Posted: April 25th, 2025

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Write an initial response to the following key prompt: Based upon your investigation of the agricultural industry thus far, choose a specific agricultural market and describe the competitive environment at each stage in the supply chain (the suppliers of feed and other inputs, the individual farmer, the aggregator of the farm output, the food manufacturer, and the final consumer.) How did you make your determination of market structure in each of these stages? From a VBM perspective, how might understanding the market structure affect decision-making?

After you answer the questions on your own, find a generative artificial intelligence program online and input this query, “In the [Market You Chose] market, what is the competitive environment at each stage in the supply chain (the suppliers of feed and other inputs, the individual farmer, the aggregator of the farm output, the food manufacturer, and the final consumer)? How do you make a determination of market structure in each of these stages? From the perspective of a virtuous business manager, how might understanding the market structure affect decision-making?”
Some of the better known AI platforms are Viso Suite, ChatGPT, Jupyter Notebooks, and Google Cloud AI. Or you could submit your own Google search for an alternative AI platform.
How to cite AI(new tab) with The American Psychological Association
McAdoo, T. (2024, February 23). How to cite ChatGPT. APA Style Blog. https://apastyle.apa.org/blog/how-to-cite-chatgpt.
How to cite AI(new tab) with Purdue University
Purdue University Libraries and School of Information Studies. (nd). How to Cite AI-Generated Content. LibGuide. https://guides.lib.purdue.edu/c.php?g=1371380&p=10135074.
Scan how the AI’s response is similar or different from your own response. Were you surprised by anything in the AI generated response?

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Abstract

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Abstract

Introduction

The Agricultural Value Chain

The Bullwhip Effect

Discussion

References

Agriculture is the most important industry for humanity. Unfortunately, however, it is also one of the least effectively managed
industries. It is true that for the last several decades, there have been enormous scientific advancements that have increased the
agricultural productivity. However, the question is whether the world has been able to reap the benefits to the fullest extent of such
scientific advancements. The agricultural supply chain is characterized with an extremely long and fragmented system consisting
of many gatekeepers throughout the value chain. As a result, it is vulnerable to a serious systemic malfunctioning such as the
bullwhip effect. When a supply chain is inflicted by the bullwhip effect, it suffers huge inefficiencies, which include increasing costs,
hampering innovation, and weakening problem solving capability. Unless it overcomes such inefficiencies, the industry as a whole
will lose its competitiveness and perish eventually. As such, in order for the agricultural industry to sustain and thrive, it is vital
to implement supply chain strategy effectively through coordination among the entire participants in the agricultural value chain.

Introduction

Go to

Abstract

Introduction
The Agricultural Value Chain
The Bullwhip Effect
Discussion
References

There is no doubt about that the agricultural industry is the
most essential one for humanity [1]. It also employs a great number
of people, providing economic means to them. But it is not easy to
answer whether the agricultural industry is an effective one. On the
quite contrary, the industry is perhaps the least effectively managed
one for the last several thousand years. As people in the world are
enjoying longevity, the world consumes more and more food. Can
the world’s agricultural industry feed all the people on earth? It is
a vital question. If the earth capacity is limited and the crops are
not produced enough, the only possible solution is to increase the
productivity of the agricultural industry. In order to find ways to
increase such productivity, we first have to understand why the productivity of the agricultural industry is so low. Then we can
suggest how the agricultural industry changes itself to be more
productive and effective. In this paper, we endeavor to answer the
question from a value chain perspective.

The Agricultural Value Chain

Go to

Abstract

Introduction

The Agricultural Value Chain

The Bullwhip Effect

Discussion

References

The Agricultural Value Chain

Every industry has a value chain. It is usual that the agricultural
industry has a long and quite fragmented value chain. For the sake
of simplicity, we define the agricultural supply chain as consisting
of four primary functions, i.e., suppliers, farms, distributors, and
consumers (Figure 1). Each of the supply chain participants is
defined as follows [2]:

Figure 1: Agricultural Supply Chain.

a) Suppliers are those companies or individuals, who
provide raw materials or necessary supplies to the farms and
farmers. These include seeds, fertilizers, pesticides, machinery,
equipment, farming tools, and the like.

b) Farms are those companies or individuals, who are
actually growing crops like rice, potato, corn, and beans. In
order to produce those crops, farms need the farming land,
water, and the supplies from the suppliers.

c) Distributors perform two functions, processing and
distributing. Once the farms harvest their crops, these crops
must be transported to wholesalers, who then sell the crops
to retailers. Individual consumers buy their crops from
the retail stores. Distributors perform this transportation
function. Sometimes certain crops need to be processed, e.g.,
sliced, refrigerated, or canned, before being transported to
wholesalers or retailers. Some of the distributors carry out this
processing function.

d) Consumers are those companies or individuals, who use
the crops for their businesses or their own use. Companies as
consumers include restaurants or food manufacturers, who
produce processed foods such as snacks, soft drinks, frozen
packaged foods, and so on. Also individuals are important
consumers in the agricultural supply chain.

Although the basic structure of the agricultural supply chain is
similar with that of other industries, it has unique attributes
that are quite unusual from other supply chains’ perspectives.

Some of the conspicuous characteristics are as follows:

a) The distance, physical or even psychological, between
suppliers and consumers, i.e., the length of the agricultural
supply chain is in general much longer than that of other
industries. It might be simply due to geographic conditions,
e.g., the rural area, where most farms are located, is usually
far away from the urban area, where many consumers reside.
Considering social and also cultural differences between rural
and urban areas, we put forth the psychological distance is also
quite extensive.

b) As a supply chain’s length increases, more intermediaries
enter the supply chain. That is, the longer the supply chain, the
more the gatekeepers involved in the transactions at various
stages throughout the supply chain.

c) As a result, the agricultural industry becomes more and
more fragmented, filled with small players that have myopic
perspectives to optimize their own interest without considering
the supply chain as a whole. But, this is not a criticism. We just
want to highlight the current state of the agricultural industry.
Although the individuals in the agricultural supply chain
behave myopically, i.e., in a suboptimum way from the entire
supply chain’s perspective, it is not because these individuals
are ill-intentioned, but because there might be a systemic
failure in the supply chain itself. In fact, it is the quintessential
proposition we have in this paper and in the next sections, we
delve into explaining why it might happen.

Figure 2: The Bullwhip Effect in the Agricultural Supply Chain.

The Bullwhip Effect

Go to

Abstract

Introduction

The Agricultural Value Chain

The Bullwhip Effect

Discussion

References

In order to create maximum value in an industry, its supply
chain must function effectively. But it is not an easy feat to
accomplish. It requires seamless coordination among the
participants in the supply chain. As such, we often observe
across the board breakdowns of supply chains in many different
industries. One of the most conspicuous such breakdowns is the
bullwhip effect, which is caused when a long and often complex
supply chain makes it difficult for information and communication
to flow efficiently through the chain. Let’s first explain what the
bullwhip effect is and how it affects the agricultural supply chain.

The bullwhip effect is the phenomenon, where the amount of
order or production at an upstream function fluctuates more than
that at its downstream function. As Figure 2 shows, the order or
production at the distributor fluctuates more than that at the end
market. The order or production at the farm (i.e., manufacturing
function in a general supply chain) fluctuates more than that at the
distributor, and so forth. More fluctuation means more uncertainty
faced by the function in point. For instance, the uncertainty faced
by the farm is greater than that faced by the distributor. Why does
the bullwhip effect hurt the industry? The bullwhip effect causes
the uncertainty to magnify more as the decision point moves from a downstream to an upstream function. There are two aspects of
the uncertainty. First, there is the magnitude of fluctuation, i.e.,
the extent or size of the fluctuation, which becomes larger as one
moves backward in the supply chain (Figure 3). The other is the time-to-stability, i.e., how long it takes to return to the stable state,
which becomes longer as one moves toward an upstream function.
As the uncertainty increases, other things being equal, the firm has
to keep larger inventory in order to buffer against the uncertainty.

Figure 3: Consequences of the Bullwhip Effect.

A larger inventory has three negative consequences for the firm.
First, more inventory means higher inventory management cost.
It is the most widely mentioned consequence of keeping a large
inventory. However, there are more damaging consequences than
the cost itself. When it has inventory more than effectively optimal,
it becomes more difficult for the firm to innovate. For instance,
when the firm’s warehouse is full of old, outdated inventory, it
cannot introduce new products into the market, unless it is willing
to write off its inventory. Finally, keeping an unnecessarily large
inventory might prevent the firm from identifying and solving
problems. It is due to that the inventory might cover up serious
flaws in the firm so that it cannot identify managerial problems
appropriately. If you cannot identify a problem, you cannot solve it.
We expect these negative consequences of having an unnecessary
inventory to affect the agricultural industry in the same way
impacting other industries: the agricultural industry is affected
by the increased inventory due to the bullwhip effect causing
uncertainty throughout the supply chain in three ways. That is,
due to the chronic uncertainty embedded in itself, the agricultural
industry is afflicted with three deficiencies, i.e., increased inventory
management cost, decreased innovation, and reduced problem
solving capability.

