Beyond the merger Shuanghui-Smithfield

Posted on September 7, 2013 by Christophe Pelletier

Last May, when the Chinese company Shuanghui announced it was buying Smithfield Foods, the world’s largest pork producer, I was very curious to read about reactions to the news, in particular from the US. The takeover did not surprise me. In my second book, We Will Reap What We Sow, I already told my expectation that the geography of corporations would change, following the shift of economic power around the world. I predicted that the new emerging powers would take over some of today’s agribusiness beacons, and hinted that eventually, headquarters of large corporations would also move to locations closer to the bulk of consumption. The Smithfield takeover quite fits in this scenario. My interest in the reaction of Americans came from some of my earlier speaking engagements. At the beginning of my activities with The Food Futurist, I presented in several occasions how the rise of the Asian middle class would affect markets. In particular the magnitude of the Chinese market always put things in perspective. When I showed my audiences how much volume an increase of 10 kg per capita per year of beef, pork and chicken would represent, there was usually a silence of surprise. Then, when I told that the evolution is not just about volume but also about the choice of cuts, that instead of being complementary to Western consumption by buying low quality cuts, the Chinese market would become a direct competitor for the same pieces of meat, the surprise usually turned into annoyed denial. The price of the meat that Americans would buy would be set by the consumers in Beijing and Shanghai at least as much as by those in New York or Los Angeles? That’s bold, isn’t it? I could understand the reactions. After all, the coming situation would mean the end of the undisputed dominance of American stomachs (and to some extent, their minds as well). The highest bidder will get the best product. It is not just a hunch about the future. It is the here and now. There are already examples of that in the seafood sector, where the top quality products are shipped to China instead of ending on French tables as it used to be, simply because the Chinese buyers are willing to pay more than the French to get the product, probably because they still make very good money at those prices.

However, many reactions from the US have been the ones I expected. I could find outrage at the idea that a Chinese company could dare buy an American one. I do not remember seeing such opposition when Brazilian meat companies would buy Western ones, but after all Brazil is not perceived (yet) as a contender to the US supremacy as China is. That would explain the double standards, I suppose. There were the extreme reactions such as those who decided and claimed they would not eat meat from Smithfield because, according to their simplistic conclusions, their pork would sink to the quality standard of what they think Chinese products are. Well, no… because applicable food standards in the US would still be those of the USDA and not from the Chinese government. How simplistic they may sound, such reactions are not from average Joe. They come from comments posted on professional meat magazines for which readers need to subscribe. The world is changing, but some still hope the old status quo will prevail. Good luck with that!

Yes, there will be competition for the attractive cuts of meat. Actually, it will shape the coming couple of decades of global agriculture, and of agricultural markets. Prices will depend on the ability to forecast and align production and consumption of animal products with commodities for animal feed. There is much work needed in that area. Those who attended my presentations in which I mention the dynamics of future markets know what I mean.

But there are more lessons from the Shuanghui-Smithfield merger, beyond the simple competition for the carcases and the geography of purchasing power. It sends a clear signal that the Chinese market is evolving towards more quality. The local suppliers want to be able to provide the market of the increasing affluent Asian middle class with the same standards as Western markets, which I have been also indicating as a growing trend both in my writings as in my presentations. Purchasing a company such as Smithfield offers Shuanghui the possibility to speed up the learning curve towards a better pork quality by also buying the processes and procedures that already exist in the production units in North America and Europe. Such a move is going to have interesting ripple effects. Normally, it should give Shuanghui a competitive advantage, as they should learn and implement better procedures faster and better than their Chinese competitors. This will give them a strong position in the urban centers, at least in the short term. In the long term, the side effect is that their competitors will also work harder at raising their own standards and improve food quality in China. This will also indirectly serve the Chinese governments by having market forces working in the same direction as government regulations to achieve better food standards. Finally, it will benefit the Chinese consumers, as they will be able to buy better quality foods. As they became wealthier, Chinese consumers have also become more critical and aware of environmental and food safety issues. They will not accept the current situation anymore and they want the same top quality as the Westerners. After all, the income in large Chinese urban center is quite similar to the one of Westerners. Why should they settle for less? And in the future, we will see the same trend growing in other emerging countries. That is where the best opportunities will arise in the coming decades.

