Global Agribusiness

Week 2
Lecture: Players of the agribusiness 2

The agrifood supply chain

Input
providers Farms Traders Processors Retailers Consumers

• Input providers: they are agrochemical companies, fertilizers and seeds companies, factories producing heavy machinery;
• farms: they produce agricultural commodities such as cereals, meat, fruits and vegetables;
• traders: represent an intermediary between farms and processors;
• processors: with an industrial transformation process they turn commodities into food, clothing, fuel;
• retailers: they are distributors, restaurants, cantines, caterings services and hotels;
• consumers: they activate the whole chain by generating a demand for products and services.
Lecture: Competitive dynamics 1 and 2 3

Global perspective
• A strong need to reduce the input/output ratio for a growing commodities demand worldwide in tougher climatic
conditions will lead the market to continuously grow globally.
Player's dynamics
• Input providers à In the 80’s the advent of biotechnologies changed the competitive landscape and agrochemical
companies expanded their production and R&D capacity through mergers and acquisitions. In approximately 20
years M&As concentrated the market around 10 large multinational companies.
• Traders à The main traders in the world are global companies with extremely diversified lines of business, acting in a
very concentrated market. 5 companies control over 90% of the global supply of grains and agricultural commodities
in general.
• Processors à While small food processing companies tend to supply locally, the major firms in the business buy at
global level searching for price advantage, flexibility and large volumes responding to an increasing demand.
• Retailers à Worldwide the top 10 retailers operate globally with a larger geographical footprint than the remaining
250 competitors. The increased attention towards products’ traceability push retailers to move closer and closer to
farmers, cutting wholesalers and promoting the creation of Organizations of Producers.
Lecture: From subsistence to complexity 4

At the heart of complexity

Background
• Only 2% of farms in the world can be defined as large, organized businesses.
• National governments created a protected market for farmers thanks to the European Policy on Agriculture.

• When the European policy changed from ensuring food to develop the industry, farms had little knowledge on how to
access the market and had basic managing capabilities mostly related to the agronomic side of production.

Currently
• The market is global: players have conflicting objectives at each stage of the value creation, marked by information
bias and an unevenly distributed value.

• The pulverization of farms competitive landscape and their limited size and investment capabilities, put farms on the
wrong side of a bargaining power imbalance if compared to their suppliers and customers.
Lecture: The US Agricultural System 5

• The development of American agriculture that has made USA the first crop exporter today began in the 1850s,
triggered by a demographic explosion and the construction of railroads connecting the country.

• The 20s with the introduction of Haber-Bosch fertilizers and the economic and demographic boom of the 50’s turned
farms into factories for good. Many small farms survived thou, helped by a continued subsidizing policy first
introduced after the great depression.

• Following the supply-side economics that became politically fashionable in the 1980s, the USDA’s official policy
became “Get big or get out” and farms programs were rearranged to incentivize the highest possible production. As a
consequence, today the average US farm size is around 180 hectares.

• Today the agriculture sector extends way beyond the farm business to include a range of farm-related industries (such
as food and beverage, food services, textiles) but it has reduced its overall weight on the economy.

• As for today, the whole agribusiness sector is under considerable pressure as a consequence of an increased
awareness of the agricultural system’s impacts and climate change; environment-friendly practices will be increasingly
incentivized in the next years.
Lecture: The Brazilian Agricultural System 6

• Traditional agriculture prevailed in Brazil until the 1970s and progressively transformed during the following decades
into a modern competitive agricultural system.

• Three policies played a central role in the process of agricultural modernization in Brazil:
1) the availability of subsidized financial credit, mainly for capital financing and modern inputs;
2) the rural extension, often occurred at the expenses of biodiversity rich ecosystems such as the amazon forest;
3) the provision of support for agricultural research.

• Nowadays Brazil is one of the three largest producers and exporters of sugar, coffee, orange juice, soybean, beef,
tobacco, ethanol, and broiler chicken in the world. Moreover, the Country is one of the major exporter of
commodities worldwide: just to give some reference numbers, in the lase 10 years, Brazil's soybean exports have
increased by 230%, more than 50% share of the total world soybean exports.

