The agri-food industry at the heart of the global food system

Date: 2012
L'industrie agroalimentaire au cœur du système alimentaire mondial
Article Index
Highly contrasting food industries
World leaders in the agri-food industry, 2009
Global agri-food trade

The economic efficiency of the agro-industrial model is often at the expense of the natural environment and generates social injustices between countries and among chain actors. Sustainability will only be ensured by its coexistence with an alternative model based on proximity and networks of small businesses that value the natural and cultural heritage of specific territories.

Box 1 Box 1

On a historical scale, the processing of agricultural raw materials and storable perishable commodities used for food preparation, that we define today as the "food industry", is an ancient activity. Its origins probably date back to Neolithic agriculture and settlement, which means that processes such as the manufacture of flour and meal from cereals, cheese making, fermentation to make beverages and the drying and smoking of meat and fish, have been practiced for about 11,000 years.

For a long time this activity remained integrated with agricultural production and was carried out on an artisanal or family scale. The agri-food industry, in the contemporary sense of the term, did not arise until relatively recently during the Industrial Revolution of the nineteenth century. As occurred in other sectors (such as textiles and metallurgy), the industrialization of food processing originated through technical innovations, such as: the beet sugar extraction process (Chaptal and Delessert, 1811), the heat sterilization method for canning (Appert, 1802) and chocolate making (Meunier, 1824). New ways of organizing production accompanied the profusion of innovations at this time, with a movement away from artisanal production towards industrial factories. Large agribusinesses (Nestlé in Switzerland, Unilever in the Netherlands and the United Kingdom, Liebig in Germany, etc.) started to appear at the end of the nineteenth and early twentieth centuries. However, the market structure did not change significantly until the Second World War (Rastoin, 2000).

Today, the agri-food industry is situated at the centre of a very important economic complex that we call the "food system", the purpose of which is to feed populations, mostly through a system of market relationships (Rastoin and Ghersi, 2010). The position occupied by the agri-food industry within the food system varies by country. However, there is convergence towards a global agro-industrial service sector, a model in which the agri-food industry plays a pivotal role, that is described in the first part of this chapter. Following these foundations, the second part of the article discusses the trends of globalization and financialization inherent to this model, before the conclusion outlines three long-term scenarios for the agri-food industry.

Heterogeneity and convergence of the agri-food industry

In a majority of countries, the agri-food industry is primarily the largest subsection of the manufacturing industries, representing 10% to 30% of this sector. With an output of nearly $4000 billion and more than 25 million employees in 2009, the importance of the industry relates to its technical and economic proximity to agriculture (utilization of basic raw materials) and by its role to satisfy an inexhaustible demand - the sustenance of humankind.

The agri-food industry is highly heterogeneous in terms of its structure and geographic space. Indeed, it is composed of a large number of sectors (for example, the processing of cereals, oilseeds and animal products). Each of these sectors has distinct technological, economic and managerial characteristics. In addition, agri-food sector profiles differ according to the agro-climatic constraints, markets and economic levels that vary from one country to another. In 2009, high-income economies (HIE), which contain about 16% of the world's population, accounted for 64% of the industry's global production in terms of economic value (72% of global GDP), while developing countries account for 32% of the global population and only 6% of production.

Growth in the agri-food industry has "plateaued" in rich countries, is steady in emerging countries and rapid in developing countries, which confirms the basic and demographic nature of food markets: in the process of economic growth, the agri-food industry serves as a kick-start sector which is able to mobilize small amounts of capital and large workforces to accompany, through the relative decline in food production costs, the rise of other consumer goods. However, most governments neglect to stimulate the sector. In HIEs, this observation remains valid, because if current needs become saturated and demand therefore stagnates (i.e. a "mature" market develops), the emergence of new demands (environment, health...) potentially has the knock-on effect of generating economic growth in the agri-food industry.

The heterogeneity of the agri-food industry remains very high, but there are signs of its erosion, as is also occurring in most other capital-intensive activities that are under pressure from three powerful and interrelated forces: concentration, globalization, and financialization.

A rapid concentration dictated by economies of scale Ten countries concentrate 85% of the agri-food industry's global production and 70% of its workforce. It is interesting to note that, in the early 2000s the absolute supremacy of major rich countries (USA, Germany, France and Japan) was superseded by a shared leadership with the emerging world: China, Russia, Brazil and India.

