Agribusiness Megatrends

Let me share my analysis about the drivers that might shape the future of our agribusiness. My original interest in the subject comes from the interaction of two concepts: Nasbiit’s megatrends that highlighted women participation in the labor force (Nasbiit); and Gary Becker’s theory, which states that homes manufacture final goods, mainly food (Becker). The combination of both theories explains the demand for convenience, households outsourcing of food production, and the growth of fast food business and the proportion of shelves of ready-to-eat goods in supermarkets.

I Megatrend Demand Drivers

I.1Demand Growth

The first trend driver in the demand side is the growth of the world middle class, the Burke’s Americums; social groups of 350 million people, with an average income of 15,000 dollars a year, living an American lifestyle. They are now in China and India, people expect that there will be 9 Americums in 20 years (Burke). They will demand meats, fruits, vegetables, electricity, SUVs, etc.

Besides, there is another group I call Povericum. Data from the CIA, shows that 39% of the world´s labor force work in agriculture, in non OECD countries; they generate only 2.9% of the world GDP. Those workers are poor by definition. The other part of Povericum, are the urban poor. Their poverty is worse, because they can compare.

We face now a global abundance of food and many local scarcities, the insignificant contribution of agriculture to the World GDP, as currently measured, is due to the decrease in relative prices. Not its value of use, but its value of exchange.

After the recent ups and downs of agricultural prices, those prices showed some kind of Ratchet Effect, prices went up and did not decrease to its original level. The FAO Food Price Index shows a 100% price increase en 2008, compared to 2006 prices. Even if prices decreased later, the net price increase compared to 2006 prices is still 55% in Cereals, 50% in Fats and Oils and 8% in Sugar (FAO). All those commodities are related to biofuels. In the USA the proportion of price paid by consumer received by farmer has been declining from 40% in 1950 to 19% in 2008 (ERS), increasing the so called “Marketing Bill”

I. 2 The Financial Crisis and Future Demand

Some people may think that the Americums’ demand growth will be stopped by the current mortgage crisis. The capital market indicators like the Dow Jones show a financial Hysteria: large ups and downs in financial indexes, with no relationship with actual GDP trends. The world GDP rather shows Hysteresis, maintaining its upward trend, or with only minor decreases, fueled by the hysteria, however most of the World GDP projections are positive.

I.3 The Gallo’s 10 Fs of Agribusiness Demand

There are additional sources of demand growth for agribusiness: The Gallo’s 10 Fs of agribusiness demand, all these crops competing for our fixed resources: Land, Water and Pollution Rights. We can group 10 types of demands: Food, Feed, Fiber, Fuels, Flowers, Forest, Fish, Pharmacy, Furfural for Bioplastics and finally Fools, demanding for drugs.

The synergy between increased purchasing power of the Americums, the population growth in Povericum and the 10Fs, will multiply the demand for agribusiness products, generating new opportunities for our sector.

II Supply Drivers

Let us analyze some supply side drivers of megatrends in agribusiness.

II.1 Volatility, Risks and Cost

Global Warming suggested by Gore and by Friedman, (Gore), (Friedman), and Climate Change (FAO), will increase the volatility in agribusiness. Those factors will increase the variance of yields and business risks; hence we might expect increased costs of capital, debt and insurance.

The Input/output relation in manufacturing is deterministic. But in agribusiness input/output relationship is stochastic. The weather variability, the price inelasticity, and the global climate change, will leverage the volatility. We might face a Taleb´s like “Black Swan”, a highly improbable event with devastating consequences, like a Giga Niño. In such event food prices will raise, the urban poor people will suffer, but farmers will have nothing to sell. Mega Niños have caused the vanishing of civilizations in ancient Peru. If we expect to face this kind of phenomena, countries would need higher security levels of food inventories.

II.2 Operative Risk Management

An increasing proportion of High Value Agribusiness Products HVAP, like fruits and vegetables, will be produced under controlled conditions. Confined poultry and swine operations are now called “animal factories”. Minimizing stochasticity is very important in this HVAP business. In Almeria in Spain there is a cluster of 60,000 acres of greenhouses called the “Plastic Sea”, we are observing in small countries like Honduras and Nicaragua, farms operating up to 100 acres of green houses producing bell peppers.

II.3 Aquabusiness.

Aquaculture is the most efficient way of producing protein foods for human consumption. Shepherd cites a Kontari´s report that shows that the conversion of 100 kg of feed into edible meat is 65 kg, in the case of salmon; 20 kg, in chicken; 13 Kg, in pork; and 1.2, in lamb. He suggests that this new business will start with the advantages already developed in genetics, nutrition and animal medicine, and also in supply chain management, packaging, etc (Shepherd). We should expect an important growth in this business. Current extractive fishing is at the development stage of food recollection 10,000 years ago. In China, the biggest fish producer, 70% of total output comes from aquaculture (Lansun). At the world level, in 2006, cultivated fish and sea plants available for food represented 42% of the total marine capture. (FAO), (Nierentz).

Tilapia will become the “Aquachicken”, (not the chicken of the sea). Tilapias eat vegetal proteins, which are cheaper than fish meal, available and renewable. Tilapias have good taste and nutritional attributes. The good feed–meat conversion rate in fish is due to its low energy consumption, because the fish floats and need no big skeleton. Its thermal regulation is also efficient.

The sea might also give us most of the 10 F’s before mentioned, plus a very important “F”, Fresh Water; which will be feasible once the energy costs of desalinization are reduced. An ecological monitoring of the sea, from the beginning, would be mandatory to avoid disasters. It is interesting to see how the consumption of bottled water is higher than milk consumption (ERS).

