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Mc kinsey on cooperatives five trends and their implications for agricultural coops

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Mc kinsey on cooperatives five trends and their implications for agricultural coops

  1. 1. International Summit of Cooperatives Five trends and their implications for agricultural coops October 2012Any use of this material without specific permission of McKinsey & Company is strictly prohibitedCopyright © 2012. All rights reserved
  2. 2. Five major forces will shape the agriculture sector over the next decade Feeding the planet: the The industry will address the productivity imperative it is facing in 1 productivity imperative a bid to meet rapidly growing demand The rising priority: Industry stakeholders will be ready to engage with governments on 2 governments’ food their food agenda. Food safety, quality, and security will become key agenda priorities for country leaders in both developed and emerging markets Farming 2.0: new Digitization and automation of farms are profoundly changing 3 technologies, new farming operations. Farm operations are being revolutionized by a host markets of new technologies and new ownership models From push to pull: the Market dynamics are transforming the agricultural value chain. 4 upheaval of the Increasingly demanding consumers are gaining power by shifting the agriculture value chain value chain from being supply-driven to demand-driven Big agriculture: As farms consolidate, farmers will need to evolve their 5 getting bigger management skills to successfully handle large-scale operations McKinsey & Company | 1 Copyright © 2012. All rights reserved
  3. 3. Five key questions arise for agricultural cooperatives 1 How can your cooperative ensure continuous alignment with members’ interests amid the upcoming ownership renewal? 2 Where will the next S-curve of growth come from for your cooperative? 3 Which advanced capabilities could your cooperative turn into a strategic advantage? 4 How can your cooperative help members anticipate shifts in consumer tastes and coordinate production patterns to better meet demand? 5 How can your cooperative better prepare members for regulatory change? McKinsey & Company | 2 Copyright © 2012. All rights reserved
  4. 4. Contents Overview of key trends Detailed questions for agricultural coops McKinsey & Company | 3 Copyright © 2012. All rights reserved
  5. 5. 1 The industry will address the productivity imperative it is facing in a bid to meet the rapidly growing demand Context Implications Feeding the planet: the1 productivity imperative ▪ Historically, yield increase has ▪ Developing new land will be been the main driver of difficult, expensive and may production growth rather than conflict with political or The rising priority: area harvested, but a decline in environmental goals2 government’s food yield improvements has been ▪ In emerging markets, agenda observed in recent years productivity solutions will ▪ This decline may be due to need to be adapted to the – Land degradation, which unique circumstances of each Farming 2.0: new already affects 25-35% of the region3 technologies, new land under cultivation ▪ More widespread use of markets – Insufficient global water available inputs in emerging supplies to meet the markets will help bridge the expected growth of the yield gaps From push to pull: the agricultural sector4 upheaval of the ▪ Climate change could agriculture value chain potentially reduce global productivity by up to 16% by 2080 Big agriculture: – Particularly in South Asia5 getting bigger and Sub-Saharan Africa McKinsey & Company | 4 Copyright © 2012. All rights reserved
  6. 6. 1 Historically, yield increase, rather than area harvested, has been the main driver of production growth1 Global yield MT/ha 3.5 1.2% Global grain and oilseeds 3.0 output2 63% of the growth 63% of the growth Billions of metric tons 2.5 in global output 1997 2002 2007 in global output 2.5 comes from 1.9% comes from 2.0 X increase in yield increase in yield and 37% from and 37% from 1.5 Global area planted increase in area increase in area 1.0 Millions of hectares planted 1997 2002 2007 planted 700 0.7% 600 500 400 300 1997 2002 20071 Trend observed in developed markets2 Includes wheat, corn, barley, sorghum, soybeans, rapeseed, sunflower and palm McKinsey & CompanySOURCE: Food and Agriculture Organization of the United Nations Statistical Division (FAOSTAT) | 5 Copyright © 2012. All rights reserved
  7. 7. 1 However, a decline has been observed in yield improvements 1970s 2000s in recent years Cereal production1 Exacerbating factors Ton/ha, percentage change in yield over selected period ▪ Overall worldwide productivity growth North East Asia America has slowed over time 3.6 – 1970s: 2.7% 2.8 2.5 – 2000s: 1.3% 1.0 ▪ Several factors will further exacerbate yield improvements 70s 00s 70s 00s – Decrease in public agriculture R&D South spending South Asia America European Sub- Middle East and North – Increase in soil Union Saharan Africa degradation Africa 2.1 1.7 1.6 – Increase in water 1.2 2.5 2.7 2.7 scarcity 1.3 1.7 1.3 – Climate change 70s 00s 70s 00s 70s 00s 70s 00s 70s 00s1 Cereal yield, measured as kilograms per hectare of harvested land, includes: wheat, rice, maize, barley, oats, rye, millet, sorghum, buckwheat, and mixed grains; does not include crops harvested for hay or harvested green for food, feed or silage, and those used for grazing McKinsey & CompanySOURCE: Food and Agriculture Organization of the United Nations Statistical Division (FAOSTAT) | 6 Copyright © 2012. All rights reserved
