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11/06/2009

Future Food Landscape

Claire Schaffnit-Chatterjee, Deutsche Bank, Frankfurt.

This article appeared in the October 2009 issue of Current Economics with permission of the author.

Key Concepts: Scarcity | Climate Change | Sustainable Food Production |

There are various forces shaping the global food landscape. What major challenges can be expected from this evidence? We summarise below the major issues surrounding global food security in the 21st century and discuss some ways to tackle these challenges.

A Scarce Environment

Scarcity issues are expected to plague world food and agriculture over the next few decades: competition for land and water, high energy prices and climate change all mean that the world has to produce more with less.

The magnitude of the upcoming scarcity is next to impossible to forecast. Indeed, there is a high degree of uncertainty across all issues, be it land or water availability, energy issues (oil prices, biofuel production) or the effects of climate change. Moreover, these issues are highly interconnected, which adds to the uncertainty: food production is both part of the problem and part of the solution when it comes to climate change and energy. Additionally, water availability depends on energy inputs, thus contributing to climate change, which in turn affects water availability. "Future interactions between scarcity issues will be shaped by complex feedback loops and by human attempts to mitigate them, making it difficult or impossible to predict how these linkages will play out in future."1 What is clear is that scarcity issues are here to stay, long term, and are a challenge to innovation.

These scarcity issues are poised to affect poor countries more seriously. Water scarcity and climate change on one hand, population growth on the other hand, are more acute in their geographical areas. This will further affect developing countries' capacity to adapt to scarcity, and to adopt some Green Revolution approaches (mechanisation, irrigation, fertilisers) where needed.

Other sources of uncertainty in assessing future food security include, on the supply side, technological advances in food production as well as impacts of pests and diseases; on the demand side actual versus predicted population growth (also potentially affected by major disease outbreaks in humans) and human behaviour, in terms of food preferences, ability to adapt to changing conditions of food supply, as well as the degree of commitment to more equitable distribution of resources.

Catastrophic events may also affect both sides of the equation, such as major wars, earthquakes, droughts, floods or volcanic events.

Sustainability: A Must

We need sustained growth in the agricultural sector to feed the world, to enhance rural livelihoods and to stimulate economic growth. We also need to meet food safety standards - all this in an environmentally and socially sustainable manner. While it is critical to boost food production, the world's systems for producing and distributing food will also need to change along three lines: more resilience - to help mitigate the impacts of shocks and stresses (such as extreme weather events or spikes in oil prices), more sustainability (more considerate use of resources), and more equity, to enable access and entitlement to food.2


Farming must change
 
Industrial production
(2008=100)
The different roles and functions of food
production and their inescapable
interconnectedness
Industrial production
(2008=100)

Farming must change to feed the world. There is no one-size-fits-all farming method, as each region has its own optimal (green) ways to boost food production. In Africa, for instance, the Alliance for a Green Revolution in Africa (AGRA) focuses on boosting the production of small-scale farmers with better agricultural technology through Integrated Soil Fertility Management: choice of improved varieties, judicious use of chemical fertiliser together with locally adapted organic fertiliser and appropriate combinations of crops (e.g. cereal-legume, like maize-soybean).3 Another stream promotes organic practices (e.g. use a cover crop like spring onions as natural pest control, use of composts etc.), that can be as productive as industrial farming, but far more sustainable. While organic farms require more labour, they save in commercial nitrogen, insecticides and herbicides, with net savings, especially in Africa where labour is cheap and capital scarce.4 In Africa, organic farming is especially well-suited for high-value commodities to export.

From Subsistence Farming to Commercial Farming

The potential of agriculture to contribute to growth and poverty reduction depends on the productivity of small farms.” World Development Report 2008.

About two-thirds of the 3 billion rural people in the world live off the income generated by farming less than two hectares.5 These 500 million small farms have a crucial role to play when it comes to equity and poverty reduction.6 Indeed, agricultural growth that includes smallholders boosts food availability and incomes, and thus generates demand for locally produced goods and services, resulting in broad-based socio-economic development in rural communities. Small farms are also particularly resilient: their size makes them more flexible, and their farmers can react to changes more readily. Even if larger farms are usually considered more efficient in terms of land or crop productivity, small farms can be very productive when productivity at large (total factor productivity) is considered - including labour and capital. So what are the conditions for smallholder farming to grow successfully?