Discussion

Go to

Abstract

Introduction

The Agricultural Value Chain

The Bullwhip Effect

Discussion

References

We have discussed why and how the bullwhip effect in the
agricultural industry could cause serious inefficiencies and
deficiencies in the industry. Considering the unique structure of the
agricultural supply chain, we believe the negative impacts of the
bullwhip effect affect the agricultural industry more severely than other industries. Is there any way to overcome these problems?
To answer the question, we should think about the fundamental
cause of the bullwhip effect. As Figure 1 hints, the main cause of
the bullwhip effect is the poor information quality, which in turn
is determined by two factors, i.e., the physical or psychological
distance and the number of gatekeepers between the information
source (consumer market) and the decision point (each supply
chain participant). The longer the distance, the poorer the
information quality. The more the gatekeepers, the poorer the
information quality. As a result, in order to reduce and eventually
get rid of these negative consequences of the bullwhip effect in
the agricultural supply chain, we should improve the information
quality. One of the most effective ways to improve the information
quality is to enhance the communication for information sharing
among the supply chain participants in the agricultural supply chain.
Then, another relevant question is “why hasn’t the communication
done effectively in the agricultural supply chain?” Like human
beings, firms do not communicate with each other, unless there is
trust between them. This series of reasoning leads.com to a logical
conclusion that in order to solve the damaging problems prevalent
in the agricultural industry, it is essential to dramatically enhance
the trust among the partners or participants in the supply chain.

It is, however, neither easy nor straightforward to make the
supply chain participants trust each other suddenly, unless a trustbased
relationship has existed among them. Fortunately, there
emerges a new technology that could help managers and their
companies to trust other players in the supply chain, not necessarily
having known each other for long. It is the blockchain technology [3]. In fact, there are already several cases, where the blockchain
enables the supply chain to function effectively by restoring the
trust among the players sharing the same value chain [4]. Although
it has been regarded as a traditional industry that might not be
nicely compatible with cutting-edge technological innovations,
now it is the time for the agricultural industry to transform itself
completely. The key to this change is technology. In particular, the
agricultural industry must invest heavily in innovative technologies
that help the partners and participants alike to trust each other in
doing business.

References

Go to

Abstract

Introduction

The Agricultural Value Chain

The Bullwhip Effect

Discussion

References

Cervantes Godoy D, J Dewbre (2010) Economic Importance of
Agriculture for Sustainable Development and Poverty Reduction: The
Case Study of Vietnam. OECD.
Kim B (2018) Supply Chain Management: A Learning Perspective.
Cambridge University Press, UK.
Iansiti M, KR Lakhani (2017) The truth about block chain. Harvard
Business Review.
Aitken R (2017) IBM & Walmart Launching Blockchain Food Safety
Alliance, Forbes.

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GLOBAL LIFE SCIENCES

The agricultural and
food value chain:
Entering a new era
of cooperation

kpmg.com

KPMG INTERNATIONAL

http://www.kpmg.com

© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Executive summary 2

Introduction

Part 1: Characterizing the agribusiness
value chain

• Volatility 6
• Complexity 1

• Scrutiny 24

Part 2: Implications for stakeholders 2

• Input companies 28
• Farmers 2

• Traders 3

• Food companies 32
• Retailers 34

Conclusion: A new era of collaboration? 36

_________________________________________________

If you would like to discuss any of the ideas in this report

or how they can be implemented, please contact any of
our KPMG teams listed at the end of the report.

Contents

Executive summary

“Opportunities to take
advantage of a rapidly
changing agribusiness
landscape abound”.

Chris Stirling

2 | The agricultural and food value chain: Entering a new era of cooperation

The agriculture and food sector remains one of the few bright spots in an
otherwise troubled global economy. With strong underlying growth drivers
such as population, urbanization, and the rise of the middle classes, it is

expected to remain so. Not only are the economic fundamentals strong, but so is
the level of political support as food security tops government agendas.

At the same time, the sector is facing challenges driven by climate change, rapid
technological innovation and new demands for biofuels and access to informatio

These forces are manifesting themselves through increased volatility, complexit

and scrutiny throughout the value chain.

Furthermore, recent food controversies in the UK, such as the ongoing horsemeat
scandal and the supplier of halal food found to contain traces of pork, further
drive transparency and food security up the political agenda. These issues are not
new, but as history shows, can have dire consequences, including the deaths of
six babies linked to the 2008 Chinese milk scandal where milk and baby formula
were adulterated with melanine. Thousands died or were seriously injured

disabled after the 1981 Spanish ‘cooking oil’ disaster, where years later it was
determined that the contamination was most likely caused by farmers’ overuse
of chemicals and pesticides rather than the cooking oil itself.

To overcome these challenges and help prevent future tragedies, greater
collaboration and cooperation both up- and down-stream will be required between
various players in the value chain. The extent and structure of that collaboration will
be a very important strategic decision. Options may include vertical integration
at one end of the spectrum right through to relatively loose relationships at the
other end. In addition to seeing greater cooperation between private players
from different industries, we are witnessing more collaboration between the
private and public sectors.

Opportunities abound for players at all stages of the value chain, but improvements
to business intelligence, agility, and risk management strategies must first be
realized.

Chris Stirling
Global Head of Life Sciences
KPMG International

The agricultural and food value chain: Entering a new era of cooperation |

The goal of the global agribusiness value chain, which spans input companies
through to the final consumer1 and has a total value of around US$5 trillion

is to provide sustainable access to affordable food, feed, fibre and, more

recently, fuel. However, this goal is getting harder to achieve every year due to
several prominent challenges.

On the demand side, the growing global population and economic growth combine
to generate more need for increased levels of crop and food production. Policies
promoting biofuels have also added a significant new source of demand to the
equation. Apart from such considerations affecting the quantity of demand, there
are also drivers affecting its quality as the food chain and consumers increasingly
consider the environmental and social dimensions of how food is produced. On the
supply side, there is concern about declining levels of yield gain, whether due to the
laws of diminishing returns or the effects of water shortages and global warming.

The agribusiness sector’s complex value chain spans input companies, farmer

traders, food companies and retailers, all of whom must ultimately satisfy the varying
demands of the consumer in a sustainable manner. The sector encompasses huge
diversity and variety at each stage, from R&D-based input companies to generic
manufacturers, subsistence farmers to high tech agroholdings, biotech boutiques and
small and medium-sized enterprises (SMEs) to multinational corporations.

On the opposite page, Figure 1 maps this while Table 1 provides profitability metrics
for the major sectors in the chain. While most reports on the sector tend to focus on
specific parts of the value chain, the approach taken here is to look across the whole
value chain, thus reflecting the tendency for it to become increasingly integrated. The
participants of this value chain contribute to a total profit pool of around US$600 billion.
Agribusiness is currently one of the few bright spots in the global economy, wit

high crop prices sustaining the income of farmers and businesses which sell to them,
and high levels of R&D investment in certain sectors indicative of faith in its future.

Introduction

1KPMG International, 2013

4 | The agricultural and food value chain: Entering a new era of cooperation

Figure 1: The agriculture and food value chain

• Crops
• Meat
• Dairy

• Seeds
• Fertilizer
• Crop protection
• Animal health and nutrition
• Crop insurance
• Food ingredients

Food
companies

Retailers

Consumers

Traders

Farmers

Input
companies

• Urban
• Rural

• Hypermarkets
• Supermarket
• Corner shops

• Bakery
• Meat
• Dairy
• Snacks
• Beverages

• Crops
• Meat
• Oils/meal
• Biofuels

Table 1: Key profitability metrics for the agribusiness value chain

Sector Input Farmers Traders Food companies Retailers

5,400Sales: US$bn 400 3,000 1,000 3,50

(approx.)

Number of players 100s 450 million Tens Thousands Millions

EBIT % 15% Variable 2–5% 10–20% 5%

R&D % sales <1% (fertilizers) – 0% <1% 1–2% <1%
10% (seeds)

R&D spend: US$bn 10 – Low 8 Low

Composition/ • Seed • Grains • Handling • Bakery • Multiples
Sub-sectors • Fertilizer • Fruit and • Primary processing • Meat • Discounters

• Crop protection vegetables • Secondary • Dairy • Wholesalers
• Machinery • Meat processing • Snacks • Independents
• Animal health and • Dairy • Ready meals
nutrition • Beverages

• Crop insurance
• Food ingredients

Range R&D-based Smallholders to Global SMEs to Corner shops to
majors to generic agroholdings agribusinesses to multinationals hypermarkets
manufacturers local middlemen

Source: KPMG International, 2013

The agricultural and food value chain: Entering a new era of cooperation |

PART

Characterizing the
agribusiness value chain01

Volatility
The agribusiness environment is becoming increasingly volatile. This volatility stems
from several different sources: the changing climate, political actions and soci

changes. The weather has been responsible for fluctuating yields and a supply
shortfall which has put pressure on crop prices. This was what sparked the 2006
food crisis when drought in Australia led to a greatly reduced wheat crop whi

then had knock-on effects around the world and on other crops. Historically, while
demand tends to be relatively smooth and predictable, supply is much more erratic,
due mainly to the weather (see below).

Figure 2: Global supply versus demand for major grains and oilseeds*

2.0

2.1

2.2

2.3

2.4

2.5

2.6

/2
00

20
03

/2
00

20
04

/2
00

20
05

/2
00

20
06

/2
00

20
07

/2
00

20
08

/2
00

20
09

/2
01

20
10

/2
01

20
11

/2
01

20
12

/2
01

Consumption Production

Source: USDA PSD database, February 2013
*Maize, wheat, rice, soybeans, rapeseed, sunflowers, barley, rye, sorghum, oats

B
ill

io
n

m
et

ri
c

to
n

n
es

It is now generally accepted that with the advent of global warming we can
expect more weather-driven volatility in the future as average temperatures and
rainfall increase. Despite the extent of these extremes, assessing the timing and
impact of global warming on agriculture is still very much a developing field.