  8. 8. 1 This decline may be due to land degradation, which already affects 25 to 35% of the land under cultivation Degradation of land under cultivation Millions of hectares, percent Key facts Land under cultivation Degraded land1 under cultivation ▪ Globally, 5 million to 100% = 1.5B ha 100% = 375M–525M ha 10 million hectares of arable land are lost Limited Severe each year degradation degradation ▪ Degradation drivers 16 include 25-35 Degraded 33 – Misuse of fertilizers, irrigation, and machinery – Climate change 65-75 (e.g., erosion, desertification) 52 Moderate Not degradation degraded1 Degraded land being defined as a level of degradation negatively affecting the productivity of the landSOURCE: International Soil Reference and Information Centre, Oregon State University; Resource Conversation McKinsey & Company | 7 and Food Security Copyright © 2012. All rights reserved
  9. 9. 1 Yield declines may also be due to insufficient global water supplies to meet the expected growth of the agricultural sector Agriculture-related water needs will continue to This increase in need will not be met by existing water increase supply and will lead to shortage situations Estimated global water withdrawal demand Cereal and tuber production by basin type km2/year Million metric tons of rice equivalent Unsustainable sourcing approaches exacerbating water scarcity: dam construction, excess withdrawal from 5,235 rivers, excess application, ground-water overdraft 1.1% 3,438 4,432 3,208 2,811 Serious water 3,788 30% 26% deficit1 61% Agricultural 15% 3,175 64% 66% 34% 67% 49% Moderate water 63% deficit2 22% Industrial 20% 20% 51% 22% 12% Municipal Sufficient 11% 25% 7% 9% Reservoirs water supply3 4% 5% 5% 5% 7% 1980 1995 2010 2025 2010 2020 20301 Serious water deficit is defined as a sustainable and reliable water supply that provides less than 50% of demand2 Moderate water deficit is defined as a sustainable and reliable water supply that provides 50%-100% of demand3 Sufficient water supply is defined as a sustainable and reliable water supply that provides 100%+ of demandSOURCE: UNESCO; McKinsey global water supply/demand model; agricultural production based on IFPRI computed McKinsey & Company | 8 general equilibrium model base Copyright © 2012. All rights reserved
  10. 10. 1 Moreover, climate change could reduce global productivity by up to 16% by 2080 Impact of climate change on agricultural productivity without carbon fertilization Percent Latin America: By ~2050, increases in temperature and Africa: By 2020, yields from Asia: By ~2050, fresh- associated decreases in soil water are projected to lead rain-fed agriculture could be water availability in to savannah gradually replacing the tropical forest in reduced by up to 50% in many Central, South, East, and eastern Amazonia. Semi-arid vegetation will tend to be countries. Agricultural Southeast Asia, particularly replaced by arid-land vegetation. Productivity of production and access to food in large river basins, is important crops is projected to decrease and livestock are projected to be severely projected to decrease productivity to decline compromisedSOURCE: CGD – Global Warming and Agriculture: New Country Estimates Show Developing Countries McKinsey & Company | 9 Face Declines in Agriculture Productivity, 2007 Copyright © 2012. All rights reserved
  11. 11. 1 Developing new land will be difficult and expensive, and it may conflict with political or environmental goals Constraints faced Illustrative examples ▪ High cost of developing land, ▪ Land clearing and soil fertilization of technology, and infrastructure cerrado in Brazil cost ~USD 500/ha Economic ▪ Credit constraints ▪ AGRA estimates that an African “Green Revolution” will cost ▪ Small domestic markets USD 1 billion to 2 billion per year ▪ Areas are remote, with little or no ▪ Road haulage in Central Africa costs infrastructure 2-3 times as much as in Asia Logistical ▪ Landlocked countries or regions ▪ Near-defunct ports and railways in with little or no port access Angola, DR Congo, Bolivia ▪ Protected or wilderness areas ▪ Korean land deal in Madagascar Environ- included protected land ▪ Loss of biodiversity mental ▪ New plantations in Indonesia led to ▪ Deforestation, with ensuing GHG deforestation and peat burning emissions and changes in rainfall ▪ Existing land users (smallholders, ▪ Conflict between pastoralists and pastoralists) may hold prior claims investors in Sudan Political ▪ Potential backlash against land ▪ Protests against Korean land deal sales to urban elites or foreigners led to change of government in MadagascarSOURCE: World Bank/Food and Agriculture Organization of the United Nations “Awakening Africa’s McKinsey & Company | 10 sleeping giant”; Alliance for a Green Revolution in Africa (AGRA); McKinsey analysis Copyright © 2012. All rights reserved
