture and food value chain
• Crops• Meat• Dairy
• Seeds• Fertilizer• Crop protection• Animal health and nutrition• Crop insurance• Food ingredients
Food companies
Retailers
Consumers
Traders
Farmers
Inputcompanies
• Urban• Rural
• Hypermarkets• Supermarket• Corner shops
• Bakery• Meat• Dairy• Snacks• Beverages
• Crops• Meat• Oils/meal• Biofuels
Theagriculturalandfoodvaluechain:Enteringaneweraof cooperation 5
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|
Table 1: Key profitability metrics for the agribusiness value chain
Sector Input Farmers Traders Food companies Retailers
5,400Sales:US$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.
6|Theagriculturalandfoodvaluechain:Enteringaneweraof cooperation
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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
Theagriculturalandfoodvaluechain:Enteringaneweraof cooperation|7
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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
Source:KPMGInternational,2013
8|Theagriculturalandfoodvaluechain:Enteringaneweraof cooperation
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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.
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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.
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Consumerreactionstofoodscarescanbesuddenand severe and have a large impact on demand for thefoodstuffsinvolved.
Politicalinfluencesonsupplyanddemandmanifestwhengovernmentstakeactiontosubsidizeproduction,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.
s
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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,contributetoruraldevelopmentandprovideamenityand‘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
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.
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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
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)
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.
China,inparticular,has greatly increased its investment in agriculturalR&Dandnow spends almost as muchastheUS.
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BiotechnologyBiotechnolgyisanumbrellatermwhichcoversbothgeneticmodification(GM)ofcrops,wherenewgenesareintroducedwhichcouldnotoccurnaturally,andadvancedbreedingtechniquessuchasmarker-assistedselection,whichacceleratethedevelopmentofnaturallyoccurringgenes,or‘nativetraits’.WhereasGMwastheinitialfocusofthebiotechnologyrevolution,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
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.
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• 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.
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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.
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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,movingfromgeneralapplicationscenteringaroundtheprovisionofinformation,suchascroppricesandtheweather,tomorecustomizedandtransactionaltypesofuse,suchas cropinsurance,asshownbelow.
Figure 7: Type of IT intervention in agriculture
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.
Source:KPMGInternational,2013
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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
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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.
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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.
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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
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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.
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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.
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ScrutinyVariousdriversarecreatingpressuretoincreasethetraceabilityofandinformationaboutthefoodweeat.
First, concerns over food safety have been fanned by events like the BSE crisis, melamineinChinesemilk,EcoliinGermanbeansproutsand,mostrecently,horsemeatcontaminationofbeefinEurope.ThesehavebeenbehindtheformationofbodiesliketheEuropeanFoodSafetyAuthority,andalsoprovideopportunitiesforWesterncompaniestoapplytheirknowledgeandexpertiseinemergingmarkets.Thisisreinforcedbyincreasinginterestinthenutritionalandhealthpropertiesofthefoodweeat.
Second, the rapid rise of GM crops, which have achieved significant penetration in somecountriesandcrops,hasresultedinlabelingrequirementsinaround40 countries,particularlyinEurope,butalsoinChinaandRussia.AsthecropswhereGMhassofarachievedsignificantpenetrationarecommoditycrops,thiscreatesnewrequirementsforidentitypreservation,andcanbeabarriertotrade.Havingsaidthat,othercountries,notablytheUS,arestronglyopposedtolabelingforGMcrops.TheUSpositionwasreaffirmedbytherejectionofGMlabelinginavoteinCaliforniainNovember2012.
Third,consumerswanttoknownotjustaboutthecontentandsafetyoftheirfood,butalsohowitisproducedandwhattheenvironmentalandsocialimpactsare.Aspeopleascendtheeconomicladdertheirrequirementsinthisrespectbecomeevermoredemanding.Thishasresultedintheintroductionofvoluntarycertificationschemessuchas‘Fairtrade’and‘TheRainforestAlliance’.Increasinglyfoodcompaniesareadoptingtheseschemesandmakingcommitmentstoimprovethesustainabilityoftheirsourcingandoperations.Therehasbeenaproliferationofsuchschemesoverrecentyears,aswellasadiversityofapproaches.Fig.10givesatimelineforsomeofthemajorschemesintroducedoverthelast40years.Theproliferationandvarietyofschemesreflectstheenvironmentalandsocialimpactofagriculturewhichisgreater(andmorecomplex)thanthatofanyothersector.Concernoverthisaspectofagricultureisalsoreflectedinthewidespreadadoptionoftheconceptof‘SustainableCropProductionIntensification’anapproachdesignedtobalancetheneedtoincreaseproductivitywiththeneedtominimizenegativeenvironmentalimpacts.ThisispromotedbytheFAOamongothersandwidelysupportedthroughouttheprivateandpublicsectors.
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.
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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
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Accommodationoftheabovepressuresisfacilitatedbyadvancesintechnologyandthesupplychain.Therapidincreaseinpenetrationbylargeretailersbringswithitmoresophisticatedandefficientsupplychainswhichpermiteverimprovetraceability and information provision. At the same time new lifecycle analysis toolsandmethodologiesarebeingdevelopedwhichimprovetheaccuracyanddetailofinformationontheenvironmentalandsocialimpactsforfoodproduction.Anexampleofthiscanbefoundinthedevelopmentofcarbonlabeling.TheSustainabilityConsortiumintheUSisplayingaleadingroleinthisarea.Table4looksatdriversofandresponsestotheeverincreasingrequirementsforscrutinyalongtheagri-foodchain.
