Challenges Facing the Agribusiness Sector
“Explaining the importance of agribusinesses is like explaining the importance of water,” states Jay Whitehead of consultancy the AgriBusiness Group. To back up his point, the World Bank reports that agriculture alone employs 26.5% of the world’s workforce.
However, agribusiness entails much more that just agriculture – it is the entire value chain. It is easy to just think of agribusiness as the farm, but it is the whole chain and all the supporting services: consultants, fertilisers, transport companies and so on, explains Whitehead.
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According to data from the World Trade Organisation, in 2018 agriculture exports accounted for an average of 17% of total merchandise exports across 94 countries around the world. In countries such as New Zealand, this figure goes up to 72.6%.
The Food and Agriculture Organisation (FAO) of the UN underlines the importance of agribusiness through the following factors:
- It is often the main source of off-farm employment in rural areas of poor countries.
- It has positive effects on poverty reduction and women’s empowerment in countries where high-value agri-food exports are produced.
- It creates off-farm employment opportunities in agro-industrial companies located in rural areas, improving the income of rural households through wage employment and spillover effects that can increase on-farm agricultural productivity through greater liquidity to purchase inputs and increased capacity to adopt technologies.
- It helps to forge the necessary link between the agriculture and manufacturing sectors, which in turn can catalyse the development of broader manufacturing industries by providing material inputs for food processing, textiles and biofuels.
What is more, the world’s population is expected to grow by about 25.9% in the next 30 years, reaching 9.7 billion in 2050, according to the UN.
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By GlobalDataPopulation growth adds pressure to reaching UN Sustainable Development Goal (SDG) number two – achieving zero hunger by 2030. According to data from the FAO, 8.9% of the world population in 2019 was undernourished, and that is projected to increase to 9.8% by 2030. That equates to 841.4 million people without access to proper nutrition.
How consumer preferences shape agribusiness
An increase in the world’s population will have a clear effect on food systems, but the rise in urbanisation is also a defining factor. However, the shift from rural to urban population is expected to be concentrated in a few countries. The 2018 Revision of World Urbanisation Prospects produced by the population division of the UN Department of Economic and Social Affairs predicted that 35% of the projected growth of the world’s urban population between 2018 and 2050 will take place in India, China and Nigeria alone.
These changes come with shifts in dietary preferences. FAO Investment Centre senior economist James Tefft explains that this is starting to take place in sub-Saharan Africa and in parts of South Asia.
“From the consumer side, there is a trend that moves away from a diet that has a large percentage consumed on cereals,” he says. “Consumers are looking to diversify their diets, they are adding proteins, they are adding more fresh fruits and vegetables, a lot of fats.”
Sub-Saharan Africa, the Middle East and North Africa, and South Asia have seen a steep increase in food production, as the World Bank’s Food Production Index shows.
However, it is not only a matter of boosting food production. Tefft says there must also be efficient food systems and high-performing agribusinesses, and it is vital that these systems are more sustainable and resilient.
Challenges facing agribusiness
As Whitehead states, the importance of agribusiness is clear to see, but it comes with its own set of challenges. As the world population increases and climate change looms, a report on the future of food and agriculture by the FAO identified ten challenges the food and agriculture industry is facing:
- Sustainably improving agricultural productivity to meet the increasing demand.
- Ensuring a sustainable natural resource base.
- Addressing climate change and the intensification of natural hazards.
- Eradicating extreme poverty and reducing inequality.
- Ending hunger and all forms of malnutrition.
- Making food systems more efficient, inclusive and resilient.
- Improving income-earning opportunities in rural areas and addressing the root causes of migration.
- Building resilience to protracted crises, disasters and conflicts.
- Preventing transboundary and emerging agriculture and food system threats.
- Addressing the need for coherent and effective national and international governance.
According to a study in the journal Science, the food supply chain is responsible for approximately 26% of greenhouse gas emissions.
Rob Vos, director of the markets, trade and institutions division at the International Food Policy Research Institute, explains that climate change is going to be the main threat to food systems, and a game changer as adjustments to the food sector are made to both help halt climate change and adapt to the impacts that are already taking place.
“We already see a lot of impacts from climate change – more droughts, more intense natural disasters… that is affecting agriculture around the world, in different ways, but above all in developing countries,” he says. “This also happens because the agriculture there is much less resilient against the impact of climate change.”
Tefft adds that in addition to its role in making food systems efficient and sustainable, the importance of agribusiness is also linked to job creation.
“When you start looking across broader economic development, what agribusiness does is not just to do with agriculture or primary production, it also addresses the industrial aspects of the economy,” says Tefft. “And so in that way, it is addressing the jobs agenda, because when we have functional agribusinesses, there is job creation.”
In the context of sub-Saharan Africa, job creation ties in with value addition to agricultural products. Tefft explains that Africa is increasingly moving on from not just producing the raw products, but adding value to them. This links to the shifts in consumer preferences and the rise in urbanisation, and in the particular case of sub-Saharan Africa, local systems are not offering the more convenient, more nutritious products that are often being provided by imports.
To the challenges facing agribusiness cited above, 2022 has come with the added issue of the Russian invasion of Ukraine. The problems for agribusiness stem from the fact that both Russia and Ukraine are large global agricultural producers. This is coming combined with a globally widespread cost-of-living crisis that the conflict – coupled with the ongoing effects of the Covid-19 pandemic – has triggered across the world.
The role of FDI in agribusiness
Using a database developed by Dealogic of cross-border mergers and acquisitions (M&A), one of the types of foreign direct investment (FDI), Jibran J Punthakey analysed the role of FDI and trade in agro-food global value chains (GVCs) in an OECD paper.
Spanning a period of 21 years, from 1997 to 2017, Punthakey’s study found evidence “of a positive and significant link between FDI and indicators of participation and domestic value-added creation in agro-food GVCs”, which suggests that FDI is a key instrument for “stimulating productivity and the capacity of downstream industries to export”.
In 2016, the UN Conference on Trade and Development in its Global Investments Prospects Assessment 2016–18 identified agriculture, food and beverages, and utilities as the most promising industries for attracting FDI in developing and transition regions.
In Punthakey’s analysis of cross-border M&A activity, North America, the EU-28 and Asia led cross-border investment in agriculture, with North America and the EU-28 accounting for 50% of outward FDI to the agricultural sector, while Asia (including China) was responsible for 35% of outward FDI to agriculture by deal value, and 32% of the total number of deals.
When it comes to FDI in food, western Europe was the leading region in 2021 – as well as in 2020 – according to our FDI Projects Database, with Asia-Pacific in second place.
Country-wise, the US was the country that attracted the most projects in 2021, followed by Germany and the UK. At the same time, the US was also the top source country of FDI in food in 2021, followed again by Germany, while the Netherlands was in third place.
The importance of agribusiness is clear, give the world’s basic need to eat, but beyond these primary functions it is also vital for job creation in developing countries and it plays an important role in securing a more sustainable future.
Climate change and its repercussions are affecting developing countries the most, along with food systems that do not have high levels of resilience to climate events. Agribusinesses are a crucial tool in managing the effects of global warming and helping to achieve the UN’s Sustainable Development Goals.