Concentration must also be appreciated at the company level. According to calculations (Rastoin, 2008) with regard to the most advanced sectors in terms of technology and marketing, such as ultra-fresh dairy products, soft drinks and snack foods, an oligopolistic reduction has taken place, leaving a handful of companies in control of nearly three-quarters of the market. The average profile of the top ten agri-food companies - which in 2007 was a revenue of nearly $47 billion, 119,000 employees and a profit of about $3.7 billion - demonstrates the size and therefore the considerable economic power of these companies. In comparison, Danone, the industry's highest-ranking French company, is at number 12 in the rankings with a revenue of $17 billion (five times less than Nestlé, the biggest company) and profits of $1.9 billion (six times less than Nestlé). It is worth noting here that US dominance of the industry remains a reality: nine of the top 15 companies are American. Some 8000 foreign branches of the world's top 100 agri-food companies are widely present in emerging and developing countries, which increases the concentration of agri-food capital in HIEs.

At the "fringe" of this oligopoly are over 600,000 businesses worldwide, the majority of which are small and very small businesses that form a dense "mesh" in rural and suburban areas, with "territorialized" products which often trade on the strength of their organoleptic qualities and local cultures (Noronha Vaz et al., 2008). In the EU in 2009, very small businesses (0 to 9 employees) and small and average businesses (10 to 249 employees) accounted for 86% of the 360,000 businesses in the agri-food sector, 63% of employment and 48% of revenue (CIAA, 2011).

High economic and technological performance Concentration is a result of the drive for competitiveness. In industrialized food systems, large-scale food retailers dominate the market of the agri-food sector, which is itself highly concentrated (in Western Europe, households make more than 80% of their food purchases in such locations). Competition between large-scale retailers occurs mainly through consumer pricing and thus through the net prices paid to agri-food suppliers. The agri-food industry is therefore firmly focused on productivity gains, continually pushing to reduce fixed unit costs through an increase in production capacity (economies of scale, substitution of labour by mechanization and automation). Technological advances have enabled both the significant reduction of losses along with the improvement of quality control regarding health and safety issues. This Saint-Simonian achievement has two drawbacks: the significant loss of employment (caused by a three quarter reduction in the number of industrial sites)

The stability of the workforce in the agri-food industry is due to small businesses (0-19 employees) which, through job creation, offset the significant job losses caused by large companies of more than 500 employees.

and negative effects on the environment and food security. The process of concentration is observed throughout agriculture and the agri-food industry once changes start to occur in the marketing structure with the arrival of large distribution chain stores (Reardon and Minten, 2011). We estimate that in 2010, 55% of the world's population shopped in supermarkets, becoming part of an agro-industrial food system.

There is a second explanation behind concentration in the food industry, namely, the need for food safety (non-toxic food). The BSE (mad cow) crisis of the mid-1990s and those that followed (salmonellosis, etc.) prompted large-scale food retailers to establish procedures for monitoring quality and traceability that are very restrictive in terms of the agri-food industry. Today the food system operates under the influence of standards (IFS, BRC, GlobalGap, etc.), which have been partly developed by these retailers. It is obligatory for agri-food companies seeking supermarket endorsement to adhere to these standards, which involves a considerable expense.

Finally, such concentration ensures the financing of intangible investments (innovation and communication), which enables companies to gain market share due to the leverage effect derived from size. These investments are considerable. Thus, in 2008R&D represented around 1.5% of the revenue of major agri-food companies in the OECD, while advertising accounted for between 5% and 15% of the final price depending on the product. Again, the effects of scale come into play and work in favour of large companies.

The historical trajectory of the market economy is such that today in HIEs, the agri-food industry spends more on services (mainly logistics and marketing) than on agricultural commodities. In European countries, there has been a transition in the average final price structure of food products from "40/A-40/I-20/S

The share of agricultural commodities (A), industrial processing (I) and services (S) in a food product with a price of 100.

" to "20/A-30/I-50/S" in just over half a century: the agri-food sector has thus become a tertiary industry (Nefussi, 2004), which is certainly a strange paradox! In reality, the cost structure reveals firstly the development of consumer behaviour, and secondly a "sharing" of the economic value of goods that reflects the market power of the different stakeholders involved in the chain.

The inescapable law of globalization and financialization

Despite its many specificities related to the exploitation of living materials, the agri-food industry shows a tendency to become a mainstream and purely consumer goods industry, both globalized and driven by financial markets, without managing to provide food security.

Rapid globalization of agri-food markets Globalization is characterized by an intensification of all types of international trade, a new geopolitics for such exchanges, and by in depth modification at the managerial level, providing the impulse for new modes of governance. The agri-food industry has adjusted to this movement with much greater ease than agriculture because of its capacity to transform perishable products (agricultural commodities) into storable and transportable goods.

