challenges in the global agri-food sector: a consultant’s perspective on ‘big picture’ issues...

This article aims to summarise what Isee happening both in Europe andthe rest of the world and how thesedevelopments might impact on thefood supply chain and subsequentlyon our clients. It is written from theperspective of a consulting companyoperating across the globe in a widerange of supply chain projects. Thedairy sector is of particularimportance to us, but many of thecomments can also be applied toother areas of farming and foodproduction.

Businesses are currently experiencingthe biggest economic downturn

since the 1930s. The current GDP inthe UK, for example, is as much as10 per cent less than it would havebeen without a recession.Predictions are that the UKeconomy might not return to‘normality’ until 2014. In the rest ofContinental Europe it might be evenworse, with huge concerns over thefate of the eurozone economies,especially in Greece, Spain, Portugaland Italy as well as in Ireland – allmajor agricultural and foodproducers. The North Americaneconomy looks equally fragile. Japanhas seen long-term economicstagnation, even before thecombined effects of the financialcrisis and a natural disaster.

Yet in the BRIC countries (Brazil,Russia, India and China) and most ofthe so- called N–11 (the ‘New 11’which include Indonesia, Mexico,South Korea, Turkey and Vietnam),

ƒ‘‘Renforcer les liens

au sein de la filiere de

l’offre permettra dans

une grande mesure de

lutter contre la volatilite

des prix

mondiaux.,,economic performance is muchstronger with agricultural and food

sectors continuing to move forward.This economic robustness, however,can bring its own problems. Thereare concerns in these emergingmarkets over rising labour costs, thecosts of fuel and distribution as wellas exposure to volatile exchangerates.

The strength of the agriculturalconsultancy business relies partly oninternal management criteria whichwe can control to a greater or lesserextent. There are, however, a hugenumber of key external industrydrivers we need to take intoconsideration. A review of thesekey developments shows just howfast moving the sector is andunderlines the challenges we allface. Here we have picked out a fewof the main factors that areimpacting on us, our customers andin turn, their customers. Theseinclude:

• World policy developments –progress in WTO talks is stillpainfully slow. Not least, many ofthe key players are pre-occupiedwith their own economic problemsand challenges. In a worst casescenario, there is a fear that anoverly inward-looking focus oneconomic policy will lead togreater protectionism in areas suchas agricultural trade talks. Theregulatory situation in theinternational agri food sector isstill often caught between twoopposing forces – the need to

John Giles, Divisional Director withPromar International and currentChair of the Food, Drink & AgricultureGroup of the Chartered Institute ofMarketing

point devuebyJohn Giles

Challenges in the Global Agri-Food Sector:

A Consultant’s Perspective on ‘Big Picture’ Issues

Les defis pour le secteur agroalimentaire

mondial : le point de vue d’un consultant sur

les grandes questions

Herausforderungen in der globalen Agrar-

und Ernahrungswirtschaft: Ansichten eines

Unternehmensberaters mit Blick auf das

große Ganze

34ƒEuroChoices 11(1) ª 2012 The Author

EuroChoices ª 2012 The Agricultural Economics Society and the European Association of Agricultural Economists

open up agri-food markets, on theone hand, and a clear willingnessfor governments to intervene inthe cause of national self-intereston the other.

• EU policy – there are likely to besignificant changes in the way thatthe EU’s CAP will operate infuture. In particular, moreemphasis on greening, the movetowards uniform area paymentsacross the EU, smoothing outpayments to farmers in the newMember States, capping the level ofdirect payments that can beclaimed by an individual farm andmore help for smaller farms aswell as for those in disadvantagedareas.

The end of the EU milk quotasystem has already been agreed,but there is no consensus as towhether the outcome will be anincrease in milk production in theEU. The simple answer is that somecountries might well produce moremilk if they have a combination ofefficient farming systems, a strong

and consolidated processingsector and access to a range ofmarkets. The Netherlands, Denmark,France and maybe Ireland inparticular all seem better placedthan others. A number of countrieshave already been farming belowquota for some time; this includesthe UK.

ƒ‘‘Engere Beziehungen

innerhalb der

Wertschopfungskette

werden ein

entscheidender Faktor

bei der Bekampfung

von Volatilitat auf

internationalen Markten

sein.,,While the opening shots of CAPreform have been fired in October2011, there are still 2 long years

of negotiation ahead. In addition,there are important policydevelopments in other areas; theseinclude a likely tightening ofanimal welfare and environmentallegislation.