On the political front, volatility stems from government actions, for example the
push towards biofuels which has had a major destabilizing effect on world markets
since 2005. While growth in demand for food is modest (1-2 percent CAGR over the
last 20 years) limited by population and economic growth, growth in demand for
biofuels has been much greater and could in theory continue to grow at this higher
level, although it is currently showing signs of leveling off.

6 | The agricultural and food value chain: Entering a new era of cooperation

Global warming
The impact of global warming on agriculture is the subject of much research and
debate. The current conventional wisdom is that crop production will move towards
the poles with countries such as Canada and Russia benefiting from the combin

impact of increased temperatures, greater precipitation and the carbon fertilization
effect. Meanwhile, countries closer to the equator, such as India and Africa, could be
hit the worst as higher temperatures reduce crop yields. The effect, however, will vary
significantly by crop as some are more susceptible to temperature increases than
others. Overall, the impact on global crop production is uncertain. Wheat, for example,
is already geographically constrained as it cannot be grown in tropical climates, is
more vulnerable than corn. Any significant effects are likely to lead to major changes
to the location of production as well as global trading patterns.

In addition to the impact on the overall level of agricultural production, global warming
is also likely to result in more extreme weather patterns, with more droughts and
floods which could lead to increased volatility in crop production and markets.

The upcoming fifth report on the topic from the Intergovernmental Panel on Climate
Change (IPCC), due in 2014 will hopefully shed more light on the issue. In the
meantime, various regional studies are being conducted, including studies on India and
Central America which both point to significantly reduced production in each region.
Additionally, an interim review commissioned by the World Bank and published in 20122
paints a more worrying picture than some previous assessments.

Figure 3: Climate change impact on

agriculture

Impact on agricultural productivity with carbon fertilization (percent)

n.a.
25

2 World Bank report Nov 2012 ‘Turn Down the Heat’: https://openknowledge.worldbank.org/
handle/10986/118

Source: Global Warming and Agriculture: William Cline, Peterson Institute for International Economics, 2007

The agricultural and food value chain: Entering a new era of cooperation | 7

https://openknowledge.worldbank.org/handle/10986/11860

Global warming will present different challenges and opportunities to different parts
of the value chain, some of which are summarized in the table below.

Challenges and opportunities presented by global warming along the value chain

Seeds
companies

Fertilizer
companies

Farmers Traders
Food
companies

Retailers

Mitigation Research Increase Choice of crops, Changing Carbon labeling Carbon labeling
and targets: e.g. nitrogen use carbon credits production and
adaptation stress and heat efficiency trade patterns
opportunities tolerant crops

Source: KPMG International, 2013

8 | The agricultural and food value chain: Entering a new era of cooperation

Concern over greenhouse gas (GHG) emissions also figures prominently in
agribusiness companies’ environmental strategies, a focus which is slightly
surprising given that other sectors emit GHGs far more intensively and agriculture
is not included in the UN’s Clean Development Mechanism.

Biofuels
Biofuels first became a significant factor in the transport market when Brazil
started producing bioethanol from sugar cane in the 1970s in order to reduce
dependence on imported oil and support the agricultural sector. The rate of growth
further accelerated when the US government and the EU both increased their
support for biofuels with mandates and subsidies in the early 2000s in order to
reduce carbon emissions. In the US, there were additional motivations to increase
energy independence and support rural economies. By 2011, bioethanol production
accounted for 40 percent of US maize production and biodiesel production for
around 30 percent of EU rapeseed oil production.

Since 2010 however, biofuel production has stagnated (see table below).

World ethanol fuel production (million litres)

2006 2007 2008 2009 2010 2011 2012

Europe 1,627 1,882 2,855 3,645 4,254 4,429 4,973

Africa 0 55 65 100 130 150 235

North and Central America 18,716 25,271 35,946 42,141 51,584 54,765 54,5

South America 16,969 20,275 24,456 24,275 25,964 21,637 21,335

Asia/Pacific

World

1,9

39,252

2,142

49,625

2,753

66,075

2,927

73,088

3,115

85,047

3,520

84,501

3,965

85,088

Source: F. O. Licht

This is largely because US production from corn grain has approached the ceiling
imposed by the authorities although it also reflects a downturn in Brazilian production.

As far as the future is concerned, prospects for biofuels which use food crops
as a feedstock are not as bright as they used to be. In recent years the case for
biofuels has been questioned on grounds of both food security and environmental
impact. They have been blamed for contributing to the high levels of food prices,
and in the case of biofuels derived from palmoil in Asia, for leading to loss of
biodiversity. The original claims about their carbon footprint have been challenged.
They have also faced economic problems as, in the case of corn for example, the
crop feedstock accounts for around 70 percent of cost of goods sold (COGS), so
when crop prices rise, depending on the relative price of oil, margins can become
very thin and even negative.

The agricultural and food value chain: Entering a new era of cooperation | 9

In turn, these doubts are reflected in a reduction in support for biofuels both in
the US, where subsidies and tax-breaks have been reduced, and in the EU, which
has reduced its target for the amount of transport fuel provided by renewable
energy from 10 percent to 5 percent by 2020. Only in Brazil, where the production
economics are more favorable, does the future of biofuel look optimistic. Some
forecasters see this driving the sugar cane area from its current level of 6 million
hectares to over 9 million by 2015.

Apart from Brazil, significant future growth in bioethanol is predicated on the
development of cellulosic bioethanol, derived from crop residues after harvest
rather than grain. Progress towards this goal has been slower than originally
anticipated as large scale, commercially viable production has yet to be achieved.
There are several so-called ‘second generation plants’ under construction due to
come on stream in 2013 and 2014, but the amounts they will produce are small and
their commercial viability has yet to be proven.

10 | The agricultural and food value chain: Entering a new era of cooperation

nsumer reactions to
d scares can be sudden

d severe and have a
ge impact on demand for
foodstuffs involved.

Political influences on supply and demand manifest when governments take actions
to subsidize production, as they have to a large degree in the EU and US in the past,
or to influence trade, for example by banning exports when there are concerns
about domestic supplies as Russia has been known to do. The collapse of the Doha
round of the World Trade Organization (WTO) trade negotiations increases the
likelihood that such actions will take place in the future. At the same time, it opens
the way for more bilateral trade agreements.

Another significant political influence could come from China. To date, China has
had a policy of near (95 percent) self-sufficiency for its major crops: rice, wheat and
maize. The notable exception is soybeans, where China has had to increase imports
to satisfy growing demand for animal feed. If this were to be relaxed, it would have
destabilizing impacts on world markets.

There is no doubt that politics play an increasingly important role in agriculture and,
due to its inherently unpredictable nature, more political complexity means more
potential volatility.

Where social forces are concerned, consumer reactions to food scares, such as
the recent horsemeat issue in Europe, can be sudden and severe and have a large
impact on demand for the foodstuffs involved.

Amid all this volatility it has now become the conventional wisdom that crop prices
will remain high and well above their long term historic levels – the continuation of
the so-called commodity ‘supercycle’.

High crop prices will impact players at different stages of the value chain in various
ways. While farmers and those who supply them with seeds, crop protection,
fertilizers and machinery, generally benefit the companies which purchase their
outputs, food companies and retailers find their costs ever higher and must adopt
strategies to increase efficiency and pass on price increases, etc. Meat companies,
for which the costs of crop feed-stocks make up the greatest proportion of their
costs, are particularly vulnerable. The impact on traders, who sit in the middle of the
chain is more complex and will depend on their particular business model.

The impact of and possible reactions to volatility at each stage of the value chain
are examined in more detail in the following section. However, certain strategies
can be used to mitigate or adapt to volatility at all stages of the value chain:

• Be more agile – if the future is harder to predict, you must be better able
to respond rapidly when changes occur. This approach has implications for
organizational structure.

• Improve business intelligence and environmental scanning. Forewarned is
forearmed. Look beyond your own sector to developments up and down the
value chain to gain a greater understanding of possible external drivers and
emergent disruptive technologies as the chain becomes more integrated.

• Diversify, though going too far beyond the ‘core’ introduces risks of another
nature. ‘Adjacency’ might be the best approach.

Co
foo
an
lar
the

The agricultural and food value chain: Entering a new era of cooperation | 11

Complexity

The agribusiness chain is already highly complex, but various drivers are
conspiring to make it even more so. There are many different crops and food
types, each with its own distinctive and often fragmented supply chain. There
is also huge variety within each crop in terms of how and where it is produced,
and by whom. Environmental factors play an important part in production and
vary by region and by year.

New objectives

New objectives for agriculture have been introduced: whereas the primary purpose
was to provide food, feed and fibre, the sector is now being asked to provide
increasing supplies of biofuels, contribute to rural development and provide amenit
and ‘ecosystem services’. There is also talk of agriculture providing bio-materials
to underpin the ‘bio-economy’ of the 21st century. In the jargon, agriculture is
becoming increasingly ‘multi-functional’. Another driver for change is the increasing
emphasis being put on the health dimension of food as more people in the world
now suffer from obesity than malnutrition. Governments are considering ways
of intervening in the food chain to mitigate this trend while the development of
functional foods is becoming an integral part of many food company strategies.

New solutions

Technological advances, particularly in plant genomics and IT are creating all sorts
of new possibilities for agriculture. There has been a consistently high level of R&D
investment across the value chain (see below) which has resulted in a continuous
stream of innovation.