  12. 12. 1 To raise productivity, emerging markets will increasingly explore innovative solutions addressing barriers to growthInnovation Details Examples ▪ Low-cost, innovative design for ▪ Africa – KickStart sells for-profit foot-operated irrigation and mechanization irrigation pumpsTechnology ▪ High-resistance, high-productivity ▪ Africa – Monsanto collaborates to develop GM staple crops cassava ▪ Non-traditional financing ▪ Kenya – Subsidized weather “microinsurance”Business mechanisms for low-income offered by the Syngenta Foundation to mitigatemodel individuals and families the risk of investments in inputs ▪ Low-margin, high-volume ▪ Senegal – Farmers and fishermen receive information services commodity prices by mobile phone ▪ Alternative channels for information ▪ India – Internet kiosks set up by ITC in villagesInfra- and telecommunications delivery to transmit data on markets, legislation,structure weather, and prices to local producers ▪ Public-private partnerships for ▪ Ghana – Government and private investment integrated infrastructure and to establish storage and logistics “corridor” for logistics development commodity aggregation ▪ Extension services provided ▪ Brazil – Unilever established model farms toTraining through working pilot farms teach efficient irrigation, pest management,and and soil health practiceseducation ▪ Women- and minority-targeted ▪ India – Livelihood training (farm and off-farm) training services and socio-behavioural skill building with rural women organizations McKinsey & Company | 11 Copyright © 2012. All rights reserved
  13. 13. 2 Industry stakeholders will be ready to engage with governments on their food agenda Context Implications Feeding the planet: the1 productivity imperative ▪ Worldwide, food consumption is ▪ Industry stakeholders need to increasing due to a rising middle understand regulations that class in the emerging markets and affect them an increase in total population – Governments, particularly in2 The rising priority: ▪ Countries will keep putting emerging markets, will governments’ food agenda mechanisms in place to ensure increasingly pursue public- their national food interests are private partnerships to meet protected from increased volatility their food agenda – Developed markets will remain – Agricultural players will have Farming 2.0: new primarily concerned with become accustomed to dealing,3 technologies, new markets ensuring the safety and quality negotiating, and influencing of the food governments and will thus be – Emerging markets will be ready to engage with them on focused on assuring food their food agenda From push to pull: the4 upheaval of the agriculture security, particularly in light of ▪ In the face of important external value chain the recent crises pressures, countries in ▪ Governments are increasingly emerging markets need to trying to secure food supplies create innovative platforms to and play a strategic role in the support agricultural Big agriculture: food industry transformation5 getting bigger McKinsey & Company | 12 Copyright © 2012. All rights reserved
  14. 14. 2 Worldwide, countries will keep putting mechanisms in place to ensure their national food interests are protected from increased volatility Feb: FAO announces Apr: UN establishes May: World Bank Jun: FAO 36 countries in crisis as High-Level Task Force announces USD 1.2 billion declaration on Food-price index protests sweep the (HLTF) on the Global Global Food Crisis world food 2006-2009 globe Food Crisis Response Program (GFRP) security crisis 2002-2004 = 100 Oct: Kofi Annan 280 accuses rich countries 260 of reneging on promises to help feed 240 the hungry 220 Jul: World Bank report 200 links food prices to 180 increased biofuel Grain 160 production 140 FPI Mar/Apr: Cambodia and Egypt 120 ban rice exports, with India, Apr: Kazakhstan Dairy 100 Dec: Russia applies Mar: Vietnam caps the 3rd largest rice exporter, bans wheat 40% export tax on rice exports to 4M quickly following suit for non- exports (5th largest 80 wheat tons basmati rice wheat exporter) 60 40 Jan-2006 Jul-2006 Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 The end of cheap food Corn-Based Ethanol Tied Food cost may force Fertilizing profit, sowing The Economist, Dec 2007 to Higher Food Costs rethink on biofuel misery Wall Street Journal, Financial Times, April 2008 Hindu, June 2008 April 2008 McKinsey & CompanySOURCE: Food and Agriculture Organization of the United Nations food price index; press search | 13 Copyright © 2012. All rights reserved
  15. 15. NATURAL/ORGANIC MARKET - TRACEABILITY 2 In the face of external pressures, countries in emerging markets are creating innovative platforms to support agricultural transformation Ghana: The northern region Ethiopia: Agricultural growth Tanzania: Kilimo Kwanza Growth program Corridor ▪ Ghana is committing 10% of its ▪ Ethiopia is committing 13% of its ▪ Tanzania is committing 9% of its national budget to agriculture national budget to agriculture national budget to agriculture ▪ Targeting the northern region for ▪ National strategy (PASDEP) calls ▪ Targeting the Kilimo Kwanza ~USD 700 million public-private for accelerated market-based Growth Corridor – public- investment to transform development private partnership to promote agriculture there ▪ ~USD 800 million partnership “clusters” of profitable ▪ Expected impact: 250,000 with World Bank, GoE, USAID, agricultural farming and service farmers; rice self-sufficiency and other donors in the businesses increased to 70%; USD 500 million agricultural growth program to ▪ Expected impact: ~1.5 million per year agriculture GDP increase productivity and people; 30,000 smallholder market access farmers ▪ Expected impact: ~2 million households; ~10 million people McKinsey & CompanySOURCE: United Nations Economic Commission for Africa (UNECA); government speeches; press search | 14 Copyright © 2012. All rights reserved