Access to assets (land, water, machinery) is an obvious prerequisite for farmers. Land is a basic asset, and equitable land distribution has been shown to go together with economic growth.7 In practice, however, small farmers' access to land is often undermined by insecure property rights or corruption leading to illegal seizures of land. This is a particular problem for women.8 Land reform can be beneficial in providing access to landless people, and in encouraging farmers to look at the long-term sustainability of their land management practices. Similarly, equitable access to water, in a sustainable way, requires effective governance mechanisms.9

Access to functioning markets for both staples and high-value commodities (such as vegetables, fruits, fish, nuts, spices and flowers) is a key requirement for smallholders to move from subsistence farming to commercial farming. In many developing countries, smallholder participation is often constrained by:

- a lack of infrastructure (roads and storage facilities);

- poor market information;

- inadequate and poorly enforced grades and standards and

- poor farmer organisation for bulk marketing.

With the advance of globalisation, the sales channels are changing: less through traditional markets, more through multinational food companies and supermarkets. This increases both the need to address the above constraints and the challenges associated with them.

Smallholders can benefit from these changes, if they are able to respond with the volumes and quality standards usually required by big companies. Well-managed cooperatives or public-private partnerships can be good enablers, at the same time reducing marketing costs. Farmer organisations, the government or private companies can also play a useful role in disseminating price and other marketing information, with internet and mobile phones replacing radio and newspapers. As discussed above, another aspect of market access for small farmers is ensuring that they do not have to compete with highly subsidised exports from developed countries.

Access to knowledge is also key to farmers' success, especially in the context of limited land resources. Many small-scale farmers of the developing world have benefited little from past innovations originating from scientists or other farmers. Governments and the private sector have a role to play in supporting the transfer of knowledge and technology to smallholders, as well as the sharing of best practice among them.

Access to affordable credit is insufficient for the majority of small-scale producers. On top of allowing them to use the basic inputs, appropriate financial arrangements can help them to be more productive by allowing them to invest in technology and innovation. Rural households in developing countries are still largely reliant, for their financial needs, on informal providers. They include rotating savings and credit associations10, money lenders, pawn-shops, businesses that provide financing to their customers, and friends and relatives. The dominance of informal lenders as credit source is even greater among poor rural households. For instance, in Pakistan and Cameroon, less than 5 per cent of the amount borrowed by poor rural households in 1998 was obtained from formal lenders, including banks and microfinance institutions.11

SmallHolder production is the key
Industrial production
(2008=100)
A (historical) gap to be filled
Industrial production
(2008=100)

The root of the problem is that transaction costs are particularly high in rural areas because of the greater spatial dispersion of production, lower population densities and lower-quality infrastructure. Additionally, risks associated with financing in agriculture are high due to the seasonality and often high covariance of rural production activities (e.g. due to a common set of weather risks or same periods of project gestation). Lenders tend to offer only a limited menu of products, mainly with heavy collateral requirements. Wealthier farmers can obtain larger loans at lower cost from formal lenders because they can credibly pledge assets or future cash flows. Asset-poor households are limited to considerably smaller loans at much higher rates because they have to turn to lenders who must substitute costly monitoring for collateral.

Innovations are required to permit more flexible forms of lending while guaranteeing that borrowers repay loans. Microfinance institutions12 offer various contracts with new arrangements that substitute for collateral, for instance standing crops. They often have guidelines to favour groups excluded from borrowing through other channels, particularly women. Partnerships between formal finance institutions and informal organisations can also effectively join forces (supplying credit and sharing the risk for the former, monitoring and recovering loans for the latter). For instance, in India, ICICI Bank, the country's second largest commercial bank, has successfully partnered with a leading microfinance institution (owned by India's largest tractor manufacturer). Reformed state-sponsored lenders have also been successful in several countries. Self-help groups and financial cooperatives provide other financing options with reduced transaction costs. Another way to increase access to agricultural capital is financial intermediation through agents in the value chain (input suppliers or output processors). They are in a good position to cost-effectively monitor on-farm behaviour and enable financial institutions to accept crops as collateral.13

Information technologies offer a broad array of ways to extend financial services to rural areas, through the use of mobile phones, or branchless banking, using "correspondents": post offices, stores, petrol stations and input providers.

Access to risk management mechanisms is also necessary to mitigate price volatility and production volatility. Weather-indexed risk management products represent an innovative alternative to the traditional crop insurance programmes for smallholder farmers in developing countries. Payments are linked to a weather proxy for crop losses like rainfall deficit, eliminating the need for monitoring actual losses.14 The farmers benefit directly through steadier income, which in turn unlocks credit facilities. Pilot programmes conducted in several developing countries have proved the feasibility and affordability of weather-index-based insurance products.