II. 4 The Future Energy Portfolio

The future energy portfolio will include some biofuels for some years, but relative prices of food, will limit the utilization of land in fuels. The prices observed in 2008, when oil prices skyrocketed; show that some agricultural prices might triple. Food demand inelasticity and its actual value of use, would force large price increases. Currently, the only financially and ecologically sound biofuels are sugar cane ethanol, and palm and jatropha biodiesel. The higher the price of oil, the greener we will become. Corn ethanol and soybeans biodiesel are sustained by subsidies. An increased utilization of corn and soybeans in biofuels might have vast social costs for the urban poor of the world.

Friedman classifies fuels in “dirty fuels from hell”: oil, carbon; and “clean fuels from heaven”, sun, wind, etc. (Friedman). He proposes what I would rephrase as a ““Sin” Tax to Fuels from Hell”, to charge to the fuel users (not only to producers) for the externalities from their dirty fuel consumption, generating funds for research in fuels from heaven.

We might expect that the interaction of Nanotechnology, Biotechnology, Information and Managerial Technologies will generate synergistic outcomes, for the development of new, better, and affordable products, under the management of our agribusiness leaders. I do not expect a Malthus scenario due to the demand growth, because that synergy of sciences will generate the appropriate supply.

II. 5 Firm Approach to Farms

Agribusiness in lower income countries should be addressed more as firms, rather than as traditional farms, subject to paternalism. The Millennium Challenge Account programs in agriculture require that the beneficiary farmers must increase their income by U$2,000 a year. Contractors are evaluated on that basis.

We should implement the Goldberg’s Agribusiness Systems Approach; I would say that under the leadership of large agribusiness firms or cooperatives who supply technology, capital, marketing, management, and vertical coordination. The farmer’s contribution would be land, labor and risk taking, which should be fairly paid.

II. 5 Countries Buying Countries

Arable land availability is limited in developed countries, some people think that there is a risk of a New Colonialism (Cotula et. Al.), based on cases like the offer from interested firms in buying or leasing for 100 years large lots of land in Madagascar, Ethiopia and Mali.

Even if this would be seen as a foreign direct investment matter, i.e. Fiat buying Chrysler in the USA, in agriculture it is perceived as colonialism. However, local business men and government in those countries, might not be have the required capital, and technological resources to develop such large farm

III. Market Drivers

III.1 Protectionism and Trade Conflicts

Protectionism is almost over. The fall in the protection of textiles in the USA, together with the fall of sugar protection in Europe (F.O. Litch), set the beginning of the end of protectionism. Some people think that once the USA and European markets are open, poor farmers will be competitive, that is not logic.

Krugman says that the conflicts of interest in international trade, the ones that lead to trade policy interventions, are more internal: within the importer countries; than external: local producers against foreign producers. The local consumers want good and cheap products, local or imported; but the local producers want closed frontiers. Closed frontiers call for retaliations. Retaliations affect to the exporters of others goods, in the importing country. Free Trade also reduces Government Revenues. The final balance has leaded to most countries to sign free trade agreements.

III.2 New Logistics Paradigms

I expect a new logistics paradigm that will facilitate High Value Products trade; those are B2B and B2C, Business to Business and Business to Consumer trends. The traditional trade model is based on Economies of Scale and large traders. The new model is based on small buyers and sellers who trade directly, outsourcing the logistic to specialized Full Logistics Service Companies, which consolidate at origin many small shipments, exporting at less than container load (LCL); consolidating the shipments, and de-consolidating those small shipment at destiny, for it delivery to receivers. Those firms combine economies of scale and scope from many small shipments. They do all the customs clearings in both cusroms. The margin of DDP (Delivered Duty Paid) prices, at destiny and Ex-Works prices, at origin; might generate extra value to pay the higher outsourced logistics costs and might generate extra profits for small producers. That way a producer from Tegucigalpa Honduras could sell small shipments special coffee to a coffee shop in Vienna, at affordable logistics costs.

III.3 The Contribution to the Economy from the Poor in the Basis of the Pyramid

Most of poor people in the basis of the pyramid are rural farmers; the name of their contribution to the economy is Economies of Scale. Their immense demand allow global firms like Coca-Cola, Nokia, Toyota, etc, to produce at scale levels that significantly reduce their average costs.

Without the demand from the basis of the pyramid, the costs in industrialized countries would be higher and rich people would have to pay higher prices. Some products would not be available. The price discrimination strategies allow big firms to sell similar products, to high and low income buyers, generating much higher revenues than selling at high fixed prices. That is why you can see poor teenage girls in the highlands of Peru, talking to their friends with mobile phones. Millions of users, in poor countries help us, to have cheap cell phones and service.

IV The Future Agribusiness Education

Dr Goldberg said that when they had to give a name to their agribusiness initiative in 1959 in Harvard, I quote … “The word ‘business’ implied a managerial approach to it and, I think that we wanted people to understand that the farmer was a sophisticated part of our economy, not … someone who wasn’t well educated, that didn’t worry about technology, that wasn’t up to date about the changes that were affecting his/her farm; but was very much a change-maker”.

University Agribusiness education must promote a firm, rather than a farm approach; to teach less policy and more strategy, and to promote a wider academic knowledge and more human virtues.

Our graduates should develop some virtues: magnanimity, to be able to undertake large ventures; solidarity with the needed; and must be trained to be World Class Agribusiness men and women.

References

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http://www.ers.usda.gov/Data/FarmToConsumer/Data/marketingbilltable1.htm

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