  16. 16. 3 Digitization and automation of farms are profoundly changing farming operations – 1/2 Context Implications Feeding the planet: the1 productivity imperative ▪ Digitization and automation of ▪ To stay competitive, developed farms are profoundly changing markets will need to rapidly farming operations deploy advanced farming – From labour-intensive to technologies to improve The rising priority: capital-intensive productivity2 governments’ food agenda – Better-informed decisions – E.g., GPS soil sampling, through data analysis satellite imagery, and yield – Tailored approach to land monitoring data analysis management ▪ To adapt to the revolution, Farming 2.0: new ▪ The technology revolution will farmers will need to develop3 technologies, new markets enable a new paradigm in their skills along 4 dimensions productivity improvements, quality – Management skills control, and production resilience – Financial risk management From push to pull: the of farms through skills4 upheaval of the agriculture – Advanced automation – New technologies value chain – Advanced sensing and – Advanced analytics analytics – Microsegmentation Big agriculture:5 getting bigger McKinsey & Company | 15 Copyright © 2012. All rights reserved
  17. 17. 3 Digitization and automation of farms are profoundly changing farming operations – 2/2 Automation and new An increased amount Land management is equipment are of data is being evolving from the transforming farming gathered and analyzed, same approach for the from a labour- enabling farmers to entire farm to one that intensive to a capital- make better informed is tailored to each intensive industry decisions parcel of land▪ Traditional equipment (e.g., ▪ Sensors are increasingly used to ▪ To maximize land productivity, a tractors) is being augmented with gather a wide range of data points granular approach is increasingly new technology to be remote- (e.g., weather, land yield, adopted controlled or fully automated production output) ▪ Land characteristics and needs are▪ New equipment (e.g., drones) is ▪ Software solutions are used to assessed on a granular basis being used to perform tasks that process the data, track them in real ▪ Solutions are determined farmers could not have done on time, and generate insights, all of exclusively for a given parcel of their own (e.g., pictures of land or which enables farmers to compare land parcels of the land) their operations with those of their ▪ Sophisticated equipment will▪ Routine tasks are being peers as well as improve their administer the tailored solution to increasingly automated (e.g., decision making the targeted parcel of land measurements, soil preparation)Example Example ExampleRemote-controlled tractors enable Yield monitors and variable-rate Software solutions can identifya single individual to oversee the application control systems areas with a below-average yieldfarming of larger portions of land represented ~45% of the and help adjust fertilizing and USD 1.2 billion spent on precision watering accordingly agriculture in 2011 McKinsey & Company | 16 Copyright © 2012. All rights reserved
  18. 18. 3 The technology revolution will enable a new paradigm in productivity improvements, quality control, and production resilience of farms Farms’ new paradigms Advanced automation Advanced sensing and ▪ Productivity analytics ▪ Automated and selective harvesting ▪ Quality control ▪ Real-time tracking of production KPIs ▪ Automated measure- and standardization ments (land and product ▪ Micro-optimization of characteristics) ▪ Resilience genetics, irrigation, and fertilization ▪ Automated soil pre- paration and weeding ▪ Advanced forecasting Microsegmentation ▪ Granular view of the farm’s activity (land characteristics, crops, and animal health) ▪ Granular and tailored intervention (feed, fertilizer) ▪ Global positioning of equipment McKinsey & CompanySOURCE: McKinsey analysis | 17 Copyright © 2012. All rights reserved
  19. 19. 3 Case examples of technology revolutions in farming Specific examples ▪ The cow-milking process is being automated – Milking conditions are assessed by a computer multiple times per day Advanced – Issues are relayed to farmers through alerts to automation their mobile devices ▪ Unmanned aerial or ground vehicles are used to perform traditional farming tasks (e.g., applying chemical products) ▪ An increased amount of data (e.g., nutrients in the soil, humidity, density of weeds) is gathered and Advanced analyzed to assess the optimal use of chemical sensing products and ▪ A wide range of sensors have become instrumental, e.g., analytics – Temperature control during storage and transportation – Soil respiration and moisture ▪ Land is broken into multiple parcels, each of which is optimized according to its requirements Micro- – Data is gathered to understand the land’s segmenta- performance tion – Sensors and GPS-tracking are leveraged to administer chemical products in the right quantity to the right land parcels McKinsey & CompanySOURCE: McKinsey analysis | 18 Copyright © 2012. All rights reserved
