Innovation in the Food and Agribusiness Sector

I recently filled out a survey that the International Food and Agribusiness Management Association is conducting with McKinsey & Company to better understand where the global growth opportunities are in food and agribusiness across the value chain.  They are working to gain a broader perspective from industry experts, practitioners, and academics.  I’ll look forward to seeing the results of the survey mid-year.

The questions were timely for me in that I’m scheduled to give a talk to a group on the same topic in late March, so I had a chance to spend some time thinking about opportunities.  Three areas of significance for innovation in the global food and agribusiness sectors I addressed in response to the survey are below.

Technologies for greater productivity

Agriculture and the food industry face the challenge of producing more, which is nothing new, but the scale of production increases needs to pick up.  As global population moves over 9 billion around mid-century, food production needs to double.  Given crop land constraints, 70 percent or greater of this production increase is going to need to come from increased in productivity, getting more output for each unit of input.

Development and application of new technologies that increase productivity has been the story of agriculture for the last century, and certainly needs to be for the next century, even at a greater scale.  Where does it come from?  Plant and livestock genetics?  Mechanization?  Scale?  Process engineering?  Supply chain management?  Information technology?  All of the above in my estimation.

One concern about agricultural productivity is related to investment in basic agricultural research.  Basic research is carried out to increase understanding of fundamental principles.  It is not intended to yield immediate commercial benefits.  However, in the long term it is the basis for many commercial products and applied research.  Modern government, historically the important source of funds for basic research as a public good, is increasingly constrained by other budget priorities.

In 2009, for example, the U.S. Federal Government budgeted $57 billion for basic research, much of that going on to research institutions like universities.  Of that total, only $1.7 billion (3 percent) went to agriculture-related research through the U.S. Department of Agriculture.  The private sector will continue to drive innovation in agriculture and the food industry, but one wonders why the U.S. Federal Government spends little more than any one of the big plant sciences companies annually on agricultural research.  Monsanto, for example, will spend $1.4 billion on research and development in 2012.  Corporate R&D spending by its nature will be more applied and related to commercialization, but there needs to also be basic research that creates the pipeline of technologies that can be commercialized 10, 20 and 30 years in the future.

Food niche markets

The growth and emergence of niche markets in agriculture and the food industry is quite interesting and opens up huge doors for innovation and entrepreneurs.  There have, of course, always been niche markets in the food industry.  Whether ethnic tastes, regional specialties, trendy ingredients, or whatever, the way people eat changes through the course of time with fad and fashion emerging and fading.

What is happening today, however, is bigger and has more significant repercussions for the structure of agribusiness and the food industry.  Since the dawn of refrigeration the construction of mass marketing in the 1940s, much of agribusiness and the food industry in developed countries has been built around the idea of commoditization, creation of systems that deliver mass produced, largely undifferentiated products to consumers very efficiently and with rigorous safety standards.  I don’t use the term commoditization in a derogatory way.  The growth in productivity and efficiency in the U.S. agricultural and food sectors has enabled the proportion of disposable income spent by consumers on food in the U.S. to go down from almost 30 percent in the 1930s to almost 10 percent today, a good thing indeed.

What seems to be changing among a higher proportion of U.S. consumers today is a reawakening to a richer array of ingredients and sources of foodstuffs, a partial break away from the mass market if you will.  Income constraints are most certainly an issue for most food consumers, but the depth of demand for niche products is significant.  Demand for organic and ‘local’ foods approached $40 billion in 2011 in the U.S.  As similar trends take hold across the globe it represents both a challenge and opportunity for the industry.

Africa agricultural development

I believe the agricultural development needs of a single continent represent a singular challenge and opportunity, Africa.  For any number of reasons, agricultural and economic development has lagged in most African countries.  This needs to change, and it will.

The FAO projects that Africa population will increase from 1 billion today to 1.8 billion in 2050.  It is imperative that Africa greatly expand its agricultural production capacity, but there are significant obstacles, political, cultural, economic, to doing so, both from within Africa and from forces outside the continent.

In many countries in Africa today, more than 80 percent of the population is one drought away from starvation.  Yet in some of those same countries there is much potential for agricultural development.  I assert that in many countries agricultural development is the necessary foundation for economic development.  The basis for economic development and wealth creation is specialization of labor.  This cannot occur where the bulk of the population spends most days just trying to provide for their basic needs.  For example, a rural peasant woman in modern Malawi spend her time roughly as follows*:

  • 35 percent farming food
  • 33 percent cooking, doing laundry and cleaning
  • 17 percent fetching water
  • 5 percent collecting firewood
  • 9 percent other kinds of work, including paid employment

In the U.S., we can go to a grocery store and trade our labor (wages) for products resulting from the efforts of ten of thousands of others simply by what we place in a single grocery cart.  There are significant pockets of Africa where people spend a high proportion of their day’s labor simply working to feed themselves.  This is poverty.  Prosperity involves moving from self-sufficiency to interdependence on others who specialize in their labor and become more productive.  This process has to start in much of Africa with development of agriculture.  Bill Gates recently made remarks and wrote articles that get to the heart of matter related to use of modern agricultural technology.

In the next post I’ll write about trends that will create growth and business opportunities within the agricultural supply chain.

* Page 40. The Rational Optimist. Matt Ridley.