The most visible manifestation of globalization is that of the sustained, although irregular, growth of international trade. Global exports of agricultural and food products have thus increased by a factor of 4.4 over the last 30 years to around $1000 billion in 2009. However, agricultural commodities (basic raw materials) have experienced much slower growth in international trade than the processed products of the agri-food industry (the exports of which in 2009 represented 40% of the total trade of agricultural and food products). The EU is the world's leading agri-food power, accounting for 54% of exports and 49% of imports of processed products globally. Three-quarters of this latter figure consist of intra-community trade flows, but even disregarding this amount, European supremacy remains clear with 31% of exports and 22% of imports globally, which is well ahead of Mercosur (20% and 2% respectively) and NAFTA (10% and 17%). However, the rapid growth of the total exports of raw and processed food products from Brazil, "the world's farm", and from other emerging countries, inexorably remodels the global leadership landscape.

This dynamic, however, is conditioned by the completion of the Doha Round, the aim of which is to dismantle tariff protection and technical barriers to trade for agricultural and agri-food products. In a context of stalled negotiations, regional and bilateral agreements are multiplying, often exacerbating international distortions. The geopolitical issue that then arises is the construction of a Euro-Mediterranean and African political strategy in order to avoid a hegemonic US/China duopoly. The current problems of economic management in the Eurozone make such an objective seem doubtful in the medium term.

Globalization also has an impact on the organization of productive activities. A new phenomenon has developed in recent years, where large companies distribute their functional activities - i.e. research, human resource management, information technology and finance departments - throughout the globe according to cost/benefit criteria. This geo-strategy is motivated by two factors: the search for growing markets and to obtain advantages in terms of production costs, which accounts for the two recent investment waves: central and eastern Europe and Asia.

The most controversial issue here is that of the delocalization of industrial units on the basis of competitive advantages. However, this trend does not currently benefit developing countries, which only account for 0.06% (agriculture) and 2.8% (agri-food) of direct investment abroad. On the contrary, these countries continue to pay the price of this strategy which entails the location of activities on sites that offer advantages in terms of fixed per unit costs and, above all, organization and technology, which are located in rich or emerging countries. From these sites products are exported worldwide, as shown for example by the flooding of African markets by American and Brazilian mass-produced frozen chicken, destroying local industries and in the long term eradicating regional culinary heritage.

Globalization also impacts upon health risks (increased vulnerability to pandemics due to animal production concentration), environmental damage (pollution and GHG emissions), professional organizations and NGOs. Multi-national protest movements are becoming increasingly frequent and large scale, due to the technologies of the digital society. In the agri-food sector, crises provide the trigger for international reactions which are coordinated with varying degrees of effectiveness, but all of which are becoming increasingly visible, as observed during the 2008 price spike.

Governance: the impact of the financialization of major agri-food businesses The agri-food industry has not been spared from the financialization of the global economy over the last thirty years: most companies have resorted to the stock market to finance themselves. Consequently, investment funds, which are based on short-termism and the demand for high returns, make up a part of their capital

For example, Danone's "stable core" of shareholders is estimated to account for 5% of the capital.

. These two indicators justify often brutal decisions to buy or sell shares, generating chronic instability which is incompatible with agri-food activities. Indeed, this activity is subject to the vagaries of biological and climatic hazards and thus to a much longer temporal horizon than the electronics or clothing industries. In addition the intervention of hedge funds on international exchanges dealing with commodities, such as Chicago, New York or London, amplifies the effects of volatility (thus in 2007 and 2008, the prices of cereals and oilseeds were first tripled and then halved). These upheavals pose major problems for farmers as well as for the agri-food industry, especially small businesses.

What about consumers? Agriculture and the agri-food industry have a vital role to play in consumer food safety. Indeed, together they constitute the "productive heart" of this food safety, with a desirable contribution to the objective defined by the FAO in 1996, which is to ensure food for all that is of good quality, in sufficient quantities and in accordance with local cultures. The global challenge of feeding a growing population has been met or even surpassed in the last fifty years, in quantitative terms, illustrated by the fact that the current global per capita food availability exceeds the standard requirements set by nutritionists (2800 kcal/day/person in 2007, i.e. 600kcal/day/person above the requirement). The growth in food availability provided by agriculture and the agri-food industry has been higher than demographic growth. In addition, at the global scale, microbial toxicity risks have been greatly reduced by progress in science, technology and organization.