The hot regions of the future

Posted on September 18, 2009 by Christophe Pelletier

Food strategies around the world

In this article, the term hot does not refer to climate, but to strategic and active food producing regions. Not only is the population growing, but also the demographics vary greatly between regions and this will change deeply where from and where to the trade is going. Here are, briefly, the main changes as I see them happening as we go forward.

The aging and increasingly health-conscious West will not show any increase in consumption per capita, and very likely it even will drop, as older people need less food than the youth and also because the shift from quantity to quality will continue. Of course, immigration policies in these countries might offset this somehow. The direct consequence of this is that suppliers are going to have to look for alternative markets for agricultural products. They should not have to worry too much, as there will be plenty of people to feed in other regions.

Asia, with about half of the world population is definitely a huge market, although it presents a great variety of conditions and situations.

The largest economy in the region, China, is developing a middle class with more disposable income. This results in a change of diet, with relatively more protein, especially animal protein than by the past. Although being the largest meat producing country in the world, China is struggling to feed its population, and I expect that it will remain a net food importer. Further, the country has major challenges to overcome when it comes to availability and quality of water. However, in the long run, the past one-child policy will affect the Chinese demographics and influence their need for food, as well as the dynamism of their economy at large, by the way.

The second largest economy, India, is very dependent on the monsoon for its food supplies, and climate will remain a challenge. They seem to struggle to be able to secure their self-sufficiency, rural development is still a challenge and poverty remains a concern to reach prosperity.

Emerging South Asian countries, on the other hand, for instance Vietnam, show a different picture. They have a young population and want to benefit of the economic momentum coming from China. They are actively developing agricultural and aquaculture production for export purposes, and they keep on this policy. Aquaculture is very active, as some of these countries have a very extensive shoreline, like for instance The Philippines.

Although food security in the region remains uncertain, and the scare of last year’s food price increase, some countries are trying to establish structures to protect from such risks. For instance, a number of ASEAN countries are trying to set up a rice cartel, some sort of an OPEC for rice, in order to have more control on the market and the prices. Of course, we will have to see if this will work as planned.

Another region that is showing booming demographics is the Arab world and the Middle East. Many countries in the region are wealthy thanks to oil, but also have the disadvantage to be located in desert areas. Attempts to increase food production have met their limits, and they do not guarantee food security. The main reason is the shortage of water and trying to grow more food would create a drinking water crisis. This is why some Arab countries are developing other strategies to “outsource” their food production like mentioned in the article “The Great Unseen Land Grab”. Other countries, like Qatar, are considering investing in food companies in order to secure their food supplies.

Some players are already making their moves

I expect stronger ties between the Middle East and former soviet republics. Russia, Ukraine and Kazakhstan are joining forces in the “Black Sea Wheat Pool”, another agricultural OPEC. Although we will see how this combination works. Another area that I see booming in the future is the Mediterranean region, which is the interface between Africa and Europe. Although immigration has been a hot issue in the past, there is a great potential for a win-win situation for both sides if managed properly. The idea of creating an Economic Zone around the Mediterranean has already been brought forward and considering the demographics of the region, it makes quite a lot of sense.

Africa, although plagued by many problems, be it natural, social, political, humanitarian or health, as a huge untapped potential. The plans of Arab and Asian countries to lease land on this continent and develop agriculture for their needs, could give the necessary impulse to develop African economies. I also believe that South Africa has the potential to be the driver of the economic surge for the continent.

Last but not least. South America and Brazil in particular, is going to play a major role in agricultural production. They have an amazing potential, but also many issues to solve, especially on the environmental and political level. Their position of producers of basic commodities as well as high value products like meat gives them a strategic role in the international food trade, and the upcoming merger between JBS and Pilgrim’s Pride in the US and between JBS and Bertin is another step in the creation of agribusiness giants, following the merger between Perdigao and Sadia.

How much can the rule of 80-20 tell us about the future?