• Looking to the future, it seems that Brazil will face many challenges such as finding foreign investors for new
infrastructure projects and balance a further growth with limited impacts on the Amazon Forest, which is the most
valuable ecosystem in terms of biodiversity, climate regulation and water retention.
Lecture: The Chinese Agricultural System 7

• The Chinese agri-food system has begun transforming over the past 30 years from a traditional system to a more
modern form of production system. Since the Reform period began in 1978, the percentage of China’s population
depending on agriculture decreased, shifting from 70% to 25%, which is the percentage of population employed today
in agriculture. This transition has led to significant improvements in agricultural productivity and greater
mechanization.
• Today, China is a leading exporter of agricultural products, producing 18 % of the world's cereal grains, 29% of the
world's meat, and 50% of the world's vegetables. Moreover, China is one of the world's largest importer of agricultural
goods.
• The rise in population and incomes has radically transformed Chinese consumers’ food demand. The new class of
customers will consume more calories from fish, meat, dairy, and sugar than from grains; rice will remain the major
staple; and protein consumption will be 20% higher than the global average.
• The government’s five-year plans, which are a series of social and economic development initiatives, have stated the
need to integrate environmental concerns into the agricultural industry in China.
Lecture: The Indian Agricultural System 8

Key features of Indian agricultural system:

• India is still a rural country: approximately 60% of the population works in agriculture;
• agriculture represents 18% of the country’s GDP;
• the agricultural fabric is highly fragmented; farms on average have low yields and a low level of mechanization;
• India is a world leader in the production of milk, pulses and jute, even if today is diversifying towards livestock since
returns are less volatile and grow at a major pace.

Key features of Indian agricultural trade market:

• the Country has consistently been a net agro-food exporter over the last two decades;
• low-value products dominate exports while processed products dominate imports;
• India's largest trade partners are US, China, United Arab Emirates;
• in 2018 the Country adopted an Agricultural Export Policy framework in order to reduce uncertainty and transaction
costs.

In the long-term, significant structural adjustments need to occur in India. Continued reforms in land regulations need to be
complemented by investments in key public services and the broader enabling environment.
Lecture: The EU Agricultural System 9

• The 27 member states constitute a diversified agricultural system with some distinctive common features:
o small and large farms coexist in the same market;
o products with high added value are produced together with primary goods;
o there is a strong push towards sustainability and the adoption of new technologies.
• The total agricultural output in 2020 was estimated at around 411.8 billion (1,5% of total GDP), resulting mainly from
crops cultivation (52,8%) and livestock (36,6%). The first 7 member states produce around three-quarters of the total
value.
• As for today some trends at EU level can be observed:
o the number of farms is decreasing and the average farm size increasing;
o production is steadily increasing along with risks and costs;
o climate change is affecting agriculture, leading to yields reduction.
• Such trends have ignited a new approach in agriculture based on technological innovation coupled with new field
techniques such as regenerative agriculture and ecosystem-based agriculture.
Lecture: The Italian case: industry history and evolution 10

Before the industrial boom

• Farms were still pre-mercantile, self-consumption, micro-productive units bonded with families.

• Physical isolation during centuries created small local markets where farms could exchange some of the produce for a
very limited set of manufactured products.

• The feeding requirement of the family forced farms not to specialize on one product.

After the industrial boom

• Rising incomes in cities decoupled food production from food consumption, both spatially and temporally.

• The increased productivity sustained a larger production of agricultural products in volumes. These larger volumes
were bought by food manufacturers in a modern trade context.

• Farms rapidly changed from unspecialized small family-subsistence units to specialized businesses, focused on
monocultures.
Lecture: The Italian case: cultivating excellence 11

With approximately 3000 quality products all over the world (of which 809 certified), Italy is by far the first country in
terms of quality production. What are the conditions that allowed Italy to become the first country worldwide in terms
of quality agrifood products?

We have identified 3 sine qua non conditions:

1. Natural assets;
2. strong cultural heritage (able to influence know how, production techniques and technologies);
3. strong entrepreneurship.

While the three conditions can be found in any Italian region, the extent to which these have been leveraged on to develop
excellent productions varies from region to region, with a high concentration in the north. Why?

• There are two speeds in the development of the economy in the north and south of Italy.
• Limited diffusion of innovation, poor development of managerial skills and resistance in listening to the consumers’
needs.
Lecture: The Italian case: techniques and technology in an unfavorable landscape 12

• Around 50% of all farms in Italy is located in the flatlands even if Italian territory is mainly characterized by mountains
and hills.

• Uplands are characterized by yields too low to justify investments in technology. Furthermore, European policies until
recent times have favored farms in the flatlands. For these reasons mountains and hills have been gradually
abandoned.

• Some farmers have never left unfavorable landscapes and developed specific skills and techniques, to the point that
some of these farming techniques are defined as “heroic agriculture”.

All successful case histories of profitable and sustainable agriculture in unfavorable landscapes in Italy carry some
common elements:
1. multifunctionality and connected activities;
2. territorial marketing and branding;
3. cooperation.