However, these observations must be qualified: significant disparities exist between countries and between regions within countries, some of which are marked by major food deficits, by deficiencies and/or nutritional excesses. In addition to the one billion people that the FAO estimates as suffering from calorific deficit, deficiencies of micronutrients (especially iron) and vitamins affect two billion people worldwide, causing often irreversible health problems particularly among children (Delpeuch et al., 2005). In 2008, at the other end of the scale, 1.5 billion people were overweight

As defined by a Body Mass Index (BMI) that is equal to or above 25.

and obesity

BMI = / ''> 30

affected more than 500 million people aged over 20 (WHO, 2011). Furthermore, scientists suspect that severe pathological effects may result from the accumulation of heavy metals or residues from agrochemicals or synthetic food ingredients (Schlosser, 2005).

The conclusions that can be drawn from the above review cast the global agri-food industry in a mixed light, which must of course be adjusted according to different countries and sectors. The activity, which is oriented towards the very basic food market, continues to occupy a prominent place in modern economies. This position is supported by economic and social ripple effects, both upstream (agricultural supply and agriculture itself) and downstream (marketing), as well as on the periphery (industries and services such as equipment and logistics): it is estimated that a single job in the agri-food industry "generates" an average of four jobs in the surrounding sectors. The model of mass production based on economies of scale, to which most countries converge, allows a significant reduction in real food prices and leads to relative food and health security. However, it is accompanied by a relocation of industrial sites, which induces a redistribution of agricultural production areas and aggravates international and regional asymmetries. There is a further, controversial, consequence: the convergence of dietary trends caused by standardized global products that are promoted to consumers via expensive and often excessive packaging and marketing. Purchase incentives on food products and a lack of education on the subject lead to the inevitable consequence of considerable wastage in rich countries, where close to one third of food purchased is wasted (Ventour, 2008). Finally, negative externalities from concentration in the agri-food industry generate significant costs in terms of public health and the environment, which are not currently integrated into company responsibilities because - to varying degrees - these costs are met by the community. The agri-food industry now faces a huge challenge: given its position at the interface between insufficient agricultural production (in developing countries) or production that is weakened by specialization and intensification (in HIEs) and consumers that are often poorly nourished, it could make a major contribution to global food security.

Towards a "hybrid" food transition?

The combination of pressure from changing variables (population increase, decline in natural resources and biodiversity, climate change, socio-economic crises) together with variation in political and strategic frameworks, justify the development of two prospective scenarios for the global food system leading to 2050. The first is the generalization of the service sector-based agro-industrial model (AIM), in a context of the continuance of "liberal" capitalism. The second scenario envisages the consolidation of an alternative model based on proximity (AMP) and networks of small and very small businesses, assuming the strengthening of policies for a balanced local development.

Within the framework of the AIM, it can be estimated that by 2050 only 500,000 farms of 4000 ha

Theoretical average does not account for the remaining international disparities.

(agribusinesses), and around a hundred giant corporations in the sectors of agricultural supply, the agri-food industry, logistics and distribution, will be responsible for the bulk of food production and marketing. The combination of a market that is shaped by huge advertising budgets and intense collusive lobbying of multinational corporations on cross-cutting issues such as product quality standards, consumer information, taxation, etc., will provide these companies with control over the global governance of the food system.

By contrast, in the AMP the reduced dimensions of companies (micro-businesses and small and medium businesses) reduces their capital requirements, so that they do not have to resort to financial markets and are able to adopt a more transparent legal status than the anonymous companies that form the majority under the AIM, and can also allow greater stakeholder involvement (direct contact with shareholders and employees). In agriculture, the family business predominates (about 50 million). Company size in the AMP leads to customized technologies and a reduction in the size of industrial units, while forms of organization and business management are based on the sharing of resources and expertise across business networks, enabling the reduction of costs that would have benefitted from economies of scale under the AIM, allowing the creation of synergies between stakeholders.

Projections for the food system built around these two contrasting scenarios, shows that the AIM is unable to respond adequately to the requirements of sustainable development. Indeed, while this model generally manages to provide food at low prices (economic efficiency), it is often at the expense of the natural environment (negative externalities) and the generation of social inequalities between and within countries and among stakeholders in different sectors - whether they are producers, traders or consumers. The alternative scenario on the other hand, while better satisfying the three requirements of sustainable development (equity, environment and participatory governance), raises problems regarding economic competitiveness and the ability to provide cheap food

The Agrimonde quantitative model leads to an important conclusion: in two contrasting scenarios akin to the models discussed here, the resources of agricultural biomass in the world that can potentially be mobilized would enable the food demands of nine billion people to be met by 2050 (Paillard et al., 2010).