• World dairy production – worldmilk production in 2010 reachedsome 710.3 million tonnes, anincrease of 1.6 per cent from 2009(although below the 2.1 per centaverage annual growth seen in thepast decade). The biggest growth isstill being seen in the emergingmarkets, while in the EU and US, itis more modest. Asia is now thelargest global region with 257million tonnes. North America’sproduction increased by 1.1 percent to 87 million tonnes, withSouth America seeing a 2.5 percent increase to 61.3 milliontonnes and the EU by just 1 percent to 133 million tonnes.New Zealand’s production grew 6per cent from the 2009 ⁄ 10season to 17.8 million tonnesand in Australia, growth was

Larger scale dairy herds are becoming more normal in many parts of the world

ª 2012 The Author EuroChoices 11(1)ƒ 35


at 2 per cent to 9.2 milliontonnes.

• World prices – the Food andAgriculture Organization’s (FAO)food price index hit a record levelin early 2011, topping 2008’sprevious high when soaring foodcosts led to food shortages andriots in many parts of the world.Producer prices in the US andthe EU have increased over thelast 12 months. In theory, highfarm gate prices are good newsfor farmers, but this benefitcan be offset by rising prices forinputs and the time lag betweenprices going up and paymentbeing received. Higher pricescan also squeeze margins forprocessors who are sometimes notable to pass on such increases totheir retail or food servicecustomers.

• Oil prices – these determine thecost of energy and transport for bothfarmers and food processors. Formany processors, the cost of energy

is now the single largest cost theyincur – even higher than labourcosts. Although oil prices havedeclined in recent months they are athigher levels than 12 months agoand again on from 36 months ago.The future of oil supplies and pricesremains uncertain but are still likelyto remain higher than historicallevels even if the worst predictions ofthe ‘peak oil’ advocates are notrealised.

• Feed prices – are largelydetermined by wheat prices onglobal markets and in the last12 months, the overall trend hasbeen upwards with the price quotedon international exchanges early in2011 topping US$350 per tonne.Sharp increases can often reflectreactions to global events such aswhat has happened in Japan and theMiddle East – rather than to data oncrop production, quality andavailability. The international marketis still nervous in its attitude, due toa range of issues. These include theimpact of export bans such as

occurred with Russian exports ofgrain in 2010, the effect of severeweather events in countries such asPakistan and Australia, poor cropconditions in the US and LatinAmerica, lower than expected worldstocks and booming demand in Asia(a recurring theme). Even thoughwheat prices have fallen recently,they are still at high levelscompared to those seen inprevious years.

• Retail developments – in the UK,the combined market share of thediscounters has now reached 6 percent. The so called middle marketwhich is characterised by a mix ofdiscount retailers, independentretailers and foodservice companiesis thought to account for about 40per cent of all liquid milk sales andis a highly price conscious market.Both Aldi and Lidl have announcedambitious plans for significantlymore store openings in the UK overthe next few years and mainstreamUK retailers have consequently been

Water usage will become an increasingly important issue as is already the case in e.g. parts of the US, the Middle East and East Africa



forced to readjust their position inthe market. The plans of theGerman discount giants do notappear to stop at capturingincreased market share in the UK.Long-term, Aldi have stated theirintention to continue expansion, notonly in the UK, but also in the US,as well as in other attractive marketssuch as China, Russia and NewZealand. Lidl are also sizing upopportunities in markets such as theUS, Turkey and Russia.

• Non governmental organisation

(NGO) activity and large dairy

farms – Large scale dairy farms arenow becoming more common –partly in response to the forecastincreasing population growth to2050. In parts of the US, such asCalifornia, dairy farms and herds ofup to 20,000 cows are notuncommon. It is worth notingthough that the role of the small-scale family dairy farm in the US isstill critical – over 75 per cent ofUS dairy units still have less than100 animals. In the UK, the averageherd size is 140. There are alsoplans for large- scale dairy units inmany other parts of the worldstretching from China, Vietnam andRussia to Latin America. However,the role of larger dairy farmsbecomes more challenged whencosts for feeding materials such aswheat and soya are at the highlevels being seen at the moment.

There have also been plans formuch larger units in the UK, mostnotably recently in Lincolnshire,where plans were submitted for a4,000 cow unit. This project waseventually rejected after a review ofits impact by the EnvironmentalAgency, as well huge pressure froma well-planned and implementedconsumer protest harnessed byNGOs focusing on animal welfareissues. In the US, one of theleading fast food chains hasdeclined to source milk from alarge-scale dairy farm on similargrounds.

• Animal disease – there are stillproblems occurring at regular

intervals – for example, South Koreahas had a massive FMD outbreak,where 2.2 million animals have beenslaughtered. They have been usingemergency vaccination and are nowconsidering whether vaccinationshould play a larger part in theirlonger-term control strategy. Therehave been other important recentdisease outbreaks in Eastern Europe,Russia and China.

What does this all mean?

The implications of these factors forour agri-business and other clientsinclude the following.