  20. 20. 3 To remain competitive, farmers will need to develop their skills along 4 dimensions to adopt the technology revolutions Improved management skills Financial risk management skills Farm sizes are changing, with large-scale Pricing of agricultural commodities will operations increasingly replacing family- become increasingly volatile; to smoothen size ones; farmers will need to gain out the impact, while ensuring the stability more advanced management of operations and of their financial skills to control and optimize performance, farmers will need to master the output of large hedging techniques operations Farmers must adapt to remain competitive Understanding new Advanced analytics technologies Similar to industries in other sectors of the From automation to genomics, economy, farm operations are becoming new technologies are emerging increasingly data-driven; tomorrow’s and evolving extremely fast; farmers, farmers will have learned to gain access primarily those in mature agricultural and capitalize on this unexploited asset to markets, will need to embrace this new measure their operations, benchmark reality and rapidly develop the against peers, and make better informed corresponding knowhow and decisions capabilities McKinsey & Company | 19 Copyright © 2012. All rights reserved
  21. 21. 4 Market dynamics are transforming the agricultural value chain Context Implications Feeding the planet: the1 productivity imperative ▪ The agricultural value chain is ▪ Competitive landscapes will evolve shifting from being supply-driven both upstream and downstream to demand-driven from farming activities – Consumers, desiring a healthier ▪ Consumers will become The rising priority: lifestyle, will assert their needs increasingly demanding regarding2 and expectations to the food quality, price, and sourcing governments’ food agenda agricultural industry practices – Retailers will increasingly be in a – As an example, Walmart position to shape the direction in differentiates itself from its Farming 2.0: new which the industry is headed competitors by actively promoting3 based on their own strategic sustainable products technologies, new markets agenda ▪ Market dynamics are increasingly blurring the lines between key From push to pull: the functions along the agricultural4 upheaval of the agriculture value chain value chain – Input manufacturers will begin to deal with farmers directly – Secondary processors will Big agriculture: integrate upstream to secure a5 supply of good quality food getting bigger McKinsey & Company | 20 Copyright © 2012. All rights reserved
  22. 22. 4 The agricultural value chain is shifting from being supply-driven to demand-driven; market dynamics are increasingly blurring the lines between key functions along the chain Consumers, desiring a Retailers will increasingly be healthier lifestyle, will assert in a position to shape the their needs and expectations direction in which the to the agricultural industry industry is headed based on their own strategic agenda ▪ Consumers, leveraging the democratization of ▪ Owning the relationship with consumers, retailers are information brought by the internet and social media, will best positioned to understand rapidly changing needs become increasingly knowledgeable about food benefits and expectations in the market and the sourcing practices in place ▪ Leveraging their powerful position along the value ▪ Driven by the desire for an improved lifestyle, chain, retailers will increasingly steer the industry in sophisticated consumers will demand that their food be the direction that suits their strategic agenda healthy, organic, safe, and sustainably sourced Input manufacturers will Secondary processors will begin to deal with farmers integrate upstream to secure directly their supply of good quality food ▪ Input manufacturing will be dominated by a handful of ▪ As the food supply continues to tighten, secondary players processors will become increasingly concerned with ▪ Yet product differentiation will remain limited and input sourcing food of high quality in large quantities and at a manufacturers will look to solidify their ties with the reasonable price growing proportion of large-scale farms ▪ Consequently, they will move upstream along the value ▪ Input manufacturers will thus often bypass distributors chain to secure their own food supplies and deal directly with farms McKinsey & Company | 21 Copyright © 2012. All rights reserved
  23. 23. 4 The competitive landscape will evolve both upstream and downstream from farming activities Trade and Input Farming and Secondary Retail and Inputs primary distribution land processing distribution processingDescription Manufactured Wholesale Production Storage and Preparation Storage, trade inputs and supply of inputs of crops and wholesale and processing wholesale and capital goods to farms livestock trade of crops for retail retail of final for agricultural and livestock agricultural production productsKey playersEvolving Input manufacturers will deal directly with large- Secondary processors will move upstream to securemarket scale farms to solidify influence on inputs used food supplies in good quantity, quality, and pricedynamics and sell more value-added services Competition will become increasingly integrated along the agricultural value chain McKinsey & Company | 22 Copyright © 2012. All rights reserved