Given the inertia of producers and consumers, and the limitations inherent in the democratic system (politicians have very limited horizons when making future plans, a period usually dependent on the date of the next election), the most likely evolution of the food system is a coexistence between the two models presented, with uncertainties remaining regarding the consolidation and growth of the alternative scheme. Indeed, an adjustment of the agro-industrial model to take into account some of the constraints mentioned above is already underway.

It is therefore essential to consider how to organize the transition towards a new model of "sustainable" development for food. Over a period of two generations, this model is likely to take on a hybrid form, combining attitudes and behaviours according to geographical areas, integrating modern configurations (based on globalization) as well as post-modern ideas (based on territorial roots), due to the extreme diversity of the observed situations.

To move towards sustainable food, we cannot rely on self-regulation by the market alone. A proper food policy must be established, the like of which has not been seen in any country in the world to date.

A food policy must be an effective incentive to improve the nutritional diet. It should be based on a change in consumer behaviour through education that must be started at an early age. It requires reflection on the allocation of budgetary resources (revaluation of the food budget) and of time (increasing the domestic time spent on meal preparation). It must also guide agricultural and industrial policy in the direction of improving the nutritional quality of products, and it must also help transform the production-commercialization model through diversification and shorter cycles. Finally, such a policy should includeR&D effort into relevant models, especially those aimed at new crop management, food baskets and the sizes of businesses.

Such a food policy requires regional coordination and international consultation. Given the excesses caused by the globalization of agricultural markets and agri-food markets, a form of "regionalized globalization" may be a viable solution (i.e. to envisage specific deterrents and incentives at borders and within macro-regions such as the Euro-Mediterranean) to achieve the "re-localisation" of food systems. This would reduce the distances between places of production and consumption. Some of the main benefits of the re-establishment of short food chains would be the maintenance (if it is not already too late) of diverse consumption patterns (by moving them towards better nutritional adequacy); the stabilization or creation of activities and therefore jobs in rural areas in most countries of the world; and to restore a meaningful relationship between producers and consumers

Such as the one envisaged by the Tikei movement in Japan or the association of community-supported agriculture (AMAP) in France

(Winter, 2003).

The alternative scenario invites us to invent a new agri-food model that values the specific historical heritage of individual societies and territories, while integrating the scientific and technical knowledge of the present century.

Food miles, LCA and sustainable development

A British study (Smith et al., 2005) calculated the negative externalities of food miles (£9 billion in 2002, i.e. 13% of the added value of the food system), with a high proportion of the total cost attributable to congestion (57%) and a significant impact in terms of public health (accidents, pollution and noise: 30%).According to an American study, 84% of greenhouse gas (GHG) emissions in 1997 were due to agricultural and agri-food production and only 6% were due to transport within the food system (Weber et al., 2008). Therefore, buying locally would enable maximum savings of 4% to 5% in terms of GHG emissions. A change in eating habits, such as a one-day per week substitution of red meat and dairy products with an alternative source of animal or plant protein, would have a similar impact.Finally, environmental and social life cycle analyses (LCA) appear much more relevant than food miles for assessing the impacts of different food production and marketing channels.

The food issue in developing countries

In developing countries, and particularly LDCs, the situation is radically different. Indeed, over time, in most such countries a dual, if not schizophrenic, food system emerges: one sub-sector aims at the middle and upper classes of major urban areas, focusing on export and reproducing the agro-industrial pattern; while another traditional sub-sector exists to cater for the majority of rural areas. Generally, these countries have large agricultural populations, food prices are relatively high (accounting for the bulk of household income), women spend a considerable amount of time involved in food preparation since food products are at a basic development level and international trade integration remains low, except for a few rare commodities. The priority for these countries is obviously to escape from poverty (Sen, 1981) through agricultural modernization and the diversification of activities. It is therefore very important to combine agricultural policies and food policies (Raoult-Wack and Bricas, 2002). These countries must avoid the mistake of repeating a model that is today showing its limitations, and should instead integrate objectives of sustainable development into their policies.

Highly contrasting food industries

The importance of the production of the agri-food industry does not correlate to the size of the supplied population, but rather to the purchasing power and investment capacity of a country. It remains primarily concentrated in rich countries.
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World leaders in the agri-food industry, 2009

Alongside the historical players in the agri-food industry - from Europe, the United States and Japan - are emerging countries, which are currently developing large production capacities. The performance of these new competitors is particularly impressive because they have not yet achieved the level of productivity of Northern countries.
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Global agri-food trade

While agri-food exports are growing rapidly in emerging countries, including Brazil, global inter-zone agri-food trade is still dominated by stakeholders from the North: EU and NAFTA.
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