Posted on September 3, 2009 by Christophe Pelletier

We all have heard about this rule across all industries, including agriculture and food. Eighty percent of the food would be produced on 20% of the farms and vice-versa. If it still applies in the future, it can indicate us how our food production and supplies will look like in the future. Of course, this is always a theoretical exercise, but it is quite convenient to elaborate on our thoughts.

As the population is expected to grow quite strongly in the coming decades, especially in urban areas, this could indicate two dominant trends:
• Further size increase of the largest farms and further industrialization of agriculture and food for global markets, although the number of farms in this segment would not increase strongly.
• Strong increase of the number of small farms involved in specific value chains and strongly linked with their local economy.

Industrial agriculture
Producing more, yet in a sustainable way. That is the challenge! This group will continue to be involved in mass production of commodities for global supplies, like this is the case today.
Yet, they will face an increased pressure to adapt to the requirements of sustainability, which technically is quite possible. New systems and more efficient technologies will be the pillars of its growth and development. They will have to find ways of reducing the amount of chemicals in crops and the amount of pharmaceuticals in animal productions
The requirements for capital will be quite high and the sector will be led by increasing larger corporations, by an increasing level of capital by large private investors and, last but not least, by some governments. This agriculture will innovate further and will be developed thanks to this capital. It will use automation and mechanization to reduce the dependence on labor. Mergers & acquisitions will continue in the agricultural sector and a few large blocks will remain, dominating their sectors.
Their mandate will be about more control the natural conditions of production and about reducing to a minimum their impact on air, water and soil, by using less polluting transport methods, water preservation, effluent treatment and soil preservation. They also will have to engage in maintenance of their environment.
The role of this type of agriculture will be to bring to market large amounts of affordable food for the masses, and should play an important role in strategies around food security, which is where corporations and government will interact on a regular basis.

Local food value chains
Closer to nature This sector should undergo a strong growth and be build in a market-driven approach. These are the farmers that produce specialty products aimed at serving either a very specific segment of the retail or foodservice market.
This trend, which has been already initiated around concepts such as organic or authentic, will evolve into a more integrated local economy, and the initial concepts will probably become less differentiated as food production in general, be it industrial or traditional, will use more sustainable techniques.
Contrarily to the common belief, this agriculture will be developed thanks to very efficient techniques, but will be centered relatively more about labor and relatively less about capital. In this case, efficiency does not necessarily mean intensification.
We must not underestimate the significance of this part of the food production, as it will play an important role. However, we must not expect this type of agriculture to be the solution to feed the world, and this is not the purpose of the farmers involved in such food production chains.

This type of farming will grow in two different environments:

In “developed” countries to serve a increasing, but aging, population more demanding about the origin and the production methods, and who is ready to pay a premium for the perceived better quality. The angle will be about quality, transparency, sustainability, traceability and as close to zero a use of chemicals and pharmaceuticals. In some areas, it could help strengthening a local economy and local communities.
In emerging countries, the development of a local agriculture, and aquaculture, will be a key driver of economic development for under industrialized and/or under urbanized regions. It also will be a way of slowing down the migration of population to urban centers and limit social problems, by creating satisfying economic conditions and by securing food supplies locally. This farming will be about basic needs, before marketing.

Mergers in agribusiness are building strategic economic blocks of tomorrow

Posted on May 20, 2009 by Christophe Pelletier

Only yesterday, two major mergers took place in the agribusiness world.
In Brazil, Sadia and Perdigao will now form the world’s largest poultry producer, as the new company is larger than Tyson Foods. That is not nothing.
In Canada, Viterra, formerly Saskatchewan Wheat Pool is acquiring the Australian ABB Grain.
As there is a growing awareness that agricultural commodities will play an increasing economic role, we certainly can expect more of such mergers & acquisitions.
With larger and more powerful players in the agribusiness, we will see a lot of strategic realignment and shift to gain more control in teh food production chains.
This will not only have an impact at corporate levels as well among suppliers as among the distribution and the retail, but this will also reshape the world map of the politics of food.

We saw two possible strategies here, although of course not new. One is the creation of a national giant in an emerging country with great ambitions as a major economic player in general and in agriculture in particular. The other is a multinational player specialized in their own specific industry, but now active in two very critical production areas.