  24. 24. 4 Consumers will become increasingly demanding regarding food quality, price, and sourcing practices From To ▪ Purchasing habits primarily driven by the ▪ Consumers facing an ever-growing selection of producers and food available in markets food ▪ Consumers having limited access to ▪ Consumers having access to a wealth of information about product characteristics or how information on food, including they were produced – Ingredients and additives used ▪ Food often sourced locally – Nutritional value ▪ Whereas food quality remains important, it is not – Sourcing practices a key concern for consumers ▪ Increasingly diverse varieties of food available to consumers ▪ Increasingly globally sourced food Resulting changes In the future, it will become lt to distinguish ▪ Consumers will become increasingly demanding on several fronts increasingly difficu demands from – Food quality and attributes consumer-driven by retailers initiatives promoted – Sourcing practices iate themselves looking to different – Food price (value for the money) from their peersSOURCE: McKinsey-International Food and Agribusiness Management Association (IFAMA) Agribusiness McKinsey & Company | 23 & Food Survey, 2012, carried out among 117 members of IFAMA Copyright © 2012. All rights reserved
  25. 25. 5 As farms consolidate, farmers will need to evolve their management skills to successfully handle large-scale operations Context Implications Feeding the planet: the1 productivity imperative ▪ A significant portion of farmers ▪ Farm consolidation will continue in developed countries will have enabling the emergence of retired by 2020, implying large-scale operations important consolidation in land – Global agriculture and livestock The rising priority: ownership and operations land acquisitions are expected2 governments’ food agenda ▪ The global population is to continue to increase forecasted to grow by 10% this ▪ The primary acquisition targets decade, with ~90% of the growth will remain emerging markets coming from emerging markets due to the large amount of3 Farming 2.0: new – Emerging markets will continue potentially available arable land technologies, new markets to significantly increase their food consumption and drive the ~70% growth in global consumption between 2000 From push to pull: the and 20504 upheaval of the agriculture value chain ▪ Emerging markets’ agriculture production is expected to grow the fastest – However, they will still face Big agriculture: shortages in many food5 getting bigger categories McKinsey & Company | 24 Copyright © 2012. All rights reserved
  26. 26. 5 A significant portion of farmers in developed countries Farmers that will likely retire by 2020 will have retired by 2020, implying an important change in land ownership Share of farmland by owner age and country Percent Age Age Less than 44 20 16 26 Less than 40 37 28 45 to 54 30 36 40 to 49 33 27 55 to 64 25 50 to 59 32 29 25 65 and over 26 60 and over 5 6 2000 2007 2000 2007 Portion of farmland Portion of farmland owned by farmers 51% 56% owned by farmers 30% 38% above 55 above 50SOURCE: United States Department of Agriculture (USDA); Ministère de lAgriculture, de lAlimentation, McKinsey & Company | 25 de la Pêche, de la Ruralité et de lAménagement du Territoire (MAAPRAT, France) Copyright © 2012. All rights reserved
  27. 27. 5 The global population is forecasted to grow by 10% this decade, with ~90% of the growth coming from emerging markets… Global population Millions Change 2010-2020 7,208 Key facts Percent 6,499 ▪ By 2020, the global population 5,750 will have 39% India/China 7.8% increased by 10% 4,910 39% and exceed 40% 7 billion people 41% ▪ More than 90% of Other that growth will 48% emerging 12.4 % come from 47% developing 45% countries 44% countries Developed 5.2% 15% 14% 14% 13% countries 1990 2000 2010 2020E McKinsey & CompanySOURCE: World Market Monitor (Global Insight); McKinsey analysis | 26 Copyright © 2012. All rights reserved
  28. 28. 5 …whose population will continue to significantly increase their food consumption… Net agricultural per capita food consumption index, by region Index 2000 = 100 Change Key facts Historical Forecast 2010-2020 Per capita food Percent consumption150 Eastern Europe and Central Asia 16.8% will rapidly145 increase in emerging140 markets,135 because of a130 ▪ Switch from North Africa/Middle East 9.4% staple food to125 Latin America 9.8% processed120 Asia and Pacific 9.0% food115 Sub-Saharan Africa 6.5% ▪ Increased consumption110 of meat, Western Europe 3.5%105 mainly poultry Oceania 2.2%100 North America ▪ Increased 2.5% calorie intake 70 2000 2005 2010 2015 2020 McKinsey & CompanySOURCE: Food and Agriculture Organization of the United Nations; McKinsey analysis | 27 Copyright © 2012. All rights reserved
  29. 29. 5 … and drive ~70% growth in global consumption between 2000 and 2050 Drivers Global annual food consumption kcal consumption, quadrillions Examples of global growth ▪ Population increase by 10.2 2050: 2.6 billion, ~2 X as of which 1 billion much are middle class dairy +70% ▪ Urbanization: 70% of 2050 6.0 population ~1.5 X more ▪ Higher calorie cereals consumption and diet shifts: more wealth = more protein ~2 X as much meat 2000 2050SOURCE: Food and Agriculture Organization of the United Nations World Food and Agriculture to McKinsey & Company | 28 2030/2050; FAO expert meeting on How to Feed the World in 2050 Copyright © 2012. All rights reserved
