Overview of agribusiness trends David Burch AAI Second Global Forum ‘Market Power and the World Food Crisis’ Sao Paulo, Brazil, 22-24 January 2009

Megatrends Globalisation Environmental degradation Resource depletion Energy costs and availability Population growth Growing urbanisation Development, poverty, gender and trade Financial crises

Five major trends in F&A Continuing concentration along the agri-food supply chain Changing power relationships along the supply chain. Shift in production to the less developed countries. The growth in consumer concerns/issues. The financialisation of food and agriculture.

1. Concentration along the agri-food supply chain The AAI has its origins in concerns about the increasing levels of concentration in key agri-food sectors, initially in the USA and Europe, and the impacts of this on farmers and consumers in particular. Ther genesis of this work lay in the research carried out by W. Heffernan, M. Hendrickson, R. Gronski and others at the University of Missouri in the 1990s.

Concentration ratios in processing Broilers (USA) 1986 1990 1994 1998 2001 CR4 = 35% 44% 46% 49% 50% Top 4 companies - Tyson, Gold Kist, Perdue Farms, Pilgrim’s Pride. In 2006, Pilgrim’s Pride acquired Gold Kist; CR4 in 2007 was 58.5%.

Concentration in the retail sector US supermarkets: 1997 2001 2004 CR5 = 24% 38% 46% Top 5 - Wal-Mart, Kroger, Albertson’s, Safeway, Ahold.

Rethinking concentration levels Most applications of the concept of the concentration ratio have been conducted at the national level. But in a period of globalisation, when the companies operate in more than one country, and import and export products in a variety of forms - e.g. poultry in complete ready meals - the concept of concentration needs further consideration.

Concentration in global manufacturing Company Global share of packaged food sales Nestle 3.4% Kraft Foods 2.5% Unilever Group 2.2% PepsiCo 1.8% Danone Group 1.3% Cadbury Schweppes 1.0% Mars Ltd. 1.0% Kellog Co. 0.9% General Mills Co. 0.7% Barilla Holdings 0.5% Top 15 companies account for 17.8% of packaged food sales

But in particular commodities… US company Pilgrim’s Pride is now No.1 poultry producer in the world, but the Charoen Pokphand (CP) Group of Thailand (with poultry operations in Thailand, China, Turkey, Russia, Indonesia, Cambodia, Vietnam, and elsewhere), is reportedly No. 2.

2. Power along the supply chain Supermarkets have come exert control over the supply because of: - Market concentration; - Scale of purchases and buying power; - Control over access to shelf space; - ‘Own brands’ or private labels; - Their role as food innovators.

Control over access to shelf space Supermarkets can determine who has access to shelf space, and the terms and conditions of access; Supermarket suppliers may be charged ‘slotting fees’ for space or for premium positions - in 2004, US food producers paid US$9 bll in slotting fees. Supermarkets also require suppliers to pay for ‘specials’ or price reductions - ‘Every Day Low Prices’.

‘Own brands’ or private labels ‘Own brands’ have become a mass phenomenon – in the UK, they account for over 40% of all grocery sales and growing at 6% p.a.; in Australia they are 30% of total sales; in the US they are 17%. Larger profits for supermarket; Denial of shelf space to proprietary brands, or an enhanced ability to extract rent through slotting fees

Sourcing from the Third World Increasingly, this means sourcing from the less-developed countries; e.g. in the UK and Europe, Tesco sources much of its poultry products from Thailand; Sainsbury sources organic green beans from Kenya and grapes from Egypt; In Australia, the two leading supermarket chains source ‘own brand’ canned fruits from South Africa, Thailand, the Philippines, Indonesia and Swaziland, and frozen beans and cauliflower from China.

Supermarkets as product innovators Established food companies have not been major innovators and have depended on long-standing quality brand products; e.g. Heinz baked beans were essentially unchanged for over 100 years, until they were forced to innovate through the impact of own brands. Food companies have ignored contemporary trends in consumption and the demand for new food forms - convenience foods - ‘deskfast’ and ‘dashboard dining’

Ready meals and meal ‘solutions’ Ready meals are complete single, fresh meals, with a shelf life of 4-5 days, and much in demand in a society where many people live alone or where families ‘graze’ instead of sharing a meal. Ready meals were first introduced by the UK supermarket Marks and Spencer in 1988, and now supermarket ‘own brands’ still account for 95% of production

The market for ready meals Sales in the UK are over £2.6 bll. p.a. 1 in 4 families eats at least one per week; Increasingly targeted as convenient and healthy, ‘restaurant quality’ products; There is a high level of innovation – in 2003, when Tesco introduced a new range, it included 350 new dishes (starters, mains and desserts); Such meals are ‘assembled’ from ingredients sourced globally, e.g using chicken from Thailand, China, etc.