Table 2: Private R&D spend in the agriculture and food chain

Sector
R&D spend
1994: US$m

R&D spend
2010*: US$m

CAGR %
R&D % sales

2009*

Crop protection 2,296 3,116 2.1% 6.4%

Seeds and biotech 1,130 3,726 8.3% 1

0.5%

Machinery 920 2,394 6.6% 2.7%

Fertilizer 61 100 3.4% <1%

Animal health 664 941 2.4% 8.6%

Animal breeding
and genetics

196 339 3.7% 7.3% (in 2006/7)

Animal nutrition 314 410 1.8% n/a

Total crop and
animal inputs

5,581 11,026 4.6% n/a

Food manufacturing 6,016 11,480 (in 2007) 5.5% 1-2%

*Unless otherwise specified
Source: ‘Research Investments and Market Structure in the Food Processing, Agricultural Input and Biofuels Industries Worldwide’;
USDA, Dec 2011

The agribusiness chain is
already highly complex,
but various drivers are
conspiring to make it
even more so.

12 | The agricultural and food value chain: Entering a new era of cooperation

An increase in private sector investment in agriculture is mirrored by what has been
happening in the public sector, with governments, especially those in emerging
markets, significantly boosting their investment in recent years. China, in particular,
has greatly increased its investment in agricultural R&D and now spends almost as
much as the US. Moreover, collaboration between the public and private sectors is
growing, with several initiatives to increase the level of public-private partnerships
in agriculture. Gone are the days when the private sector was distrusted by donors,
academics and NGOs as the public sector and society recognize that their objectives
can only be realized with private sector resources and skills.

Figure 4: Public sector spend on agricultural R&D

*Note: Dotted lines for Brazil (2009–11), China (2009–10) India (2009–10) indicate preliminary estimates

Source: ‘ASTI Global Assessment of Agricultural R&D spending’; Nientke Beinteme et. al; IFPRI, 2012

Biotechnology, whether based on genetic modification or ‘native traits’, is producing
a stream of new traits and expanding the possibilities of what can be achieved.
Advances in IT are driving the growth of precision agriculture and transforming both
the way in which information flows along the value chain and how transactions are
conducted. These technological drivers have ramifications throughout the value
chain: biotechnology presents the farmers with new tools and choices and drives
the need for increased traceability. IT presents new options and opportunities for
farmers, but also changes the nature of food company and retailer interactions with
consumers, particularly through social media.

New markets

New customer segments are emerging: the growth of the emerging markets in
both population and economic terms drives the level and composition of demand
for agricultural and food products. The latest Food and Agriculture Organization
(FAO) forecasts predict that overall food demand will increase by 1.1 percent a year
between 2006 and 2050, or by 70 percent of the whole period. The primary drivers
of this demand are Africa, due mainly to population growth, and Asia, due to both
population and GDP growth.

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Brazil China
India

Brazil estimate China estimate
Other middle income (98)India estimate

20
05

P
P

P
d

o
lla

rs
(

U
S

$
m

ill
io

n
s)

China, in particular,
has greatly increased
its investment in
agricultural R&D and
now spends almost as
much as the US.

The agricultural and food value chain: Entering a new era of cooperation | 13

Biotechnology
Biotechnolgy is an umbrella term which covers both genetic modification (GM)
of crops, where new genes are introduced which could not occur naturally, and
advanced breeding techniques such as marker-assisted selection, which accelerat
the development of naturally occurring genes, or ‘native traits’. Whereas GM was t
initial focus of the biotechnology revolution, increasing emphasis has recently been
accorded to the native traits approach.

Despite opposition from some quarters which continues to exclude significant
GM penetration in the EU, the former Soviet Union and Africa, the rise of GM has
been rapid (see below). GM crops now account for 82 percent of the global cotton
area (herbicide tolerance and insect resistance), 75 percent of soybeans (herbicide
tolerance), 32 percent of maize (herbicide tolerance and insect resistance), and
26 percent of rapeseed/canola (herbicide tolerance).

Figure 5: GM crop areas

e
he

100

120

140

160

180

M hectares

USA Brazil Argentina India Canada

OthersChina Paraguay South Africa

19
96

19
97

19
98

19
99

20
00

20
01

20
02

20
03

20
04

20
05

20
06

20
07

20
08

20
09

20
10

20
11

20
12

Source: ISAAA, 2012

GM’s rate of growth shows no sign of abating:

• There are many markets where existing traits have yet to be launched but the
necessary political and/or regulatory framework does not yet exist.

• The industry pipeline is full of new traits and the level of R&D investment
(over 10 percent of sales) remains higher than any other sector apart from
pharmaceuticals.

Whereas GM was
the initial focus of
the biotechnology
revolution, increasing
emphasis has recently
been accorded to the
‘native traits’ approach.

14 | The agricultural and food value chain: Entering a new era of cooperation

• Fundamental research into crop genomics is resulting in an ever increasing
number of crops having their genomes mapped – around 20 at the last count –
and providing the basis of understanding upon which further new traits can be
developed.

The main barriers to an even faster rate of GM crop penetration are the absence of
bio-safety regimes in some countries – for example most countries in Africa – and the
continued opposition from many NGOs. In several countries, the necessary bio-safety
evaluation systems are in place and GM crops have been approved as safe to plant
but introductions have been delayed by political opposition.

So far, no GM trait has been introduced into a major food crop. [Maize, soybeans and
canola are used mainly for animal feed]. However, traits for rice already exist and are
awaiting approval, while wheat is increasingly becoming a research target.

One consequence of the continuing concern over GM crops is that it is encouraging
the spread of identity-preserved channels. In order to extract value from their new
consumer traits, such as enhanced oil quality in oilseeds, input companies are
having to set up production contracts with farmers and traders. In the EU, GM crops
must be labeled, creating a need for tracking and traceability. In the US, a proposal
to label GM traits in California (Proposition 37) was rejected in 2012.

Figure 6: GM trait introductions since 1995

100

150

200

250

300

350

400

RR Canola
RR Soybean

Bollgard Cotton
RR Cotton
LL Maize

YieldGard Maize
RR/Bollgard Cotton

RR Maize

RR/YieldGard Maize

Herculex I Maize
Corn Rootworm Maize

Bollgard II Cotton

RR/Bollgard II Cotton
LL Cotton

WideStrike cotton

RR/YieldGard Plus Maize
Herculex RW Maize
Agrisure GT Maize

Agrisure RW Maize
YieldGard VT Triple Maize

RR Sugarbeet

Planted area of GM crops (Acres m.)

RR Flex Cotton
Herculex XTRA Maize

RR Flex/Bollgard II Cotton

LL Canola

Agrisure 3000GT

Liberty Link soybean
RR2 Yield soybean

Genuity VT Double Pro
Genuity VT Triple Pro
Genuity SmartStax/
SmartStax

Optimum AcreMax 1
Optimum AcreMax RW
Agrisure Viptera 3110
Agrisure Viptera 3111
Optimum Intrasect

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Phillips McDougall, 2012

In the EU, GM crops
must be labeled,
creating a need for
tracking and traceability.
In the US, a proposal
to label GM traits in
California was rejected
in 2012.

The agricultural and food value chain: Entering a new era of cooperation | 15

The impact of IT
As in other sectors, IT is having an increasingly important impact throughout the
agribusiness value chain. For input suppliers, it is creating new innovation platforms,
as with bioinformatics and seeds or precision agriculture. For farmers the explosion
of mobile phone ownership facilitates access to better market and agronomic
information on crop prices and weather conditions, and financial resources and
products such as credit and insurance. It is having an especially strong impact
with small farmers where IT is redressing some of the information asymmetries
they suffered from in the past, allowing them to improve the efficiency of their
transactions. In the case of food companies and retailers, social media has become
an integral part of their marketing strategies and engagement with customers. IT
not only impacts individual stages in the value chain but also helps integrate them
by tracking the progress of crops and foodstuffs from production to consumption,
providing the information needed for traceability.

16 | The agricultural and food value chain: Entering a new era of cooperation

Value chain Input Farmers
Traders Food companies Retailers

segment companies
Planting Growing Selling

• IT applications • Bioinformatics/ • Credit • Agronomic • Crop prices • Traceability • Social media/engaging with
and benefits crop genetics advice • Combining with customers

• Weather other growers • Traceability
information • Identifying buyers

• Market access
Precision agriculture

• Crop insurance

While the benefits of IT are being felt throughout the agri-food chain, the way in
which IT is being used is becoming increasingly sophisticated, moving from gener
applications centering around the provision of information, such as crop prices
and the weather, to more customized and transactional types of use, such as crop
insurance, as shown below.

Figure 7: Type of IT intervention in agriculture

National Local/customized

Transactional

Crop
insurance

Mobile banking/
Credit

Crop
prices

Weather

Extension/Pest identification

Farmer – specific
recommendations

Crop
marketing

Complexity

Informational

IT not only impacts
individual stages in the
value chain, but also
helps integrate them by
tracking the progress
of crops and foodstuffs
from production to
consumption, providing
the information needed
for traceability.