  30. 30. 5 Emerging markets’ agriculture production is expected to grow the fastest Net agricultural and fish production, by region Index 2000 = 100 Change Key facts 2010-2020 ▪ Developing Historical Forecast Percent countries will experience190 Latin America 21% the fastest180 Sub-Saharan Africa 28% growth in Eastern Europe agriculture170 25% production and Central Asia160 21% given the North Africa/Middle East150 existing Asia and Pacific 17% productivity140 North America gaps 11%130 ▪ Among the120 developed Oceania 13% regions, North110 Western Europe 6% America will100 capture most 90 of the global food demand 70 growth 2000 2005 2010 2015 2020 McKinsey & CompanySOURCE: Food and Agriculture Organization of the United Nations; McKinsey analysis | 29 Copyright © 2012. All rights reserved
  31. 31. 5 However, emerging markets will still face shortages in 1997 2020 many food categories Deficit Supply/demand characteristics in crop commodities, by geography Million metric tons Southeast Sub- Middle United Western Latin and East Saharan East/North Eastern States Europe America South Asia Asia Africa Africa Europe Other1 934 1,193 Cereals Large deficit increase in 313 295 174 83 ME/NA and SE/East Cereals Asia, to be filled by US -135 -35 -29 -215 -272 -132 -273 -70 and Western Europe -435 -440 -756 -731 surpluses 249 320 Soybeans 140 Large US and Latin 44 56 75 American surplus to Soybeans support growing deficit -1 -6 0 -3 -6 -13 -1 -1 in Western Europe and -76 -153 -195 -169 SE/East Asia Oil 42 50 20 23 20 23 Western Europe and Oil Sub-Saharan Africa with -4 opportunities to export -20 -9 -20 -8 -8 -35 -35 to South, Southeast and -44 -62 East Asia -77 -76 212 112 Milk 8 -32 -34 -57 -45 -7 -41 -62 -23 -46 -47 -79 -4 -123 -109 -1611 “Other” includes additional developing and developed countries not included in other categories McKinsey & CompanySOURCE: International Food Policy Research Institute (IFPRI) – IMPACT model | 30 Copyright © 2012. All rights reserved
  32. 32. 5 As in developed countries, farm consolidation will continue enabling the emergence of large-scale operations Farms have been consolidating for several decades Share of total farmland by size class1 France Hectares, percent 1978 2007 Farm consolidation is expected to continue to cope with global forces Less than 20 ha 18 5 Trends impacting Expected trend 20 to 49 ha 37 11 consolidation direction 50 to 99 ha 26 26 Available land for consolidation due to 100 to 199 ha 13 37 farmer retirement and lack of interest by younger 200 ha or more 5 21 generation Reduction in trade tariffs United States2 leading to increased Hectares, percent competition from foreign producers 1979 2007 Price pressure from end Less than 30 ha 3 4 consumers and large food retailers 30 to 99 ha 14 8 15% of the farms drive 61% of the New farming technology 100 to 199 ha 13 7 agricultural output enabling productivity gains 200 to 399 ha 15 11 400 ha or more 55 671 Over that same period, farmland has declined by 6% in France and by 3% in the United States2 Class sizes have been converted from acres and rounded at +/- 5 hectares for comparison between countries McKinsey & CompanySOURCE: United States Department of Agriculture (USDA); MAAPRAT; McKinsey analysis | 31 Copyright © 2012. All rights reserved
  33. 33. 5 Emerging markets will remain the primary acquisition targets given the high amount of potentially available arable land Agriculture land availability and acquisitions, by region Distribution of acquisitions by region, from Potential availability of uncultivated land 2000 to 2010 Number of transactions, Millions of hectares Hectares, percent percent Sub-Saharan Africa 202 52 57 Latin America 123 12 9 Eastern Europe and 52 2 2 Central Asia East and South Asia 14 27 28 Middle East and 3 6 2 North Africa Rest of the world 51 0 0 McKinsey & CompanySOURCE: World Resource Institute; Landportal.info; McKinsey analysis | 32 Copyright © 2012. All rights reserved
  34. 34. Contents Overview of key trends Detailed questions for agricultural coops McKinsey & Company | 33 Copyright © 2012. All rights reserved
  35. 35. 1 How can your cooperative ensure continuous alignment with members’ interests amid the upcoming ownership renewal?Context Questions to ponder▪ New kinds of owners, such as investors and How will your cooperative deal with the diverging priorities and governments, are interests of members? How will your cooperative ensure it is focused on increasingly entering the the right issues for members? Will it be preferable to segment your member agricultural landscape for A base in order to tailor the value proposition for each? How can capital strategic reasons utilization and risk taken by each member segment be taken into account when designing the offering?▪ At the same time, a new generation of farmers with different ambitions and needs is replacing the older generation of Is your cooperative ready to deal with a significant renewal of its farmers membership? How will the new farm owners change the dynamics of the B membership? How can your coop proactively manage the upcoming change▪ These new owners are to maintain the cooperative fabric and facilitate integration? changing what members expect of their coops▪ To remain relevant to How will your cooperative need to evolve to best serve this renewed each of their members, coops will need to membership? Will your cooperative need to review its decision rights? Or C manage members on a its capital structure? How will your coop ensure that fair and equitable segment-by-segment treatment is provided to all members? basis McKinsey & Company | 34 Copyright © 2012. All rights reserved