Food manufacturers under threat Because of the threats from own brands, etc, established food companies are re-defining themselves by focusing on health and ‘wellness’ products - functional foods and nutriceuticals; The global market for functional foods was US$72 bll., in 2005, with the largest market – the US – growing at a rate of 13 percent per annum. Takeovers and mergers between food and chemical/ biotech/ nanotech companies – strategic alliances – patents to replace brands.

Food for health The global market for functional foods was US$72 bll., in 2005, with the largest market – the US – growing at a rate of 13 percent per annum. Takeovers and mergers between food and chemical/ biotech/nanotech companies – patents to replace brands. Nestles, Unilever, Cargill, Tyson and Danone, all produce functional foods and nutriceuticals.

Nestlé The largest food manufacturer in the world now refers to itself as a ‘wellness company’. The company now has a dedicated ‘Nutrition Division’ covering infant formula, baby food, medical nutrition, weight management and performance (sport) nutrition, and a Strategic Wellness unit to ‘drive’ the idea of wellness throughout all of the company’s main divisions;

3. Production moving to the LDC’s Less developed countries have experienced a shift away from the export of traditional tropical products (coffee, cocoa, tea, sugar, etc) and towards non-traditional exports - especially horticultural products; Much of this is fresh produce and is certified organic; But there is also underway a significant shift towards value-added processed products, e.g. poultry, seafood.

3W production of processed foods e.g. poultry products for supermarkets and fast food chains (led by China, Brazil, Thailand, with India to follow); In 2003, the USA accounted for 27% of world poultry production - by 2008 this was down to 23%; Similarly, the US share of world exports fell from 36% in 1995, to 26% in 2005 - the share held by Brazil, China and Thailand went from 16.5% to 36% over the same period.

3W production of processed foods Seafood products (prawns from Thailand, Vietnam, Bangladesh; tuna from Thailand and small Pacific island states; Canned and frozen fruits and vegetables (often under supermarket own brand labels) - tomatoes from China, pineapple from Thailand, Indonesia, the Philippines, canned fruits and desserts from Swaziland, cauliflower, peas, beans from China, etc.

Agribusiness in developing countries Much of this new production is accounted for by western agribusiness companies re-locating to lower-cost production sites (e.g. poultry production by Tyson (US) in Brazil and China, and Grampian Food Group (UK) in Thailand). This is done to meet the growing demand for poultry in the less developed countries and to supply cheap produce to the West.

Agribusiness in developing countries But of increasing importance are the local. ‘home-grown’ agribusiness companies emerging within Asia and Latin America; Charoen Pokphand Group (Thailand) San Miguel (Philippines) Indofoods (Indonesia) Reliance Group (India) New Hope (China) Sadia (Brazil)

Charoen Pokphand (CP) Group Thailand’s largest corporation and Asia’s largest agribusiness concern; 2001 turnover of US$12 bll. Largest producer of animal feed in the world Second largest poultry producer Largest shrimp producer a workforce of 100,000 (excluding many tens of thousand of contract farmers) in over 250 companies in 20 countries.

CP Group - a global corporation First and largest foreign investor in China; Investments in land and real estate, shopping malls, fast dood outlets and supermarkets, telecommunications, motorcycles and machinery, petroleum, seeds, etc; Poultry operations in Thailand, Russia, Turkey, China, Vietnam, Indonesia, Cambodia, UK; The largest single supplier of poultry to Tesco, UK’s largest supermarket chain.

3W Farmers and globalisation Whether the agribusiness company is locally- or overseas-owned, the effects on local communities are the same; Farmers are drawn into global market economy through spread of agribusiness and neo-liberal models of development advocated by WB, ADB, IADB, etc; Free Trade Agreements (NAFTA, Thailand-Australia); Contract farming - increased capital intensity and imported technology; GMO’s and Nanotechnology A viable model?

4. Agribusiness and Consumers There are many issues that have emerged in the relationship between agribusiness and consumption; In the developed centres, food safety is an issue; globalisation and ‘food from nowhere’ who produces food, where and under what conditions? Food scares - foot and moth, BSE, melamine in milk, bird ‘flu, pesticide residues on fruit and vegetables, etc. Health issues and obesity, etc. GMO’s and Nanotechnology Quality control systems and certification

Emergence of ‘green’ issues Food miles; Carbon footprint in production, processing and distribution; The emergence of alternative agricultural movements - slow food, organic produce, farmer’s markets; The fair trade movement; How effective are these ‘movements’?

Consumption in the Third World In the less developed countries, food security refers to security in supplies (as well as safety); This in turn relates to issues of income distribution as well as issues of food self-reliance and self-provisioning; self reliance under threat; GMO’s are an issue; Other issues relate to competition for land and labour, gender equity and food production.