• Business models – there isprobably no single ‘right’ businessmodel. Nonetheless, businesses thathave achieved a degree of scale intheir operations, have access tounique products and technologies,

sell to a good spread ofinternational markets and havewell-developed supply chainrelationships are in a betterposition than those without suchcharacteristics. Even in niche marketssuch as organics and Fair Trade,having a large scale of operation isnormally desirable.

• Trade policy – governments andcompanies will tend to developtheir own agendas ifinternational organisations areunable to reach agreement onwider objectives.

• Farm size – there is a role for farmsand food companies of all sizes – thekey to success is being a goodperformer, regardless of scale.

• Food security and sustainability

of supply – this is a real issue forgovernments. Witness the imposition

Fast emerging economies such as Chile will be increasingly important globally in thefuture – the development of highly professional agri-food sectors such as the salmonsector is one indication of this trend

Opinion on the future role of large scale dairy herds in Europe remains firmly divided

ª 2012 The Author EuroChoices 11(1)ƒ 37


of export bans in a number ofcountries – India, Russia andArgentina – over the last few years.The Chinese government has alsolaid plans for emergency storage anddistribution of food if supplies of keyessentials tighten or costs continueto escalate.

• The challenge for retailers – inthe commercial supply chain,retailers are aiming to developdedicated supply chains for keyproducts and build strongrelationships with the bestsuppliers. They also want toencourage high standardsof animal welfare, other aspectsof Corporate Social Responsibility(CSR) and environmental goodpractice. They want to be ableto procure at prices andqualities that suit their businessmodel.

• Adding value to products and

services – in today’s environment,it is not always necessarily aboutwho has the cheapest products.It may be equally or moreimportant to add value to aportfolio of products and servicesbased on a company’s knowledgeof its market, customers andindustry.

The big picture

Feeding a world of seven billionconsumers in the face of thesechallenges will be no small task.However, what we can be sure of isthat the supply chain of the futurewill be characterised by:

• supermarkets, processors and largefoodservice companies stilldominating the end user markets –the big companies will carry ongetting bigger and the supply chainwill carry on consolidating at allstages from the farm baseupwards;

• volatility will be a key feature ofinternational markets in the future,but closer supply chain relationshipswill be an important way ofcombating this. The need to partnerand work in close collaboration withothers in the supply chain has neverbeen greater;

• growth will come from emergingmarkets, but mature markets in theEU, US and Japan are still veryimportant to international agri-businesses and should not beignored;

• the supply chain will be greenerand more environmentally aware

than in the past. The CSR agendawill also come to the fore in a waynot seen until now. In addition,food will need to be produced in asafer and more efficient manner inthe future.

ƒ‘‘Closer supply

chain relationships will

be an important way of

combating volatility in

international

markets.,,The current underlying theme ofpublications globally is the need to‘produce more from less’ i.e.productivity growth. Companieswho can contribute to this agendaare more likely to be successful.However, patchy global economicrecovery, price and currencyvolatility, strong NGO activity, therole of the middle market andsupply chain efficiency willcontinue to feature strongly inthe agri-food business environment,presenting both threats andopportunities

Further Reading

n Beddington, J. (2011). The Future of Food and Farming: Challenges and choices for global sustainability. Government Office forScience. Available online at: http://www.bis.gov.uk/assets/bispartners/foresight/docs/food-and-farming/11-547-future-of-food-and-farming-summary

n Binfield, J., Moss, J., Zhang, L., Patton, M. and InSeck, K. (2010). Impact of Volatile World Prices on the European Dairy Sector.EuroChoices, 9(2): 26–27.

n COI Communications (2008). Food Matters: Towards a Strategy for the 21st Century, Cabinet Office. Available online at: http://webarchive.nationalarchives.gov.uk/+/http://www.cabinetoffice.gov.uk/media/cabinetoffice/strategy/assets/food/food_matters1.pdf

n Gulati, A., Brouwer, F. And Ganguly, K., (2012). Indian Agriculture: Unfolding Structural Changes and their Relevance to the EU.EuroChoices, 11(1): this issue.

n Hughes, D. (2011). European Food Marketing: Opportunities in Connecting with Consumers on Health and Wellbeing.EuroChoices, 10(2): 48–54.

n Liefert, W. M., Liefert, O. and Shane, M. (2010). Russia’s Agricultural Imports: Will the High Growth of the 2000s Continue?EuroChoices, 9(3): 43–49.

n OECD ⁄ FAO (2011), Agricultural Outlook 2011-2020, OECD Publishing and FAO. Available online at: http://dx.doi.org/10.1787/agr_outlook-2011-en

n USDA (2011), World Agricultural Supply and Demand Estimates, USDA publishing. Available online at: http://usda01.library.cornell.edu/usda/waob/wasde//2010s/2011/wasde-10-12-2011.pdf

