Mc kinsey on cooperatives five trends and their implications for agricultural coops

October 2012Any use of this material without specific permission of McKinsey & Company is strictly prohibitedCopyright © 2012. All rights reserved

International Summit

of Cooperatives

Five trends and their implications for agricultural coops

McKinsey & Company

Copyright © 2012. All rights reserved1|

Five major forces will shape the agriculture sector over the next decade

Feeding the planet: the productivity imperative

1The industry will address the productivity imperative it is facing in a bid to meet rapidly growing demand

The rising priority: governments’ food agenda

2

Industry stakeholders will be ready to engage with governments on their food agenda. Food safety, quality, and security will become key priorities for country leaders in both developed and emerging markets

Farming 2.0: new technologies, new markets

3Digitization and automation of farms are profoundly changing farming operations. Farm operations are being revolutionized by a host of new technologies and new ownership models

From push to pull: the upheaval of the agriculture value chain

4Market dynamics are transforming the agricultural value chain.Increasingly demanding consumers are gaining power by shifting the value chain from being supply-driven to demand-driven

Big agriculture: getting bigger

5As farms consolidate, farmers will need to evolve their management skills to successfully handle large-scale operations

McKinsey & Company


Five key questions arise for agricultural cooperatives

1 How can your cooperative ensure continuous alignment with members’

interests amid the upcoming ownership renewal?

2 Where will the next S-curve of growth come from for your cooperative?

3 Which advanced capabilities could your cooperative turn into a strategic

advantage?

4 How can your cooperative help members anticipate shifts in consumer tastes

and coordinate production patterns to better meet demand?

5 How can your cooperative better prepare members for regulatory change?

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Contents

Overview of key trendsOverview of key trends

Detailed questions for agricultural coops

McKinsey & Company


The industry will address the productivity imperative it is facing in a bid to meet the rapidly growing demand

1Feeding the planet: the productivity imperative

The rising priority: government’s food agenda

2


3


4


5

1

Context

▪ Historically, yield increase has been the main driver of production growth rather than area harvested, but a decline in yield improvements has been observed in recent years

▪ This decline may be due to

– Land degradation, which already affects 25-35% of the land under cultivation

– Insufficient global water supplies to meet the expected growth of the agricultural sector

▪ Climate change could potentially reduce global productivity by up to 16% by 2080

– Particularly in South Asia and Sub-Saharan Africa

Implications

▪ Developing new land will be difficult, expensive and may conflict with political or environmental goals

▪ In emerging markets, productivity solutions will need to be adapted to the unique circumstances of each region

▪ More widespread use of available inputs in emerging markets will help bridge the yield gaps

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Global area planted

Millions of hectares1.0

1.5

2.0

2.51.9%

1997 20072002

2.5

3.0

3.51.2%

1997 20072002

300

400

500

600

700 0.7%

1997 20072002

Global grain and oilseeds output2

Billions of metric tons

Global yield

MT/ha

X

Historically, yield increase, rather than area harvested, has been the main driver of production growth1

63% of the growth

in global output

comes from

increase in yield

and 37% from

increase in area

planted

63% of the growth

in global output

comes from

increase in yield

and 37% from

increase in area

planted

1 Trend observed in developed markets

2 Includes wheat, corn, barley, sorghum, soybeans, rapeseed, sunflower and palm

SOURCE: Food and Agriculture Organization of the United Nations Statistical Division (FAOSTAT)

1

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Cereal production1

1 Cereal yield, measured as kilograms per hectare of harvested land, includes: wheat, rice, maize, barley, oats, rye, millet, sorghum, buckwheat, and

mixed grains; does not include crops harvested for hay or harvested green for food, feed or silage, and those used for grazing

SOURCE: Food and Agriculture Organization of the United Nations Statistical Division (FAOSTAT)