  36. 36. 2 Where will the next S-curve of growth come from for your cooperative?Context Questions to ponder▪ By their nature, agricultural How should your cooperative capitalize on the growth opportunity cooperatives are presented by emerging markets? Among the membership, what regional entities based A appetite would exist to explore opportunities to expand in farming mainly in developed operations in emerging markets? How could your cooperative create countries value for members by distributing products in these growth markets?▪ But the fastest growth is happening in What would be the best vehicle to get exposure to emerging emerging markets and markets? impacting commodity B ▪ Partnership with local coops in developing countries? flows, pricing, and ▪ Downstream integration or acquisition into select emerging markets? preferences▪ Coops need to understand how Should your cooperative explore alternative growth opportunities emerging markets will further along the value chain in their home markets? What affect their business capabilities does your cooperative have to become a best-in-class entity and proactively C on this front and compete successfully against established players on a position themselves to global scale? Could your cooperative be an international private-label protect their members’ provider to retailers? Could entering a new market affect performance in interests your home market? McKinsey & Company | 35 Copyright © 2012. All rights reserved
  37. 37. 3 Which advanced capabilities could your cooperative turn into a strategic advantage?Context Questions to ponder▪ The automation and How can your cooperative optimally deliver value-added products “financialization” of and services based on your insights into your membership? What farming is forcing skill set or knowledge can your cooperative develop or hone to remain farmers to develop A indispensible to members? Which of these skills/ capabilities would your new skills to remain cooperative be able to develop at best-in-class levels? Which capabilities competitive or services should you develop to proactively fend off new specialized players?▪ Coops will need to decide which new Are there value-added services that your cooperative could offer to capabilities will allow its members? How can your cooperative best support its members and them to develop a remain relevant? Should your cooperative develop these skills and offer competitive advantage B them to its members? Should it help its members gain these skills by and better serve their offering them training, or by entering a strategic partnership with some members (e.g., experts? financial risk management, How should your coop react when facing the risk of disintermediation advanced analytics, from input manufacturers or other specialized players? Will large- microsegmentation) scale farms that are courted by input producers continue to see value in C your coop’s offering? How serious is the threat of large-scale farms bypassing your cooperative and dealing with input manufacturers directly? How would this affect the remainder of your members? McKinsey & Company | 36 Copyright © 2012. All rights reserved
  38. 38. 4 How can your cooperative help members anticipate shifts in consumer tastes and coordinate production patterns to better meet demand?Context Questions to ponder▪ The value chain is How is your cooperative positioned to understand shifting consumer increasingly turned needs in a timely fashion? How does your cooperative remain abreast of the upside down as market changing consumer requirements? How does it discern consumer fads from power shifts to what consumers actually want? How does your cooperative leverage knowledge customers and retailers A from other stakeholders across the value chain? Should your cooperative spearhead an initiative to ensure consumer needs are shared among partners▪ As consumers are along the value chain? Are market intelligence and analytical capabilities becoming more sufficient? demanding and discriminating, coops will have to help their How will your cooperative best leverage market information to support members anticipate members? How can members best benefit from the gained market knowledge? consumer tastes to How should your cooperative go about disseminating this knowledge? Is your maximize the value of B cooperative in a position to influence members to change/update their their products production to meet changing consumer needs and expectations? How could your cooperative coordinate activities of all its members to ensure they are all optimized in light of the changing market requirements? Would tackling production waste be a win-win from the consumer perception and output yield perspectives? Is there an opportunity to reduce C waste among members of your cooperative? What is preventing members from proactively tackling this issue? What value would there be in communicating such efforts to consumers? McKinsey & Company | 37 Copyright © 2012. All rights reserved

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