Actions

Food security, development, environmental and social sustainability must all be important goals of agricultural policy. We attempt here to summarise key points of action for the various stakeholders: governments, international institutions, the food and financial industries, as well as consumers.

In Developing Countries

1. Spend more on agriculture (both developed-country donors and developing-country governments).

2. Invest in increasing yields, especially through ecologically integrated approaches. More funding for public R&D is required.

3. Ensure farmers in developing countries, especially small-scale farmers, have access to key resources: education, knowledge, assets, credit, markets, as well as social protection.

4. Educate and empower women and give access to voluntary family planning to slow down population growth.

5. Promote healthy diversified diets.

Farm technology has to be transferred to small-scale farmers in a responsible, sustainable way. Governments, public research institutions, non-governmental organisations and corporations need to devise new ways of doing business and of forming partnerships: to accommodate both the interests of the majority of the world‘s people located in developing countries and the concerns of the technology providers and consumers in wealthy countries.15

Non-farm share of rural income (1998)in:

rural income

Internationally

1. Push ahead with agricultural liberalisation in developed countries:

- By exporting food whose production has been subsidised, developed countries reduce the capacity of developing countries' agricultural sectors to compete. Reforming agricultural support is essential (in the EU and the US).

- It is also beneficial to consider food aid in cash rather than in food: the latter often indirectly subsidises producers in the donor country while being detrimental to the recipient country's capacity-building. This is not just a question of obligation, developing countries' progress is a long-term asset for the world at large.

- Given their impact on food security, support regimes for biofuels need to be further reviewed to promote the move towards second-generation biofuels.

2. In principle, liberalise trade in agricultural goods, but ensure that domestic supply is not critically reduced, by introducing clear rules (export suspensions, for instance) in order to avoid a lapse into protectionism. Ideally, harmonise trade rules to some degree with environmental and social rules in order to guarantee a true level playing field for all producers. Also ensure fair competition through international anti-trust policy (particularly important in the developing world).

3. Examine the possibility of more global governance mechanisms for food safety. One alternative, if realistic, could be a global system of food reserves in order to cope with emergencies and shocks.16

4. Technical assistance needs to be available to developing countries for negotiating fair deals on long-term agreements (food purchase agreements, land leases or purchases in other countries) and may be financed by aid.

5. Promote sustainable water use. Implementing water pricing (at least with token prices, and by rebalancing subsidies rather than the increasing costs to farmers) is potentially effective for reducing volume of water used for irrigation (through increased irrigation efficiency or selection of less irrigation-demanding crops).

In Europe

Sustainable use of natural resources (soil, water and biodiversity) and maintenance of healthy agro-systems are key to preserving EU agricultural productivity and long-term food security.

1. Review the European Common Agricultural Policy in line with the above.

2. Re-examine the beneficiaries. Most of current spending is still untargeted and severely biased in favour of the most competitive and intensive sectors and farmers.

3. Address the environmental problems caused by current unsustainable production: soil degradation, biodiversity loss, water over-extraction and pollution and greenhouse gas emissions. Direct more support towards traditional farming, which uses little chemical input and is typically associated with high levels of biodiversity: reward farmers for good land stewardship.

4. Tackle genetically modified (GM) food production: accelerate research on capabilities and potential impacts on health and the environment.

5. Review intellectual property rights in order to regulate corporate control.

6. Address EU enlargement, ironing out the huge payment disparities between countries. Reducing market distortions is essential.

Sustained cooperation between various areas of public policy is vital: agriculture, environment, innovation, health, education, consumption etc.

The Common Agricultural Policy (CAP)

Agricultural Policy Image

For the financial industry – Financing agriculture

Farmers need increased access to financial services, such as credit, savings, insurance, mobile cash transfer systems and new risk mitigation instruments. There is a shortage of credit services currently available, partly due to poor loan repayment rates. The following items have proved to be key for success in financing agriculture.17

1. Repayments are not linked to loan use. Lenders assess borrower repayment capacity by looking at all of a household's income sources, not just crop sales. The variety of income-generating activities provides relatively steady cash flow for many farming households. It makes weekly loan payments possible over the course of the year. Borrowers understand that they are obliged to repay whether or not their particular use of the loan is successful. Microfinance has an income-smoothening role which is particularly important for farming households subject to extreme income volatility during the course of the year. For the lender, treating the household as one financial unit increases repayment rates.

