Food and Agribusiness Industry

Major Industry Trends

Despite the accelerating industrialization of the globe over the past 100 years, and the rapid growth of manufacturing industry across the developing world over the past 20 years, around four in 10 of the total global population remain involved in agriculture, according to the latest statistics from the United Nation’s Food and Agriculture Organization (FAO). The FAO says that, in 2004, 2,600 million people (out of a global population of 6,377 million) were engaged in agriculture. Clearly, the proportion of the population that is engaged in agriculture varies markedly from advanced economies such as the UK (the first country to industrialize), where agriculture accounts for just 1.7% of the population, to developing countries such as Zambia, where the figure is 66.9%.

Key Trends

Rising (and Falling) Food Prices

The FAO index of nominal food prices doubled between 2002 and 2008 and the FAO said (in its State of Agriculture 2008 publication) that, in 2008, “more than at any time in the past three decades, the world’s attention is focused this year on food and agriculture,” a comment that reflected concern about the impact of rising food prices around the world, and the potential threat to political and economic stability. For food accounts for up to 60% of household spending in many developing countries. The report warned: “World food and agriculture are facing critical challenges. Sharply higher food prices sparked riots in many countries in 2008, and have led at least 40 governments to impose emergency measures, such as food price controls or export restrictions.” A number of factors caused food prices to rise sharply in 2008. These included:

• A surge in commodity prices, driven by increased energy costs (a key input in food and fertilizer production), as well as adverse weather conditions in key food-exporting countries, and strong growth in global demand, driven by robust global economic growth. At the same time, global cereal stocks fell to “historically low” levels, according to the FAO, driving market prices even higher. Cereals are not only a key ingredient in food products such as bread, but are also a key component of animal feed. Thus, higher animal feed prices inevitably result in higher meat prices.

• Government action: according to the FAO, some of the emergency measures adopted by governments to cap food prices, such as export controls, further destabilized world markets.

• The growth of biofuel production: the impact of biofuels on commodity prices is controversial, with the FAO saying that estimates range from 3% (according to the US Department of Agriculture) to 30% (from the International Food Policy Research Institute) in 2008.

• Environmental pressures: desertification is accelerating in China and sub-Saharan Africa, while proponents of climate change argue that flooding is increasing, and changing rainfall patterns are having a significant impact on agricultural production.

Prices for many commodities, including food products, came under pressure in 2008, particularly in the latter part of the year, as the global financial crisis dramatically slowed global economic growth. Despite the decline in international prices, domestic food prices remained very high in several developing countries, affecting access to food among low-income population groups. Furthermore, many of the trends identified by the FAO, as well as the growth of Western-style diets among the citizens of emerging economies (see below), are likely to re-emerge as global economic growth recovers. They will thus exert upward pressure on food prices in the long term.

Western Diets (and Health Problems) Sweep the Globe

Rising living standards and changing patterns of food consumption in fast-developing emerging countries are other key factors driving global demand for food, and putting upward pressure on commodity prices. Consumption of dairy products in countries such as India and China used to be very low, but is now surging to such an extent that it is driving up prices for dairy products around the world. Similar trends are occurring in meat, vegetable oils, and many other areas.

Meanwhile, consumers in emerging markets are adopting Western lifestyles, which tend to be fast-paced, generating enormous demand for convenience foods, such as ready meals, and canned and packaged produce. The trend towards convenience-oriented, Western-style lifestyles is exemplified by the growth of fast-food outlets in emerging markets. In February 2009, McDonald’s said that it planned to open a further 500 outlets in China over the following three years. In 2008, the company opened 146 restaurants in China, one of its fastest-growing markets, increasing the number of outlets to 2,012 by the end of the year, out of more than 30,000 worldwide.

However, as consumers in developing countries adopt Western-style diets, they also encounter the health problems that are increasingly prevalent in the West. Scientists and health experts have documented alarming weight gains in recent years in China, the Middle East, Africa, Europe, and Latin America, especially in children and women, according to an article published in the Chicago Tribune (October 1, 2007). In the US, the obesity rate has soared to about 35% for women and 20% for men. The common factors fueling the rise in obesity are: diets rich in sweeteners and saturated fats; work and leisure activities that involve less exercise; and increasing consumption of cheap, processed foods. In the UK, the problem has grown to such an extent that fire crews are called out at least once a day to lift obese people whom staff have found too heavy to move (source: The Guardian, March 13, 2009). But even “desperately poor countries such as Nigeria and Uganda are wrestling with the dilemma of obesity,” according to the Chicago Tribune. The newspaper added that the growth of another Western phenomenon in emerging economies, the supermarket, was contributing to the rise in obesity. Although these shops offer “better, cleaner food,” they also supply more snacks and soft drinks, instead of local fruits and vegetables.

The Growing Power of Supermarkets and the Impact on Agribusiness

The growing power of supermarkets around the world is also having an enormous impact on agribusiness and the food chain. The phenomenon has already been well documented in Western countries. Up until the early 1960s, small, neighborhood grocery shops, independent butchers, and local fruit and vegetable shops dominated food retailing in many Western countries, such as the UK. Today, supermarkets account for more than 90% of food sales in the UK. Furthermore, four major chains—Tesco, ASDA (part of the US giant, Wal-Mart), Sainsbury’s, and Morrisons—account for around 75% of sales, with Tesco alone taking more than £3 of every £10 spent on food in the UK. Similar trends can be seen in other developed countries, and, increasingly, in emerging economies around the world. Supermarkets entered Latin America in the early 1990s, and South-East Asia in the latter part of the decade. They are now sweeping across India, China, Eastern Europe, and parts of Africa. In many countries, supermarkets now account for around 50% of food sales.

