Population growth, urbanization, and increased income in emerging markets

By 2020, more than half of global GDP growth is expected to come from countries outside of the Organisation for Economic Co-operation and Development; over half the world’s urban population also will be in emerging economies. 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.

A projected surge in demand for protein in emerging markets, especially pork in China, would create opportunities for companies to grow in core production and supporting industries such as breeding, animal-health testing, feed, and vaccines. For example, beef and other livestock production in Argentina and Brazil is expected to grow strongly to meet global demand. Making feed conversion more efficient so that animals produce more meat while consuming the same amount of feed as they do now could be profitable for companies with unique intellectual property in additives such as probiotics, enzymes, and acidifiers.

With opportunity come risks. Rising protein prices in emerging markets, government intervention, and environmental concerns could slow demand. Moreover, not every part of the protein value chain is doing well; livestock producers are struggling because of a poor feed-to-meat/dairy price ratio, and primary processors are suffering from high feedstock costs and low capacity utilization. Also, consumer behavior and preferences can change faster than many companies and investors can handle. Successful investment strategies will address the risks by finding opportunities to capture value (for example, technology or processing that improves feed performance or reduces feed-production cost) or by mitigating the risks (for example, vertical integration within the protein value chain).

Demographic and behavioral change in mature markets

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. As a result, demand is rising for healthier functional foods (those that offer benefits beyond basic nutrition, such as lowering cholesterol) and for traceable and certified foods that are guaranteed to meet a certain level of safety and environmental or corporate social responsibility.

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. For example, in 2010 Unilever announced plans to source 100 percent of its agricultural raw materials sustainably by 2020, and, as of the end of 2014, had reached 55 percent. Food-and-beverage companies can also profit from products with specific fortifications and nutrients to appeal to the health-conscious segment (for example, omega-3–fortified milk).

The productivity imperative

Depletion of 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 percent 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 advantage of the need for higher productivity, input companies, distributors, and logistics enterprises can expand into new geographies as well as provide a wider range of products and services (for example, high-yield seeds, fertilizer, and resource-optimization techniques) to help farmers increase crop yields. Offering innovative technologies (for example, seeds requiring less water for similar yields) is important, but so is their distribution in emerging markets.

The other way to get more from less is to reduce food waste. An estimated 30 percent of agricultural production in Africa and Asia is lost in postharvest processes. Accurate data on waste are difficult to come by, especially in emerging markets, but we know that logistics, trade, and processing infrastructure are critical bottlenecks. In developed markets, most food waste happens downstream, at the retailer or in consumers’ homes, resulting also in around 30 percent consumption loss. Economics drive waste: margins and transport costs determine how much effort to put into waste reduction while consumer behavior is slow to change.

Reducing food waste in emerging markets is a big value-creating investment opportunity, particularly in logistics and distribution. In China alone, the cold-storage-and-transportation market generates $12 billion to $18 billion in revenues and is expected to grow 10 to 15 percent annually to meet the country’s expanding meat, dairy, and vegetable demand. Some local companies are already seeking capital to promote this growth. In developed markets, there are opportunities for innovation in extending food shelf life and in packaging to reduce waste downstream.

A polarized industry structure: Toward bigger and smaller

We anticipate continued consolidation of firms across the agribusiness value chain as well as the emergence of smaller niche players. Large-scale commercial farming has taken off in places such as Brazil, where commercial farms can top 100,000 acres. In addition, smaller- and medium-size family farms are increasing their purchasing (for example, seeds, crop protection, fertilizer, and machinery) and selling grains, sugar, and ethanol through cooperatives, lowering transaction costs significantly. 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.

At the same time, there are rising numbers of specialized players, especially on the input side, where technology and intellectual property play a critical role. Small microbial-fertilizer companies are an example. In addition, the millions of smallholder farmers around the world are gradually integrating into commercial value chains; among them are coffee farmers in Ghana and cotton farmers in India.

Consolidated, integrated farming creates an opportunity for equipment manufacturers, distributors, and technology companies to offer more sophisticated and automated products and services. Smaller, specialized players could grow and perhaps wind up in the hands of strategic investors (as, for example, in BASF’s 2012 acquisition of Becker Underwood, a seed-treatment technology company).

Unprecedented price swings

We expect continued volatility in agricultural input and output prices. Wider swings in agricultural prices in recent years are similar to what happened with other commodities, such as oil and metal. In addition, there is increasing evidence of tighter linkages among commodity prices. With the spike in food prices and the economic downturn in 2008, the number of undernourished people around the world increased to more than 1 billion, from 850 million in 2005. Food-price peaks in 2011 and 2013 had a similar though less severe effect, while we are seeing a continuous price decline over the past 12 months.

The politics and technology advancements of biofuels will be an important factor in price levels and volatility. Meanwhile, other contributing factors to volatility—adverse weather, rising oil prices, export restrictions, civil strife—will most likely persist. Risk management and hedging mechanisms such as weather insurance will therefore be an important component of doing business in parts of the food-and-agribusiness value chain.

Big data and information

Expanded access to and more sophisticated use of information will play an increasingly important 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.

In our view, however, there is still significant progress to be made on figuring out a business model that captures value from data at scale. In part, that is because the data are captured by disparate players in different parts of the value chain (for example, seed companies, equipment manufacturers, traders, and software developers). Managing and capitalizing on the critical data points is likely to require strategic partnerships and acquisitions, and potentially a reshaping of the industry structure. Monsanto’s $930 million acquisition of The Climate Corporation in 2013 was one of several moves by an agriculture giant; other companies, like Deere & Company, have announced partnerships on data with input firms. More opportunities could arise in adjacent areas once integrated, comprehensive data become available.

Meanwhile, emerging markets still lack high-quality, reliable data on production and demand. Establishing a systematic mechanism to capture the data could offer additional value-creating opportunities. In particular, rapid expansion of mobile technologies in rural populations could allow farmers in these areas to greatly improve productivity based on access to better information.

Trade to contribute to food security

Agricultural trade is growing, but protectionism remains a concern for many stakeholders. Indeed, only a modest percentage of global agriculture production is traded across borders, but such exports can influence world market prices and regulation. Agriculture continues to play an important social and political role. Economics often takes a back seat to low food prices, food availability, rural employment, and slowing urban migration.

However, there are still investment opportunities for low-cost producers in countries such as Brazil, where agricultural exports continue to grow. In addition, investments in infrastructure that enables the movement of commodities, such as ports, storage, and the cold chain, can help to promote and capture more value from agricultural trade. Major agricultural traders such as Archer Daniels Midland, Bunge, Cargill, and Louis Dreyfus have committed capital to relieving some important bottlenecks such as movement of product from Brazil’s interior, and we expect additional investment will follow.