Pursuing the Global Opportunity in Food and Agribusiness
With global food demand booming, companies are ideally strategically planning to be to become premium food suppliers and a long-term partner of choice in food security. In the quest by nations across the world towards helping its agribusiness and food sector scale-up and make the most of growth opportunities, these nations are keen to attract investment in innovation, agriculture production incorporating food and fibre products, and advanced food processing.
Food and agribusiness is a $5 trillion industry that does represents 10 percent of global consumer spending, 40 percent of employment, and 30 percent of greenhouse-gas emissions and which has a massive economic, social, and environmental footprint. The quest to feeding the global population has reemerged as a critical issue regardless of the huge developments in food productivity in the last 50 years.
It’s feared that in the event that current trends defining food productivity continue, by 2050, caloric demand will increase by 70 percent, and crop demand for human consumption and animal feed will increase by at least 100 percent. At the same time, more resource constraints will emerge: for example, 40 percent of water demand in 2030 is unlikely to be met. The recent period of food price volatility has alerted the world to profound changes that are occurring in the food system. Though prices may decrease in the short term there are a series of fundamental shifts occurring in the food system that, in the medium term, are likely to see significant increases in prices.
Trends influencing food and agribusiness economics
1. Population growth, urbanization and increased income
Demand for food in emerging markets is expected to increase sharply because of population and income growth. In addition, these regions are likely to adopt a rich-country diet—more calories, protein, and processed foods. Population size will increase (though at a diminishing rate) while the world’s peoples will be wealthier and demand a richer diet requiring more resources to produce. The global population will increasingly be urban which changes the way food is purchased and marketed (as well as amplifying the social and political consequences of high food prices).
Sensing an opportunity, strategic and financial investors are positioning themselves to capture value from technological innovation and discontinuities in food and agriculture. Since 2004, global investments in the food-and-agribusiness sector have grown threefold, to more than $100 billion in 2013, according to McKinsey analysis. Food-and-agribusiness companies on average have demonstrated higher total returns to shareholders (TRS) than many other sectors: the TRS of more than 100 publicly traded food-and-agribusiness companies around the world increased an average of 17 percent annually between 2004 and 2013, compared with 13 percent for energy and 10 percent for information technology. In the quest to find the right investment, the biggest challenge is that food-and-agribusiness investing requires a deep understanding of specific crops, geographies, and complex value chains that encompass seeds and other inputs, production, processing, and retailing.
2. Demand for healthier diets
In addition to greater demand for protein, we anticipate a trend toward healthier diets. Consumers are increasingly health conscious and place greater importance on environmental sustainability, most visibly in developed countries but more and more in emerging markets.
In response, governments are tightening standards for food production. Producers and food companies that embrace more stringent environmental and social standards, organic-certification requirements, and traceability standards should be able to better position themselves in the face of evolving regulation and continue to grow to take advantage of this trend.
3. Diminished natural resource and Climate change
Decrease in natural resources, the impact of climate volatility on crops, and declining productivity gains in agriculture are expected to hinder growth in the world food supply, forcing countries to produce more with less. By 2030, for example, the gap between expected water withdrawals and existing supply may reach 40 percent. The pressure on water, land, energy, and labor resources will necessitate innovation to enhance agriculture productivity. Indeed, productivity gains have slowed in recent years; productivity of major crop yields is now growing by only 1 percent a year compared with twice that rate in the 1960s and 1970s.
This has big implications: a 2% increase in wheat yields would generate enough calories (about 150 kilocalories per day) to give an extra piece of bread to the nearly 900 million people living in the least-developed countries. To take gain of the need for better productiveness, input businesses, vendors, and logistics firms can get into new geographies as well as provide a much wider range of products and services (as an instance, excessive-yield seeds, fertilizer, and useful resource-optimization strategies) to help farmers increase crop yields. Offering modern technology (for example, seeds requiring less water for comparable yields) is important, however so is their distribution in emerging markets. Food waste reduction is another aspect of creating value based investment opportunity more so in logistics and distribution. Almost 30% post harvest losses in agricultural production occur in Africa and Asia.
4. Change in the industry structure towards bigger and more specialised
An expected continued merger of firms across the agribusiness value chain and the rise of specialized small niche players will be witnessed. Large-scale commercial farming has taken off in places such as Brazil while there is also emerging interest in Africa as a production basin: major agribusiness companies are increasingly integrating vertically as more traders extend into production and processing, while retailers are moving into production and sourcing of key input commodities.
The rise of specialized players especially on the input side where technology and intellectual property play a critical role is already being seen. Consolidated, integrated farming creates an opportunity for equipment manufacturers, distributors, and technology companies to offer more sophisticated and automated products and services.
5. Agricultural products price volatility
Volatility in agricultural input and output products will continue. These swings in prices have been witnessed in other products such as oil and metal. It’s aslo expected that politics and technology developments of biofuels will be a vital in determination of price levels and volatility. Other factors will include adverse weather patterns, increased oil prices, export limits and civil strife which are expected to continue.
6. Information revolution
Access and use of data though advanced statistical analysis will form a key role in agriculture. There is exciting potential to use more granular data (for example, data for every ten-meter-by-ten-meter square of a field) and analytical capability to integrate various sources of information (such as weather, soil, and market prices) with the goal of increasing crop yield and optimizing resource usage, thus lowering cost.
Trade is also expected to be a factor in determining food security. Limits to trade through the use of protectionism measures however remains a hindrance. A modest percentage of global agriculture production is traded across borders, but such exports can influence world market prices and regulation.
Based on these trends, the report identifies 24 key areas that may prove attractive to investors over the next decade and assessed these opportunities on market size, risk, and growth potential as seen below.
The strategy to win in the investment,/h2>
A thoughtful approach and sector-specific capabilities will be needed in addition to identifying the opportunity for success. One should consider an in-depth value-chain understanding, recognize the importance of emerging markets, Take a through-cycle approach, develop commercial relationships and Develop operational capabilities in agribusiness.
The food-and-agribusiness value chain comprises a wide range of companies, from suppliers of agricultural machinery, seeds, chemicals, animal-health tests and vaccines, and packaged foods to data providers for precision agriculture. Filling the global gap between supply and demand requires more resources—technical, human, and financial—for the majority of these companies. Investors have a critical role to play in meeting this challenge—and opportunities to benefit. Not only is demand for food in emerging markets expected to rise dramatically because of population and income growth, but also these regions are likely to adopt a rich-country diet—more calories, protein, and processed foods.