5. Financialisation of food and agriculture Financialisation refers to the: ‘…increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international levels’ (Epstein 2002: 3).

Financial actors The main actors within this process of financialisation are the merchant and commercial banks, investment finance houses, sovereign wealth funds, private equity consortia, hedge funds, superannuation funds and other agencies. Such financial instruments and institutions are becoming increasingly involved at all points of the agri-food supply chain. A growing interest in ‘soft commodities’

Merchant banks and agri-food assets Goldman Sachs began to invest in China’s agri-food sector in 2006 and purchased a 13% holding in Yurun Food Group, the country’s second largest meat and poultry processor. Other shareholders include J. P. Morgan Chase In August 2008, Goldman Sachs extended its investments in China when it bought 10 poultry farms for US$300 mll.

Private equity and the agri-food sector Many food manufacturers and retailers were targets for private equity companies such as Blackstone and KKR who saw opportunities in a sector with a high turnover and a large asset base - e.g Burger King (US), Somerfield (UK), Cadbury Schweppes (UK), Inspicio (UK’s largest food inspection/certification body).

Hedge funds and futures markets Between 2003 and 2008, the volume of speculative investments made by hedge funds into commodity futures trading increased from US$13 bll. to US$260 bll. Many such investments were in agri-food commodities - rice, wheat, corn, bio-fuels, etc.

Speculation of commodity prices Many observers have argued that the large increases in commodity prices 2007-8 was due to speculation by hedge funds; Between 2003 and 2008, the volume of speculative investments made by hedge funds into commodity futures trading increased from US$13 bll. to US$260 bll.

The case of cocoa In 2005, speculators held futures contracts over 260,970 tonnes of cocoa compared with the chocolate industry's 942,700 tonnes In 2008, speculators owned futures contracts over 654,760 tonnes of cocoa; chocolate makers and other companies in the industry owned contracts over 706,430 tonnes. Consequently the price of cocoa traded on New York’s International Exchange rose from $US1700 per tonne in 2007, to $US2600 per tonne in 2008.

Sovereign wealth funds UAE $875 bll. Singapore $489 bll. Norway $391 bll. Kuwait $264 bll. China $200 bll. Australia $81 bll Qatar $60 bll. Libya $50 bll.

SWF’s and investments in F & A Countries such as Libya, Saudi Arabia, Kuwait, China, UAE, South Korea and others are increasingly investing in land and food production in order to secure their own food security, or produce biofuels, etc. Export processing zones for the agricultural sector?

Daewoo in Madagascar Daewoo to cultivate maize (for food for Korea) and palm oil (for biofuels) on 1.3 million hectares in Madagascar (half the country’s arable land); Granted a 99-year lease - Daewoo expects to acquire the land for nothing - “It is totally undeveloped land which has been left untouched. And we will provide jobs for them by farming it, which is good for Madagascar,” said Mr Hong.

Other cases Saudi Arabia’s Hadco Company has paid $95 mll. to lease 25,000 hectares for cropland development; Abu Dhabi has initiated a project involving 28,000 hectares in northern Sudan; China is in negotiations to lease vast areas in Mozambique; GRAIN, the US NGO, has documented over 100 other cases in recent years - see http://www.grain.org/front

Financialisation ‘in reverse’ In recent years, some actors in the agri-food supply chain have come to operate as financial institutions; In 2005, Wal-Mart invested US$25 mll. to create a private equity company to invest in supplier diversity; In 2008 Louis Dreyfus Commodities invested US$65 mll. to establish Aclyx Agro Ltd, a private equity investment vehicle which aims to buy, operate and sell land in Latin America.

Supermarkets as banks In the UK, both Tesco and Sainsbury established banks, offering a wide array of financial products including loans, life and vehicle insurance, credit and store cards and more; - Wal-Mart has banking operations in Mexico and is seeking approval to do the same in the US; - In Japan, the Aeon Supermarkets established banking operations in 2007; - In Australia, Woolworth recently moved into the credit card business.

Why wouldn’t you own a bank? Like all supermarkets, Tesco delays its payments to its suppliers - usually 30 days. In 2006-7, UK Tesco made a profit of £2.5 bll. on a turnover of £47 bll. Delayed payments of one month on this sum could amount to £2.8 bll. (£25 bll. divided by 12). If held by Tesco in its own bank, used as working capital at 5%, or seen as a contribution to its bottom line, this sum represents a £140 mll. windfall, or some 18% of total UK net profit.

Agribusiness and the world food crisis Agribusiness thrives in a world dominated by a neo-liberal free market agenda based on productivist assumptions; while arguing that it can feed the world by increasing production and incorporating 3W farmers into the global food system, it responds most effectively to the demands of a market based on inequalities of income at the national and the global level, which gives priority to commodities for elite consumption - biofuels, grain for animals rather than people, and so on.