Source: KPMG International, 2013

The agricultural and food value chain: Entering a new era of cooperation | 17

Figure 8: Growth in food demand: 2006-20

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

SSA Sth Asia NE/NA Latam E Asia DC’s

CAGR: 1.1%

CAGR: 0.8%

CAGR: 0.3%

Source: N Alexandratos and J Bruinsma, 2012, World Agriculture Towards 2030/50: the 2012 revision,
ESA Working Paper No. 12-03, Rome, FAO

With GDP growth comes an increase in the level of urbanization and the rise of
the middle classes. Both of these drive accompanying changes to the composition
of demand, with some crops and foodstuffs increasing their share, notably meat,
dairy products and vegetable oils, and others, such as staple cereal crops losing
out (Fig. 9). The fact that in 2012 China produced more corn than rice is illustrative
of this and represents a significant milestone. There is also a slow trend towards
diversification of diets (Fig. 10).

Figure 9: Diets diversifying, but slowly

Contributions to total dietary energy supplies (kcal)

C
A

G
R

: 2
00

6–
20

Population Per capita consumption Total growth

Other

Source: FAO, WFP and IFAD, 2012. The State of Food Insecurity in the World 2012.
Economic growth is necessary but not sufficient to accelerate reduction of hunger and malnutrition, Rome, FAO

Sugars Fats and oils Animal-source foods Fruits and vegetables
Pulses Roots and tubers Cereals

500

3000

2500

2000

1500

1000

500

0
1990-92 2007-09

Asia
1990-92 2007-09
Developed countries

1990-92 2007-09
Latin America

and the Caribbean

1990-92 2007-09
North Africa

1990-92 2007-09
Oceania

1990-92 2007-09
Sub-Saharan Africa

18 | The agricultural and food value chain: Entering a new era of cooperation

A related GDP-driven trend is the growth in demand for value-added, often
processed food products which meet the need for convenience and new tastes,
creating opportunities for the food manufacturing sector. Most major food
companies have already targeted the emerging markets for growth.

As well as affecting the quantity and composition of demand, economic growth
will bring with it new demands in the area of how the food is produced – more
information and traceability. This is addressed in the next section.

These demand trends then beg the question: who will supply the demand? This is
more difficult to anticipate as it will depend on less predictable (than demand) supply
factors. Russia, the Ukraine and many African countries have the potential to increase
their agricultural production and the extent to which they do so will have implications
for global trade patterns. It will also play out differently at each stage of the value chain
and each of these therefore needs to be addressed separately. For example, the EU is
a net importer of primary products and next exporter of manufactured food. However
one common/universal theme across the value chain is the increasing importance of
the emerging economies as both markets for foreign and domestic companies and
possible supply and R&D bases for both.

The growth in demand
for products which
meet the need for
convenience and new
tastes is creating
opportunities for the
food manufacturing
sector.

The agricultural and food value chain: Entering a new era of cooperation | 19

Africa: the sleeping giant
African agriculture has been the subject of a great deal of interest, political attention
and recently, optimism. In 2009 the World Bank issued its book ‘Awakening Africa’s
Sleeping Giant’3 which compared Africa’s agricultural potential favorably with that of
Brazil and Thailand. There is no question that with over 50 percent of the population
still living in the countryside, development of the agricultural sector is fundamental
to both Africa’s overall economic development and poverty reduction. It has been
estimated a 1 percent increase in crop yields results in a 0.5-0.8 percent reduction
in poverty. The question is whether these high expectations can be met.

The challenges and obstacles which have held African agriculture back are
considerable: yields are the lowest in the world and have been growing relatively
slowly. As a result imports for staples such as wheat and rice have been rising
steadily. The reasons are many and complex: lack of land rights; limited credit
availability; low levels of investment and input usage, whether in quality seed,
fertilizers, crop protection products, irrigation or machinery; poorly developed
infrastructure and supply chains; and low levels of inter-regional trade, hampered by
bureaucratic barriers.

At the same time, there are many reasons for optimism: the business climate is
improving; there is huge political commitment (e.g. from the G20); Africa leads the
world in the mobile phone revolution which can beneficially impact agriculture
at various points in the value chain; the continent has the largest land bank, over
200 m hectares of currently unused land, an estimated 60 percent of the global
total, which could be turned to agriculture. This surfeit of land also partly explains
why most production increases have come from increased area, rather than yields.

By mapping the various initiatives which are being taken and positive

developments

against the above-mentioned constraints it is possible to see that many of the factors
which have historically held back African agriculture are indeed being addressed.
While the constraints should not be underestimated or belittled, there is indeed
much scope for optimism.

However, even if African agricultural productivity does show an uptick, such is the
rate of growth in demand, driven by both population and GDP growth, that it is likely
Africa will continue to import an increasing amount of its food. In this scenario there
are opportunities for local farmers and companies to increase the level of domestic
production and for exporters and traders to benefits, from new opportunities
regarding Africa.

3 ‘Awakening Africa’s Sleeping Giant: Prospects for Commercial Agriculture in the Guinea Savannah Zone and
Beyond’, World Bank, 2009

While Afica’s
constraints should
not be underestimated
or belittled, there is
indeed much scope for
optimism.

20 | The agricultural and food value chain: Entering a new era of cooperation

Table 3: Reasons to be cheerful about African agriculture

Value chain link Constraint Current situation Initiatives/trends
Supply Land ownership Land rights poorly defined

• Microcredit schemes

Credit availability Lack of availability
• Warehouse Receipts Programs (e.g. of

World Food Program)

• Mobile phone use for financial transactions

Irrigation
Only 4 percent arable land irrigated:
lowest level of any continent

• ‘Corridor ‘projects

• Foreign Direct Investment

Seeds
Poorly developed private markets: lowest
level of use of commercial seed

• AGRA’s seeds program (PASS)

• AGRA’s agro-dealer networks

Fertilizer
Lowest use/highest prices/limited local
industry

• AGRA’s soil health program

• AGRA’s agro-dealer networks

Crop protection Low usage • AGRA’s agro-dealer networks

Machinery Lowest incidence of tractor use
• Increasing interest from machinery

companies (e.g. AGCO)

• Use of mobile phones to give advice
Extension Low provision; poorly developed Increasing Public Private Partnerships

(PPP’s) with an extension component

R&D Low levels of R&D • CAADP4

Some of the major crops are of relatively • PPPs
limited interest to the rest of world and
private sector, so there is limited ‘spin-off’
potential from R&D conducted elsewhere

• Foundations (e.g. BMGF; SFSA)

• South-South cooperation (e.g. EMBRAPA
program in Africa)

• Net increase in public spending on R&D in
‘Noughties’ (IFPRI)

Demand/market Poorly developed Roads, rail, ports, storage • Foreign Direct Investment, particularly by China
access infrastructure • Corridors

• Growth in certification schemes

Supply chain Lowest level of retailer penetration in the • Growth of middle classes and GDP/capita
world • Increasing ease of doing business

• Growth in certification schemes, such as
‘Fairtrade’, integrating small farmers into value
chains and improving their remuneration

Storage Inadequate storage facilities: • ‘Triple bagging’ for cowpeas

large post-harvest losses • USAID guide to storage

Low level inter-regional Lowest in the world: 12 percent total trade • Reduction in trade barriers
trade • Various trade groupings (e.g. EAC)

Poorly developed local • PPPs to encourage SMEs
processing industry

Source: Prognoz, 2012

4 Comprehensive Africa Agriculture Development Program

The agricultural and food value chain: Entering a new era of cooperation | 21

The level of FDI in
CIS agriculture is
increasing with western
companies investing
across all sectors:
seeds, machinery, food
processing.

CIS: eastern promise
As in the case of Africa (see previous pages), though on a lesser scale, Russia and
other countries of the Commonwealth of Independent States (CIS) also suffer
from a considerable yield gap compared to other countries in spite of a surplus of
agricultural land. Many of the reasons for low productivity are also similar – poor
infrastructure and lack of access to quality inputs. The main difference is that Russia
and the CIS countries can and have produced large export surpluses, particularly of
wheat. On more than one occasion the US Department of Agriculture has identified
the significant potential of CIS countries to increase their wheat exports to levels
of 50-60 mmt. This would introduce a major new source of supply into the world
market and could potentially be very destabilizing. However, the market could
accommodate this extra production if Russia were both to take share from other
exporters, such as the US where wheat production has been on a downward trend,
and take the lion’s share of the demand growth in Africa, the Middle East and Asia.

There are many encouraging signs:

• Port capacity, a major constraint, is being expanded.

• The level of FDI in agriculture is increasing with western companies investing
across all sectors: seeds, machinery and food processing.

• Organization of local industry is being improved with the establishment of large
agro-holdings and government support in the form of subsidies and the creation
of state-owned grain companies.

Together, these factors bode well for CIS export prospects, and could contribute to
a continuing shift in global trade patterns.

A major risk, however, is intervention by the government to ban or otherwise
control exports in years when production is reduced, as this undermines Russia’s
credibility as a reliable supplier.

22 | The agricultural and food value chain: Entering a new era of cooperation

As a result of the considerable and increasing complexity of the agri-food chain
companies are faced with ever more strategic choices in terms of:

• Which crops to engage with and how great a range to cover. Technology (traits)
and politics (e.g. regarding biofuels) are opening up new opportunities.

• Which sectors to address:

– How far do they want to stray from their core business?

– Are there any synergies?

• How far to engage with emerging markets. There is no doubt that most growth
is there but there are risks attached.

• How far to use emerging markets as a resource base.

• How seriously to take emerging market companies as a source of competition
in their home markets and abroad. Most of the largest companies in all sectors
remain based in the developed world – only 6 of the top 100 food companies are
based in the emerging markets and only one of the top 100 retailers. Emerging
market companies however, are growing rapidly and becoming more involved
with overseas markets. Having long been significant investors in African
agriculture, the Chinese the are now increasingly turning their attention to the
European food sector.

