Norton Rose Fulbright interviewed over 80 senior executives from organizations across the global food and agribusiness industry in order to identify on going and recent trends within the sector.
Urbanisation, an expanding middle class and population growth in emerging markets are boosting overall demand for food and also changing dietary preferences. As a growing number of people in China, India and other emerging economies increase their incomes and enter the middle classes, they are adopting higher calorie, protein and dairy-rich Western-style diets. This is putting pressure on the food and agribusiness industry to grow more cereals and animal feeds such as soya. The fact that it takes up to 16 pounds of feed and as much as 800 gallons of water to produce one pound of beef illustrates how increasing demand for protein is transforming the industry.
Significant investment and innovation is required if the food and agribusiness industry is to meet this growing demand. Increasing the amount of land under cultivation and improving yields from existing land by irrigation, increasing the use of fertilizers and pesticides and using improved seeds are the classic supply side responses in the food and agribusiness industry. However, increasing investment in information management, logistics, processing and transportation infrastructure is also key to expanding the supply of food and other agri commodities from newly cultivated land and in enlarging the markets (including international markets) accessible to existing cultivated land. The agribusiness sector is traditionally low margin and volatile, and, as a result, securing investment capital is not always straightforward. Equally, the food and agribusiness industry involves more risks than many others, particularly because it is susceptible to numerous variables and uncertainties such as extreme weather events and natural disasters, some of which may be linked to climate change. One only needs to think of the polar vortex that swept across the United States earlier this year and the difficulties that created for livestock farmers in the Midwest. In emerging markets, social and economic changes – urbanization and industrialization – are causing more young people to move away from agricultural work and into white collar jobs, putting further pressure on the industry’s supply side response.
Some emerging markets – in particular Brazil and Russia and, in the longer term, Africa – are regarded primarily as sources of increased supply, with potential to reduce costs and increase production. Other countries – notably China, with its huge and still expanding middle-class population – are a source of increased demand for food and other agri products. Average yields in Africa are well below global averages; a lifting up to global averages would significantly expand production in Africa. Clearly the region has potential on the supply side. But Africa also has significant longer-term prospects as a consumer market for the food and agribusiness industry, especially in countries (such as Nigeria) which are predicted to see a significant rise in the coming decades in overall population and the number of middleclass consumers. India’s future role in the industry is less certain. Despite forecasts showing that India’s population will exceed China’s in 10 to 15 years’ time, India is unlikely to have the same impact on global food consumption as China. In part, this is because production will probably focus on satisfying domestic demand; and, at least to date, cultural factors have resulted in fewer changes in dietary preferences than in China. Brazil and Russia are influential producers and exporters of agricultural products. Brazil is perhaps the key producer globally in the agribusiness sector. Russia is a significant player but has not realized its full potential; its role may be further affected given recent events involving Russia and the Ukraine. In our 2012 survey, 91 per cent of respondents believed that the BRIC markets would have a ‘very significant’ impact on the agribusiness sector. In this survey, only 64 per cent believe these nations will have a ‘very significant’ impact. This is consistent with the view that the BRIC countries as a block are having a lesser impact on global growth. A broader group of emerging markets are driving demand and supply in the agribusiness industry. Parts of Africa and South East Asia (for example countries such as Indonesia and Vietnam) are increasingly important. There are particular risks in dealing in jurisdictions in the emerging markets, risks around the ability to enforce contracts and to resolve disputes, and in a heightened exposure to bribery and corruption. There are also significant difficulties related to infrastructure and logistics, areas which are underdeveloped in emerging markets. Given the risks associated with operating in emerging economies and the narrow profit margins in the agribusiness industry, relatively few respondents were enthusiastic about investing large sums to develop their own infrastructure. Even when they were, respondents were concerned that such projects may be difficult to finance, although there are signs that this situation may be improving.