While suppliers and wholesalers could once dictate prices, and even tell retailers which products they could sell, the balance of power has now shifted decisively to the retailers, which are in a position to demand ever-lower prices and improved terms. The major supermarket chains increasingly source their produce from around the world, placing further pressure on local suppliers, which either meet the demands of the major chains, or go under. Inevitably, this trend affects the person at the bottom of the supply chain: the farmer. The supermarkets are also using the increasing acceptance and popularity of their own brands to exert pressure on suppliers.

Back to top

Market Analysis

The Size of the Global Food Market

The long-established market-research publisher, Key Note Ltd of London, estimates that the global retail market for food amounted to £1,182 billion in 2008, and that growth has accelerated over the past five years, reflecting strong global economic growth (up until the latter part of 2008), and the surge in commodity prices that took place over the period, as well the growth of the global population and rising living standards, particularly in rapidly developing economies such as China and India.

Table 1. The global food market by sector at current prices (£bn at RSP*), 2004–2008. (Source: Key Note)

* RSP: retail selling price

Global Trends by Commodity

Cereals

World cereal production reached a record high in 2008, according to the FAO, reflecting clement weather conditions. But the organization anticipates that output will fall in 2009, as a result of reduced plantings and adverse weather conditions. In early 2008, wheat prices reached record highs. Extreme weather damaged crops in 2007, and US wheat inventories fell to their lowest level for 60 years in February 2008. By February 2009, however, wheat prices had fallen by around 60% from the same month in 2008, because of a rebound in world stocks.

According to Key Note, global sales of bread, cakes, biscuits, and breakfast cereals (all derived from crops such as wheat, oats, and corn, and many of which are staple foods) totaled £233 billion in 2008. Demand for products such as breakfast cereals and biscuits, which were once found only in the West, is increasing in emerging economies such as India and China, and this has helped to drive growth in global consumption over the next five years.

Rice

Rice is the staple food for around 2.5 billion people, or more than one-third of the global population. The global price of rice has been increasing for much of the current decade. According to the International Rice Research Institute (IRRI), a non-profit research and education center, this is because the world is consuming more rice than it is producing, and global stocks are becoming rapidly depleted (current stocks are at their lowest levels since 1988). A number of factors are causing this imbalance between supply and demand. They include:

• A slowdown in the growth of rice yield. In South Asia, for example, average yield growth decreased from 2.14% per year between 1970 and 1990 to 1.40% per year between 1990 and 2005, according to IRRI.

• In Asia, pressure on land is limiting the scope for increasing the area devoted to the cultivation of rice.

• Governments are devoting decreasing resources to agricultural research and development. IRRI says that declining rice prices in the 1990s led to complacency about the need for R&D among governments.

• Rice has become an increasingly popular food in Africa, leading to further pressure on global supplies.

• Population growth is outstripping growth in rice production, a problem that is projected to worsen.

• Rapid economic growth is increasing the pressure on agricultural land. IRRI says that highly productive rice land has been lost to housing and industrial development, or to the cultivation of vegetables, and other cash crops.

Meat and Meat Products

Global demand for meat has risen more than fivefold in the past 50 years, according to the FAO, and it continued to grow strongly in 2008. The FAO said that, while growth in meat consumption in developed countries is expected to remain modest in 2008, at less than 1%, stronger economic growth and growing incomes in developing countries are likely to lead to a 3% increase in global consumption in 2008.

Key Note believes that consumption of meat and meat products will continue to increase strongly. For, as the world economy grows, so does global meat consumption. The average person in the industrialized world eats more than 176 lb of meat annually, compared with around 66 lb consumed by the average resident of the developing world. As developing economies become richer, these countries’ citizens spend more on meat. This is particularly true in parts of the world where consumption is relatively low, such as China and India, with their vast populations. Pork, for example, was once a rare luxury in China, but pork imports into China rose by more than 900% during the first four months of 2008 alone. In 2008, global meat production is expected to top 280 million metric tons and that figure could nearly double by 2050.

Fish and Fish Products

Fish is the main source of protein for around 1 billion people. Demand for fish is also growing rapidly, due to population growth and rising incomes. Global per capita consumption of fish has risen from 9 kg in 1961 to an estimated 17 kg in 2008, according to the FAO. Global supplies of fish in its natural environment are clearly finite—indeed, stocks of certain species are dwindling at an alarming rate. Consequently, fish from farms accounts for an increasing proportion of global supplies. According to The Economist (March 2, 2009), farming accounted for 6% of fish available for human consumption in the 1970s. By 2006, the most recent year for which figures are available, that figure had increased to 47%.

Fruit and Vegetables

Consumption of fruit and vegetables grew at a robust pace between 2003 and 2007, and it is likely to accelerate further over the next five years, according to Key Note. The company says that consumers in both the developed world and the developing world are increasingly concerned and knowledgeable about the link between health and diet, and are responding to widespread publicity about the benefits of eating fruit and vegetables. Key Note adds that the value of the market is being driven by increased prices as well as rising volume consumption.

Dairy Products, Eggs, Oils, and Fats

Prices in the dairy sector peaked in November 2007, when the FAO’s index of dairy product prices (base 1998–2000 = 100) reached an all-time high of 302. In 2008 and 2009, however, dairy prices have been on a declining trend. Farmers and analysts have cited various factors for the fall in dairy prices, including increased supply, higher export subsidies by the EU, and price manipulation on global markets. However, in the long term, global dairy consumption is expected to increase, putting a floor under dairy prices. China’s milk consumption, for example, rose by 9.3% in 2007 alone.

Back to top