• How far to vertically integrate.

The agricultural and food value chain: Entering a new era of cooperation | 23

Scrutiny
Various drivers are creating pressure to increase the traceability of and information
about the food we eat.

First, concerns over food safety have been fanned by events like the BSE crisis,
melamine in Chinese milk, E coli in German beansprouts and, most recently, horsemea
contamination of beef in Europe. These have been behind the formation of bodies like t
European Food Safety Authority, and also provide opportunities for Western companies
to apply their knowledge and expertise in emerging markets. This is reinforced by
increasing interest in the nutritional and health properties of the food we eat.

Second, the rapid rise of GM crops, which have achieved significant penetration in
some countries and crops, has resulted in labeling requirements in around 40 countrie
particularly in Europe, but also in China and Russia. As the crops where GM has so far
achieved significant penetration are commodity crops, this creates new requirements
for identity preservation, and can be a barrier to trade. Having said that, other countries
notably the US, are strongly opposed to labeling for GM crops. The US position was
reaffirmed by the rejection of GM labeling in a vote in California in November 2012.

Third, consumers want to know not just about the content and safety of their food, but
also how it is produced and what the environmental and social impacts are. As people
ascend the economic ladder their requirements in this respect become ever more
demanding. This has resulted in the introduction of voluntary certification schemes su
as ‘Fairtrade’ and ‘The Rainforest Alliance’. Increasingly food companies are adopting
these schemes and making commitments to improve the sustainability of their
sourcing and operations. There has been a proliferation of such schemes over recent
years, as well as a diversity of approaches. Fig. 10 gives a timeline for some of the maj
schemes introduced over the last 40 years. The proliferation and variety of schemes
reflects the environmental and social impact of agriculture which is greater (and more
complex) than that of any other sector. Concern over this aspect of agriculture is also
reflected in the widespread adoption of the concept of ‘Sustainable Crop Production
Intensification’ an approach designed to balance the need to increase productivity wit
the need to minimize negative environmental impacts. This is promoted by the FAO
among others and widely supported throughout the private and public sectors.

t
he

Figure 10: Standards and certification timeline for transparency initiatives

1970

1980

1990

2000

2010

IFOAM
(Organic,
1972)

Rainforest
Alliance
(1987)

Fairtrade
(1997) RSPO

(Palm oil,
2004)

BCI
(Cotton)
2010)

GlobalGAP
(1997)

Utz Certified
(Coffee, 1994)

4C
(Coffee,
2006)

Source: ‘Understanding the impact of changing consumer demand and consumption patterns’, Jonathan Shoham, Crop World 2012

Consumers want to
know about the content
and safety of their
food, but also how it
is produced and what
the environmental and
social impacts are.

24 | The agricultural and food value chain: Entering a new era of cooperation

Environmental footprint and
sustainability
Agriculture has a larger environmental footprint than any other sector, having a
major impact on water, land, biodiversity and the atmosphere:

• It accounts for around 70 percent of freshwater demand and also impacts water
quality. Water scarcity and its impact on agricultural productivity is becoming an
increasing cause of concern.5

• It accounts for around 38 percent of global land area (pasture: 26 percent;
arable: 12 percent) and is the main cause of soil erosion.6

• It accounts for 14 percent of greenhouse gas emissions.7

Environmental considerations play a major part in strategies relating to agriculture
whether at the level of the individual company or global institutions. At the company
level this is reflected in the rapid adoption of GRI reporting and improvement
in CSR activities, with setting, publication and monitoring of targets. At the
institutional level good environmental practice is becoming an increasingly integral
part of agricultural policy. For example in the EU farmer subsidies are being made
increasingly conditional upon good agricultural practice. The potential for appropriate
policies to mitigate adverse environmental impacts is well illustrated by the case of
fertilizers where legislation in the EU has led to more efficient and judicious use and
reduced the amount of fertilizer used per unit output of crop. This can be contrasted
with China, for example where the fertilizer use intensity continues to increase and
is indicative of highly inefficient use of the products.

Whereas there used to be a polarization of views between those who believed
intensive agriculture was the answer to feeding the world and those who supported a
return to extensive, organic systems, there now appears to be a reconciliation of these
views with the new way forward being sustainable crop production intensification.
This recognizes that high-input systems using commercial seed, fertilizer and crop
protection chemicals are necessary but that at the same time they should be used
judiciously with every attempt made to minimize their adverse environmental impact.

Environmental
considerations play a
major part in strategies
relating to agriculture,
whether at the level of
the individual company
or global institutions.

5‘Charting Our Water Future’, The 2030 Water Resources Group, 2009
6FAOStat, 2012
7 IPCC, 2007

The agricultural and food value chain: Entering a new era of cooperation | 25

Accommodation of the above pressures is facilitated by advances in technology
and the supply chain. The rapid increase in penetration by large retailers brings
with it more sophisticated and efficient supply chains which permit ever improv
traceability and information provision. At the same time new lifecycle analysis
tools and methodologies are being developed which improve the accuracy and
detail of information on the environmental and social impacts for food productio
An example of this can be found in the development of carbon labeling. The
Sustainability Consortium in the US is playing a leading role in this area. Table 4
looks at drivers of and responses to the ever increasing requirements for scrutin
along the agri-food chain.

Table 4: Causes, effects and potential future developments in the area of
scrutiny

Driver
(examples)

Specifics Response
Current

situation

Potential
future

developments

Food scares Food safety European Food Western Ever increasing
(contamination Safety Authority companies traceability
or mislabeling increased testing welcomed into

some EMs
because of
their high safety
standards

Health concerns Nutritional Regulation (e.g. • Debate of More
(obesity) content pesticides) labels schemes government

‘fat taxes’ in intervention
Denmark

• Banning
‘super-size’
sugary drinks
in some US
cities

GM crops • Consumer Labels Identity • Labels in over More labeling,
choice preservation 40 countries identity

• Value • Mainly preservation

extraction commodity
crops

Ethical concerns: • Organic; • Cross- • Proliferation • Voluntary

• Environmental Fairtrade compliance of schemes standards

• Social

How food is
produced

etc.

• Animal
welfare

Agri-
environmental
schemes

• Voluntary
standards

• Nitrate

• Voluntary
schemes
confined to
cash crops and
penetration
still low

• Penetration

• Scope e.g.
Carbon labels

• Rationalization
of schemes

directive (EU)

The rapid increase in
penetration by large
retailers brings with it
more sophisticated and
efficient supply chains
which permit ever
improved traceability
and information
provision.

Source: IFOAM, 2013

26 | The agricultural and food value chain: Entering a new era of cooperation

8 Global Reporting Initiative of the UN

Despite these developments, penetration of voluntary standards is still very
low. Organic production has only 1-2 percent global market penetration and is far
better established in Europe than anywhere else. Other more recent certificatio
schemes such as Fairtrade and the Rainforest Alliance account for well under
1 percent of global consumption, although still growing fast. More significant in
terms of impact are some of the mandatory directives and policies which have
been introduced, particularly in Europe, where for example, the nitrogen directiv
has led to significant reductions on the amount of fertilizer overuse and pollution
and farmer subsidies are being made increasingly conditional upon environment
compliance.

There are choices which are common to different stages in the value chain:

• ‘Make or buy’: should companies adopt existing standards and certification
schemes or develop their own. Most companies elect for the former although
some of the larger ones also do their own thing.

• If they buy into existing schemes which should they choose? To some extent th
choice will depend upon their business profile, product range and environmenta
impact, but there will still be considerable discretion within these constraints.

• What reporting format should they follow: for example having a separate
corporate social responsibility report or integrating it into the annual report?
Having said that, GRI8 has become a de facto standard.

Such considerations are important as they can affect the attractiveness of a
company to investors, potential employees, customers and as a potential M&A
target. Moreover the rapidly evolving nature and complexity of this area offers
opportunities for differentiation and distinctive positioning.

The sustainability dimension is not only a matter of managing reputational threat
but can also lead to identification of new business opportunities and lead to
improvements in business efficiency. The process of lifecycle analysis can in itself
lead to a better understanding of product and business processes.

e
,
al

e
l

Organic production has
only 1-2 percent global
market penetration and
is far better established
in Europe than
anywhere else.

The agricultural and food value chain: Entering a new era of cooperation | 27

PART

Implications for
stakeholders02

Input companies
The input sector spans a wide variety of product segments which can be seen as
setting the genetic potential of crops and animals: providing them with nutrition;
protecting them against diseases, pests and weeds; improving the efficiency with
which they can be cultivated and harvested; and providing services to farmers,
such as credit or insurance.

Table 5: Input industry product sectors

Genetic
potential

Nutrition Protection
Growing and
harvesting

Finance and
services

Crops Seeds Fertilizers Crop
protection
products

Machinery
Irrigation
Equipment

Credit
Insurance

Animals Genetics Animal feed Animal health
products

Source: KPMG International, 2013

In general, this stage of the value chain has fared well over recent years, benefiting
from the high level of crop prices and farmer incomes, and taking advantage of the
new opportunities afforded by technology.

Many sectors invest significantly in R&D; seeds/biotech is one of the most R&D-
intensive sectors. There is increasing R&D collaboration between the private and
public sectors, driven by the high propriety being accorded to food security issues.

Technology is leading to a blurring of the boundaries between some sectors – for
example there is increasing integration of crop protection and seeds, driven partly
by advances in biotechnology – and a tendency to take an increasingly holistic and
’systems’ view of crop production.