Table 4: Causes, effects and potential future developments in the area of scrutiny
d
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
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8GlobalReportingInitiativeoftheUN
Despitethesedevelopments,penetrationofvoluntarystandardsisstillverylow.Organicproductionhasonly1-2percentglobalmarketpenetrationandisfarbetterestablishedinEuropethananywhereelse.OthermorerecentcertificationschemessuchasFairtradeandtheRainforestAllianceaccountforwellunder1 percentofglobalconsumption,althoughstillgrowingfast.Moresignificantinterms of impact are some of the mandatory directives and policies which have beenintroduced,particularlyinEurope,whereforexample,thenitrogendirectivehasledtosignificantreductionsontheamountoffertilizeroveruseandpollution,andfarmersubsidiesarebeingmadeincreasinglyconditionaluponenvironmentalcompliance.
Therearechoiceswhicharecommontodifferentstagesinthevaluechain:
• ‘Makeorbuy’:shouldcompaniesadoptexistingstandardsandcertificationschemesordeveloptheirown.Mostcompanieselectfortheformeralthoughsome of the larger ones also do their own thing.
• Iftheybuyintoexistingschemeswhichshouldtheychoose?Tosomeextentthechoicewilldependupontheirbusinessprofile,productrangeandenvironmentalimpact,buttherewillstillbeconsiderablediscretionwithintheseconstraints.
• Whatreportingformatshouldtheyfollow:forexamplehavingaseparatecorporatesocialresponsibilityreportorintegratingitintotheannualreport?Having said that, GRI8 has become a de facto standard.
Suchconsiderationsareimportantastheycanaffecttheattractivenessofacompanytoinvestors,potentialemployees,customersandasapotentialM&Atarget.Moreovertherapidlyevolvingnatureandcomplexityofthisareaoffersopportunitiesfordifferentiationanddistinctivepositioning.
Thesustainabilitydimensionisnotonlyamatterofmanagingreputationalthreatbutcanalsoleadtoidentificationofnewbusinessopportunitiesandleadtoimprovementsinbusinessefficiency.Theprocessoflifecycleanalysiscaninitselfleadtoabetterunderstandingofproductandbusinessprocesses.
Organicproductionhasonly1-2 percentglobalmarket penetration and is far better established inEuropethananywhere else.
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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
Source:KPMGInternational,2013
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.
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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)
The challenge is to have a clear view of the agribusinesslandscapewhich provides the backgroundagainstwhich to develop and implement strategies.
Source:KPMGInternational,2013
Farmers Therearearound450millionfarmersglobally.Thesectorisextremelydiverseandcanbesegmentedbyfarmsize,cropsgrownandlevelofsophistication.Farmsizescanvaryfromanaverageoflessthan1hectareinChinatohundredsofthousandsofhectaresinRussiaorArgentina.Therearearound400 millionsmallholders,withanareaofunder2hectares.Onaverage,eachofthesefarmssupportafamilyof4-5,leadingtoafarmpopulationofaround2billion.Farmingthereforerepresentsthe largest employment sector in the world. Development of these small farms inemergingeconomiesisfundamentaltotheoverallprogressofeconomicdevelopmentinaprocessknownas‘agriculturaltransformation’.
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Farmingisthemostriskyactivityinthevaluechain,subjectasitistothevagariesof the weather (amplified by global warming) and market volatility. However, in gooyears it is also potentially the most profitable.
Untilrecentlyfarmingwasthemostheavilysubsidizedindustryintheworld9, with farmersupportinOECDcountriestotalingaroundUS$280billion.TherehasbeenagradualreductioninOECDsubsidies,asaresultofcontinuingpressurefromtheWTOalthoughsubsidiesinemergingeconomieshavebeenincreasinginrecentyears.
Thefarmingsectorissubjecttocertaininexorabledemographicforces.Inallregions(apartfromAfrica)theruralpopulationisdecliningaspeoplemigratetothecities.Thisleadstoaprocessoffarmconsolidationandalsoreducedlaboravailabilityinthecountrysidewhichstimulatesgreaterlaborproductivity.
Afterbeingthoughtofassomewhatofa‘backwater’businessduringthe1970s,80sand90s,farmingisnowanattractivegrowthindustry,reinvigoratedbynewtechnologyandconcernsoverfoodsecurity.
Thetablebelowlooksathowthetrendstowardsvolatility,complexityandscrutinyaffect farmers.
Table 7: Implications of volatility, complexity and scrutiny for farmers
d
,
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.
Source:KPMGInternational,2013
9Source:‘AgriculturalPoliciesinOECDCountries:AtaGlance’,OECD,2006
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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.
Source:KPMGInternational,2013
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Food companiesMuchofthevalueaddedinthefoodchainhappensatthisstageandmarginsarecommonlyintherangeof10-20percent.Withinthefoodprocessingsectorthereareseveraldistinctsubsectorseachwithitsowncharacteristics,forexamplemeat,dairy,beverages,sugar,snacksandfoodservice.Companiescanvaryinsizefromlargemultinationals,severalofwhichemployover100,000people,someofwhichcantracetheiroriginstothe19thcentury,toSMEs.
Althoughwesterncompaniesstilldominate,emergingmarketcompaniesarerapidlyrisinguptheleaguetable.AscropandlivestockpricesrepresentthemajorelementofCOGS,profitisverysusceptibletochangesinprice.
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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.
Source:KPMGInternational,2013
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© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
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
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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.
Source:KPMGInternational,2013
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© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
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
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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.
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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.
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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
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DesignedbyEvalueserve. Publicationname:Agricultureandfood:AneweraofcollaborationPublicationnumber:130055 Publicationdate:May2013