2. Character-based lending techniques are combined with technical criteria in selecting borrowers, setting loan terms and enforcing repayment. Lending models combine reliance on character-based mechanisms (group guarantees or close follow-up on late payments) with specialised knowledge of crop production techniques and markets for farm goods. This decreases credit risk.

3. Adapt to the highly cyclical cash flows in farming communities by adjusting loan terms and conditions (promoting flexible repayment options) to track the cash-flow cycles more closely.

Investments18

Moving subsistence farmers towards commercial agriculture production will require significant investment in the following sectors:

1. Efficient irrigation systems;

2. Storage and transportation;

3. Optimised fertiliser use;

4. Funds to stimulate research and innovation (e.g. second generation biofuels);

5. Access to markets and distribution channels; and

6. Farmers' education.

For the Agricultural and Food Industry

Increased demand requires greater deployment of scarce agricultural resources. The global food and agribusiness is set to undergo significant changes in the coming years, with a likely shift of the industry's value proposition on the upstream and midstream segments of the value chain. Even if opportunities continue to exist in the downstream (in the areas of retail and food services), tremendous growth potential is first expected in agricultural inputs and equipment, crops, animal proteins (meat and dairy) and food processing ( new age consumer preferences).

Other industries such as transportation, energy, telecommunications (to provide market information) and education are also important enablers along the food-value chain.19

New processes of value creation have a role to play here: often temporary and global, and above all highly collaborative, based on commitment, openness and broad cooperation potentially spanning all functions, from innovation to marketing. These are the principles of the project economy, expected to deliver an increasing share of value creation.20

Business solutions for producers and poor consumers along the food chain

business solution Chart Image

Implications For All

The impacts of the food system on human, ecological and animal health are ultimately a consequence of consumption decisions. Our choices can support forms of agriculture that are destructive to human, ecological and animal health - such as the factory farm approach to raising livestock21 - or they can support practices that are better for people, animals and the planet. The composition of our diet is decisive, even more important than how and where food items are produced.22 Consuming locally grown, seasonal (organic) food when possible is still beneficial.

Evidence on health and the balance of environmental analysis suggest that a healthy, low-impact diet would contain less meat and fewer dairy products than we typically eat today. Western diets - full of meat and dairy products - are massively inefficient in terms of water, energy and grain use, and produce more greenhouse gases as well. More sustainable livestock management (improved nutrition, converting manure into biogas etc.) can help reduce the environmental impact.

The move towards a lower-impact and healthier diet can be facilitated by raising awareness and educating people to make smarter decisions. Pricing in the social and environmental costs (through carbon tax, for instance) may be the solution.

Making a conscious effort to reduce waste can also go a long way. Wider implementation of collection processes for recycling the food left behind (especially from restaurants, canteens, hospitals etc.) or soon to perish (from supermarkets and other stores) could benefit the poor. Burning food waste for fuel is an additional way to increase food energy efficiency. Here too, governments can help to change the perception of "waste is to be disposed of" to "waste as a commodity". Promoting technological innovation and transfer, providing agricultural extension to farmers and support policies fostering the recycling of agricultural or food waste into animal feed or fuel are all part of the solution.


Notes:

1 Alex Evans (2009).

2 World Bank (2007), Evans (2009).

3 Toenniessen et al. (2008).

4 Organic farms have a positive effect on farm workers' health. In India's Darjeeling region, hospital admissions for respiratory diseases have drastically reduced since tea plantations started moving to organic production.

5 World Bank (2007).

6 See for instance Hazell et al. (2007).

7 Quoted in Green (2009).

8 World Bank (2007).

9 Evans (2008).

10 A group of individuals agreeing to meet over a defined period of time in order to save and borrow together.

11 United Nations (2008).

12 For more on microfinance see Dieckmann (2007).

13 World Bank (2007).

14 Auer (2003), Bryla and Syroka (2007).

15 Toennissen (2003) and (2008).

16 See von Braun and Torero (2008), Evans (2009), IFPRI suggests a system where participating countries would commit funds to intervene in the grain futures markets to help smooth out fluctuations in food prices. This could be managed by a disinterested expert international agency (such as the World Food Programme).

17 CGDP/IFAD (2006).

18 For more on investing in agriculture, see Kahn and Zaks (2009).

19 For more on this, see wef (2009).

20 For more on the project economy, see Hofmann et al. (2009).

21 It may be argued that bigger farms, where cattle are raised intensively, are more likely to afford taking care of environmental issues (monitoring their impact, recycling waste, etc.), but on balance the damage is probably still greater.

22 Cabinet Office UK (2008).


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