Nearly all sectors have been increasing their engagement with emerging markets
which are growing in importance as a percentage of sales.

28 | The agricultural and food value chain: Entering a new era of cooperation

Overall, it is an exciting time for the input industry with large numbers of
new opportunities and a strong political tailwind provided by the food security
agenda. The challenge is to have a clear view of the agribusiness landscape, as
illustrated below.

Table 6: Implications of volatility, complexity and scrutiny for the input
industries

Driver Aspects Forecast Opportunities

Volatility Crop price volatility Strong continued growth New demands for crops
Global warming of the seed sector will pull adapted for drought,

through other inputs heat and salt tolerance
Insurance products

Complexity New technology • Continued growth in New products and
Emerging markets penetration and number business areas Africa
as an opportunity, of GM crops
resource base • Reversal of declining rate
and source of of yield gain
competition • A blurring of the

boundaries between
some sectors – e.g. seeds
and crop protection; crop
protection and fertilizers

• More collaboration

• Continued high rate of
innovation

• Continued strong
emerging markets growth

Scrutiny Regulatory Ever more stringent Engage with customers
requirements regulation of products (crop to ensure responsible
Product protection; fertilizers) use of products
stewardship (stewardship)

The challenge is to
have a clear view of the
agribusiness landscape
which provides the
background against
which to develop and
implement strategies.

Source: KPMG International, 2013

Farmers
There are around 450 million farmers globally. The sector is extremely diverse and
can be segmented by farm size, crops grown and level of sophistication. Farm siz
can vary from an average of less than 1 hectare in China to hundreds of thousands
of hectares in Russia or Argentina. There are around 400 million smallholders, wit
an area of under 2 hectares. On average, each of these farms support a family of
4-5, leading to a farm population of around 2 billion. Farming therefore represents
the largest employment sector in the world. Development of these small farms
in emerging economies is fundamental to the overall progress of economic
development in a process known as ‘agricultural transformation’.

The agricultural and food value chain: Entering a new era of cooperation | 29

Farming is the most risky activity in the value chain, subject as it is to the vagaries
of the weather (amplified by global warming) and market volatility. However, in good
years it is also potentially the most profitable.

Until recently farming was the most heavily subsidized industry in the world9, with
farmer support in OECD countries totaling around US$280 billion. There has been a
gradual reduction in OECD subsidies, as a result of continuing pressure from the WTO,
although subsidies in emerging economies have been increasing in recent years.

The farming sector is subject to certain inexorable demographic forces. In all
regions (apart from Africa) the rural population is declining as people migrate to
the cities. This leads to a process of farm consolidation and also reduced labor
availability in the countryside which stimulates greater labor productivity.

After being thought of as somewhat of a ‘backwater’ business during the 1970s,
80s and 90s, farming is now an attractive growth industry, reinvigorated by new
technology and concerns over food security.

The table below looks at how the trends towards volatility, complexity and scrutiny
affect farmers.

Table 7: Implications of volatility, complexity and scrutiny for farmers

Driver Aspects Forecasts Opportunities

Volatility Crop prices • Crop prices remain high and • Bodes well for
volatile farmer incomes

• Spread of commodity

• Hedging

exchanges (e.g. in Africa)

Global warming Adaptation through changing Carbon credits
crop patterns

Complexity • Biotechnology • Continued growth in GM • New potential

• IT crops revenue streams

• Precision • Spread of precision • Reduction in

agriculture

• ‘Multi-
functionality’

agriculture

• Better and more sources
of agronomic advice and
market information

‘information
asymmetries’
between farmers
(in DCs and EMs)

Scrutiny • Cross- • Gradual increase in Premium prices
compliance cross-compliance

• Standards and • Spread of GAP, ‘Fairtrade’
certification etc encouraged by food

companies and retailers

Identity More contract growing Guaranteed markets
preservation to
extract values
added e.g. from
new traits

After being thought
of as somewhat of a
‘backwater’ business
during the 1970s, 80s
and 90s, farming is now
an attractive growth
industry, reinvigorated
by new technology and
concerns over food
security.

Source: KPMG International, 2013

9 Source: ‘Agricultural Policies in OECD Countries: At a Glance’, OECD, 2006

30 | The agricultural and food value chain: Entering a new era of cooperation

Traders
Traders occupy a pivotal position in the agribusiness value chain and to some extent
their performance can be seen as indicative of the sector as a whole. Traders come
in many different shapes and sizes with respect to business portfolios, geographic
presence, degree of vertical integration and ownership. Some have significant food
processing operations.

Traders have a vital role to play in provision of the infrastructure investment required
to meet the growing production in and demand from emerging markets.

Due to the combined impact of global warming on the distribution of crop
production and economically or politically driven regional changes in supply and
demand, overall production has the potential to take off and move towards very
different patterns from those of today. Traders would play a vital role in facilitating
such a change.

Table 8: Implications of volatility, complexity and scrutiny for traders

Driver Aspects Forecasts Opportunities
Volatility Crop prices High and volatile • Superior business

intelligence

• Hedging

Global warming Movement of production from
the equator towards the poles:
shifting trade patterns

Realign infrastructure
to meet new potential
trade flows

Biofuels Slow-down in growth Re-evaluate investment
decisions

Complexity Emerging market
trends

• Decreasing Middle East/
North Africa self-sufficiency

• Secure new sources
of supply

• Increasing CIS exports • Opportunities to offer
services to farmers

Bio-materials The ‘bio-economy’ only
develops very slowly

Collaborations with
input companies

Move from global
trade agreements
(WTO) to more
regional trade
agreements (RTAs)

Proliferation of regional trade
agreements

New or changing trade
flows

Scrutiny GM Growth in GM areas and
labeling requirements

More traceability

Standards and
certification

• Spread of ‘GAP’ etc.

• ‘Fairtrade’ etc opportunities
(from low base)

More traceability

Food safety Becoming ever more
important and high profile

FDI opportunities in
emerging markets

Traders come in many
different shapes and
sizes with respect to
business portfolios,
geographic presence,
degree of vertical
integration and
ownership.

Source: KPMG International, 2013

The agricultural and food value chain: Entering a new era of cooperation | 31

Food companies
Much of the value added in the food chain happens at this stage and margins are
commonly in the range of 10-20 percent. Within the food processing sector there
are several distinct subsectors each with its own characteristics, for example meat,
dairy, beverages, sugar, snacks and food service. Companies can vary in size from
large multinationals, several of which employ over 100,000 people, some of which
can trace their origins to the 19th century, to SMEs.

Although western companies still dominate, emerging market companies are
rapidly rising up the league table. As crop and livestock prices represent the major
element of COGS, profit is very susceptible to changes in price.

32 | The agricultural and food value chain: Entering a new era of cooperation

Health and wellness is also becoming increasingly important. The $1 billion brand
has a certain ‘caché’ within the industry. Various forces – increasing concern over
costs, security of supply and traceability – are pushing companies towards ever
closer links with suppliers.

These and other developments are examined in the table below:

Table 9: Implications of volatility, complexity and scrutiny for food companies

Driver Aspects Forecasts
Opportunities and
threats

Volatility High crop Commodity ‘super-cycle’ • High input prices make
prices strong branding and pricing

strategies of paramount
importance

• Efficient supply chain
management

• Volatile • Increasing volatility • Diversify sources of supply
prices • Failure of Doha round of • Engage with smallholders

• Security of
supply

• Climate
change

WTO increases chance of
unilateral trade actions by
countries

• Hedging

• Get closer to farmers,
e.g. by offering agronomic
advice

Complexity Emerging • Main source of growth • FDI
markets • Local competition • Adapt products to local

tastes

IT Channel fragmentation Use of social media
to communicate with
customers

Lifestyle • Demand for convenience • New product development
changes foods • Growth of functional foods

• Health and wellness
considerations

Scrutiny • Food safety Sustainable sourcing • Traceability

• Ethical • Collaboration with
production suppliers

• Make vs buy, for
certification schemes

• Labeling

• Waste/packaging recycling

Various forces –
increasing concern over
costs, security of supply
and traceability – are
pushing companies
towards ever closer links
with suppliers.

Source: KPMG International, 2013

The agricultural and food value chain: Entering a new era of cooperation | 33

Retailers
As with the other stages of the agri-food value chain, retailers can vary greatly
in their characteristics, size and format. Food on average accounts for around
50 percent of retailer’s sales. Margins are low and supply chain efficiency is
paramount.

Retailer penetration varies greatly by region, with the developed markets almost
saturated with the top five retailers commonly accounting for around 80 percent
of food sales. Penetration in the more developed emerging markets is well over
50 percent10, but it is only just beginning to take off in the least developed markets,
driven by GDP growth and urbanization.

10‘The Rapid Rise of Supermarkets’, W Bruce Traill, 2006

34 | The agricultural and food value chain: Entering a new era of cooperation

The rapid growth of retailers in emerging markets will lead to more efficient supply
chains, including less waste, lower prices for the consumer and safer food. The
recent opening up of India to foreign retailers could result in a greatly improved
supply chain there. Although many retailers are expanding internationally, others are
primarily home-based and growing rapidly on the back of their domestic markets:
China overtook the US as the world’s leading grocery market in 2011. This sector is
not as global as the other stages in the value chain.

Depending on the food type, retailers may source products from any of the three
previous steps in the value chain: food companies, traders and farmers. As the
primary interface with the consumer, in addition to responding to consumer
preferences, retailers can play a significant role in influencing them, especially in
matters concerning healthy eating and sustainability.