John Giles, Divisional Director with Promar International, the value chain consulting arm of Genus plc. John has worked in 60 countries andis the current Chair of the Food, Drink & Agriculture Group of the Chartered Institute of Marketing.Email: [email protected]



summaryChallenges in the GlobalAgri-Food Sector:A Consultant’sPerspectiveon ‘Big Picture’ Issues

The UK and international agri-food supply chain is going

through an extraordinary period ofchange. The impact of the globaleconomic recession and the ongoinggrowth of world population andincomes, especially in the emergingmarkets of the BRICs and N–11countries, along with unusual climaticand production conditions have allcombined to create the so-called‘perfect storm’. Many reports tell uswhy we have reached this situation;but fewer focus on what we need todo in order to meet the challengesand how the well informed, bold andbrave companies might takeadvantage of the opportunities. Forfarmers, we have often given theadvice of ‘farm a bit bigger, buy a bitsharper and sell a bit higher’. Itsounds simple but I am not sure thatthe current situation changes thisvery much. For food companies ouradvice has often been, ‘find, get inand stay in an identified chain’. Againin this fast changing environment,being outside a recognised supplychain is a risky place to be. And thereare a host of other factors to takeinto account. As consultants, ourbiggest challenge is providing adviceon what to do, rather just explainingwhat has happened and why.

Les defis pour le

secteur agroalimentaire

mondial: le point de vue

d’un consultant sur les

grandes questions

La filière de l’offre agricole etalimentaire au Royaume-Uni et

au niveau international est passée parune période extraordinaire de mutation.L’incidence de la récession économiquemondiale et de la croissance continuede la population et des revenus auniveau mondial, en particulier dans lesmarchés émergents des pays BRIC et N-11, s’est combinée aux conditionsinhabituelles du climat et de laproduction pour créer ce qu’on appelleune ‘‘tempête parfaite’’. De nombreuxrapports expliquent pourquoi noussommes dans cette situation, maisbeaucoup moins suggèrent ce qu’il fautfaire pour répondre aux défis posés etcomment les entreprises courageuses,déterminées et bien informéespourraient profiter des opportunitésoffertes. En ce qui concerne lesagriculteurs, nous avons souventconseillé des ‘‘exploitations un peu plusgrandes, qui achètent avec une peuplus de circonspection et vendent à desprix un peu plus élevés’’. Cela paraitsimple mais je ne suis pas sûr que lasituation actuelle change beaucoup ladonne. En ce qui concerne lesentreprises alimentaires, notre conseil asouvent été de ‘‘trouver, entrer etrester dans une filière précise’’. Làencore, il est risqué dans cetenvironnement en mutation rapide dese trouver en dehors d’une filièred’offre reconnue. Il y a en outre touteune panoplie d’autres facteurs quientrent en jeu. En tant que consultants,notre plus grand défi est de fournir desconseils sur les décisions à prendreplutôt que de se contenter d’expliquerce qui s’est passé et pourquoi.

Herausforderungen in

der globalen Agrar- und

Ernahrungswirtschaft:

Ansichten eines

Unternehmensberaters

mit Blick auf das große

Ganze

Die britische und internationaleWertschöpfungskette der Agrar-

und Ernährungswirtschaft erfährtgerade eine außergewöhnliche Zeit desUmbruchs. Die Auswirkungen derglobalen Rezession sowie dasgegenwärtige Wachstum derWeltbevölkerung, insbesondere auf denneuen Märkten der BRIC- und N-11-Länder, haben zusammen mit denungewöhnlichen Klimaverhältnissenund Produktionsbedingungen zu einerVerkettung von unglücklichenUmständen geführt. Zahlreiche Studiengeben Aufschluss über die Gründe fürdiese Situation; weit weniger Studienbefassen sich jedoch damit, was wir tunmüssen, um diesen Herausforderungenzu begegnen, und wie gut informierte,mutige und zuversichtlicheUnternehmen die sich bietendenMöglichkeiten nutzen könnten.Landwirten haben wir oftmals den Raterteilt, mehr zu produzieren,kostengünstiger einzukaufen und zueinem höheren Preis zu verkaufen. Esmag einfach klingen, aber ich bin mirnicht sicher, dass die aktuelle Situationetwas an diesem Rat ändert.Unternehmen aus derLebensmittelindustrie haben wir oftmalsden Rat erteilt, eine anerkannteWertschöpfungskette auszumachen,dort Zugang zu finden und sich zuetablieren. Und wieder ist es in diesersich schnell verändernden Umgebungriskant, sich außerhalb eineranerkannten Wertschöpfungskette zubefinden. Zahlreiche weitere Faktorenmüssen ebenfalls bedacht werden. AlsUnternehmensberater besteht unseregrößte Herausforderung darin,Handlungsempfehlungen auszusprechenund nicht nur Erklärungen und Gründefür Geschehenes zu liefern.

ª 2012 The Authors EuroChoices 11(1)ƒ 39


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