The table below examines how the various trends might influence retailer behavior
and opportunities.

Table 10: Implications of volatility, complexity and scrutiny for retailers

Trend Aspect Forecast Opportunities

Volatility High crop prices Increase in food as a
percentage of disposable
income

• Private label
development

• Links to suppliers

• Supply chain efficiency

• Longer term
agreements

Security of supply Changing locus of
production

Integrating smallholders
into supply chain

Complexity Lifestyle Growth in demand for
convenience foods

Growth in packaged and
prepared foods

IT Channel fragmentation • Communication
strategy

• Online shopping

Emerging market
growth

Rapid growth in retailer
penetration in emerging
markets

FDI opportunities

Government
healthy eating

Increasing emphasis on
nutritional and health

Growth of functional
foods

programs aspects

Scrutiny Food safety • Growth in labeling • Control of supply chain

• Increased testing • Auditing of suppliers

The ‘ethical
consumer’

Backlash against
packaging/waste

• Rapid growth
in adoption of
certification schemes

• Educational role

Depending on the food
type, retailers may
source products from
any of the three previous
steps in the value chain:
food companies, traders
and farmers.

Source: KPMG International, 2013

The agricultural and food value chain: Entering a new era of cooperation | 35

Conclusion:
A new era of collaboration?

In the previous sections we outlined strategies for addressing the increased
volatility, complexity and scrutiny of the agribusiness value chain. Some apply
to all stages in the value chain: the need for better business intelligence to
anticipate volatility and understand complexity; agility to react to volatility; and risk
management strategies to protect against volatility. Others strategies are more
specific to particular parts of the value chain. Increasingly, many require an element
of collaboration with other players within and beyond each link in the value chain,
not only between private companies but also between the public and private
sectors. Collaboration has the following advantages:

• Provides greater visibility, and in some cases foresight along the supply chain

• Affords greater influence over factors previously beyond an organization’s control,
providing greater security and possibly reducing costs

• Provides access to new skills and resources and promote innovation

Collaboration can take many forms. For example, at one extreme, it can mean
mergers between companies, either in order to diversify the portfolio or vertically
integrate and obtain more control over upstream or downstream activities. At the
other extreme, it may be a loose and non-exclusive collaboration between different
parties to pool complimentary resources or property. Table 11 maps the spectrum of
possible forms of cooperation.

Many collaborations are already taking place between sectors as well as within
them, all indicative of a gradual trend towards greater integration (see Table 12). In
the future it is almost certain that companies will have to increasingly direct both
their scanning activities and collaborative efforts beyond the sectors in which they
operate to adjacent sectors and further up or down the value chain.

Designing successful collaborations

Key skills in the future are likely to include

• Identification of which parts of company strategy are best served through
collaborations

• Identification of suitable partners

• Choice of the appropriate form of collaboration
Table 11: Types of collaboration

Tight…………………………………………………………………………………………………………………….………Loose

Type of M&A Cooperatives Joint ventures Exclusive Non-exclusive Contracts
cooperation alliances alliances

Reasons/ • Portfolio • Economies of • Pooling of • Pooling of • Pooling of • Securing
benefits diversification scale complimentary complimentary complimentary supply

• Geographic • Increased skills skills skills • Extracting
expansion bargaining • Cost/risk • Cost sharing • Cost sharing value adds

• Vertical integration power sharing

to secure supplies,
internalize margins

• Synergy extraction
Source: KPMG International, 2013

36 | The agricultural and food value chain: Entering a new era of cooperation

Having decided that some form of collaboration is needed in order to meet pre-
agreed strategic goals, the issue then becomes one of implementation. By their
very nature collaborations are complex entities involving diverse organizations
which may have widely differing cultures. In order to maximize their probability of
success there are some critical ground rules which need to be followed:

• There must be a clear value-add for each party, whether from increased sales and/
or reduced costs; without this the collaboration will not be sustainable

• The objectives of the participating organizations must be aligned, or, at the
minimum, not contradictory

• Whilst a collaboration between different partners can result in ‘hybrid vigour’ there
must be some degree of cultural compatibility between the participants

• Regulatory and legal requirements must be satisfied

• The complexity of collaborations makes it essential to have clear governance and
strong leadership

• Ongoing, open and honest communication between the partners is fundamental to
realizing the collaboration’s objectives

• In the case of collaborations involving an R&D element, IP issues must be agreed
at the outset, sometimes using a novel approach. For example, the use and
development of patent pools is increasingly common

In the case of collaborations which have both private and public sector participants
(PPPs), meeting some of these criteria can be particularly challenging. Additionally,
if the collaboration involves Government, there may be an additional requirement
to create the right enabling environment in which the collaboration can succeed,
for example by addressing any legal and infrastructure constraints, which might
otherwise hold it back.

Future predictions

During the last decades of the 20th century, the agriculture and food chain remained
relatively obscure by the standards of many other industrial sectors. However
from the beginning of the 21st century that has all begun to change. Some future
trends are predictable: the drivers of population and economic growth remain the
same and can be anticipated, as can their consequences in terms of the impact on
urbanization and farm demographics. Likewise the continuing growth of emerging
markets is a reliable trend.

Other trends are much less predictable, due in large part to the forces examined
previously in this report: volatility, complexity and scrutiny. There are significant ‘wild
cards’: global warming, biotechnology, and the changing role of Africa, China, and
Russia.

In the future it is almost
certain that companies
will have to increasingly
direct both their
scanning activities and
collaborative efforts
beyond the sectors in
which they operate to
adjacent sectors and
further up or down the
value chain.

Some elements
are predictable: the
drivers of population
and economic growth
remain the same and
can be anticipated, as
can their consequences
in terms of the impact
on urbanization and farm
demographics.

The agricultural and food value chain: Entering a new era of cooperation | 37

Having said that, even amongst all this uncertainty it is possible to make some
further predictions if only of a directional nature:

• Agribusiness will continue to be more volatile than it has been in the past

• It will become subject to ever more scrutiny driven by concerns over food safety,
sustainable production and GM, as well as the general march towards increasing
sustainability. There will be greater and more detailed traceability and labeling and a
continued growth in certification schemes.

• Agricultural trade will continue to grow in absolute, and quite possibly also relative
(to overall production) terms

• There will be more collaboration across different stages within the agribusiness
chain which will lead to ever more integration. These collaborations will take many
different forms. As part of this there will be a tendency to take a longer view

• Africa will increasingly be seen as an opportunity by players within the value chain

• The rate of innovation will continue at least at recent high levels

• Companies based in emerging markets will occupy an increasingly important place
on the world stage

Whatever happens, agribusiness will remain an attractive and exciting sector for the
foreseeable future.

38 | The agricultural and food value chain: Entering a new era of cooperation

Table 12: Examples of specific collaborations within and across sectors

Input industries Farmers Traders
Food companies/
processors

Retailers ‘Public sector’

Input Bayer/AgraQuest Monsanto’s DuPont/Cargill DSM/Poet (Cellulosic SAGCOT
industries BASF/Becker Integrated (Plenish) ethanol) Syngenta/CGIAR

Underwood (CP) Farming Systems DuPont/ADM DuPont/Brion (Ug99)

Monsanto/BASF (IFS) (Plenish) (Bioenergy) Syngenta/
(GM) BASF/Cargill BASF/Pronovo EMPRAPA

Vilmorin/KWS (Canola oil) Biopharma Arcadia/USAID
(corn traits) Syngenta/Bonanza

Syngenta/Deere Bioenergy

(Plene) Bayer Fresh produce
alliances (240)

DuPont/Japan
Tobacco

Farmers Farmer ‘Outgrower Unilever has 3 million
cooperatives schemes’ farmers in supply

Marubeni/ chain

Sinograin Oils/
Shandong Liuhe
Group (Animal
feed)

Traders ADM/Wilmar Cargill/Provimi Olam PPPs

Marubeni/ Gavilon Olam/ Rusmolco Cargill PPPs

ADM/GrainCorp Unilever/Cargill
(sustainable verified
rapeseed oil)

Food PepsiCo/Unilever ASDA/Forza Unilever PPPs
companies Ardent Mills (Cargill, Morrisons/ Collaborations

ConAgra/CHS) Farmer’s Boy with certification
organizations
like Fairtrade/
Rainforest Alliance
(e.g. Unilever,
Mars)

Retailers USAID

Colour coding: M&A; Co-operatives; JVs; Exclusive alliances; Non-exclusive alliances; Contracts
Source: KPMG International, 2013

The agricultural and food value chain: Entering a new era of cooperation | 39

Global

Chris Stirling
Global Head of Life Sciences
KPMG International
T: +44 20 73118512
E: christopher.stirling@kpmg.co.uk

Willy Kruh
Global Chair, Consumer Markets
KPMG International
T: +1 416 777 8710
E: wkruh@kpmg.ca

Ian Proudfoot
Global Head of Agribusiness
KPMG in New Zealand
T: +64 936 75882
E: iproudfoot@kpmg.co.nz

Liz Claydon
Partner, UK Head of Consumer Markets
KPMG in the UK
T: +44 20 76943483
E: liz.claydon@kpmg.co.uk

Chris Stott
UK Head of Agribusiness
KPMG in the UK
T: +44 113 2313825
E: christopher.stott@kpmg.co.uk

kpmg.com kpmg.com/app

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Publication number: 130055
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