1970s

2000s

00s

2.5

70s

2.8

North America

00s

1.7

70s

2.1

South America

00s

1.0

70s

3.6

East Asia

00s

1.2

70s

1.6

South Asia

However, a decline has been observed in yield improvements in recent years

00s

1.7

70s

2.7

Sub-Saharan Africa

00s

1.3

70s

2.5

European

Union

00s

2.7

70s

1.3

Middle East and North Africa

▪ Overall worldwide

productivity growth

has slowed over time

– 1970s: 2.7%

– 2000s: 1.3%

▪ Several factors will

further exacerbate

yield improvements

– Decrease in public

agriculture R&D

spending

– Increase in soil

degradation

– Increase in water

scarcity

– Climate change

Exacerbating factors

1

Ton/ha, percentage change in yield over selected period

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Land under cultivation

1 Degraded land being defined as a level of degradation negatively affecting the productivity of the land

52

16

33

Limiteddegradation

Moderatedegradation

Severedegradation

100% = 375M–525M ha

Degraded25-35

Notdegraded

65-75

100% = 1.5B ha

Degraded land1 under cultivation

This decline may be due to land degradation, which already affects25 to 35% of the land under cultivation

▪ Globally, 5 million to 10 million hectares of arable land are lost each year

▪ Degradation drivers include

– Misuse of fertilizers, irrigation, and machinery

– Climate change (e.g., erosion, desertification)

Key facts

Degradation of land under cultivation

SOURCE: International Soil Reference and Information Centre, Oregon State University; Resource Conversation

and Food Security

1

Millions of hectares, percent

McKinsey & Company


1.1%

Reservoirs

Municipal

Industrial

Agricultural

2025

5,235

5%

12%

22%

61%

2010

4,432

5%11%

20%

64%

1995

3,788

5%9%

20%

66%

1980

3,175

4%7%

22%

67%

Yield declines may also be due to insufficient global water supplies to meet the expected growth of the agricultural sector

Sufficientwater supply3

Moderate water deficit2

Serious water deficit1

2030

3,438

7%

63%

30%

2020

3,208

25%

49%

26%

2010

2,811

51%

34%

15%

Estimated global water withdrawal demandkm2/year

SOURCE: UNESCO; McKinsey global water supply/demand model; agricultural production based on IFPRI computed

general equilibrium model base

Cereal and tuber production by basin typeMillion metric tons of rice equivalent

Unsustainable sourcing approaches exacerbating water scarcity: dam construction, excess withdrawal from rivers, excess application, ground-water overdraft

Agriculture-related water needs will continue to increase

This increase in need will not be met by existing water supply and will lead to shortage situations

1

1 Serious water deficit is defined as a sustainable and reliable water supply that provides less than 50% of demand2 Moderate water deficit is defined as a sustainable and reliable water supply that provides 50%-100% of demand3 Sufficient water supply is defined as a sustainable and reliable water supply that provides 100%+ of demand

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Copyright © 2012. All rights reserved9|SOURCE: CGD – Global Warming and Agriculture: New Country Estimates Show Developing Countries

Face Declines in Agriculture Productivity, 2007

Latin America: By ~2050, increases in temperature and associated decreases in soil water are projected to lead

to savannah gradually replacing the tropical forest in eastern Amazonia. Semi-arid vegetation will tend to be

replaced by arid-land vegetation. Productivity of important crops is projected to decrease and livestock productivity to decline

Africa: By 2020, yields from rain-fed agriculture could be

reduced by up to 50% in many countries. Agricultural

production and access to food are projected to be severely compromised

Asia: By ~2050, fresh-water availability in

Central, South, East, and Southeast Asia, particularly

in large river basins, is projected to decrease

Moreover, climate change could reduce global productivity by up to 16% by 2080

Impact of climate change on agricultural productivity without carbon fertilizationPercent

1

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Copyright © 2012. All rights reserved10|SOURCE: World Bank/Food and Agriculture Organization of the United Nations “Awakening Africa’s

sleeping giant”; Alliance for a Green Revolution in Africa (AGRA); McKinsey analysis

Developing new land will be difficult and expensive, and it may conflict with political or environmental goals

1

Constraints faced Illustrative examples

▪ High cost of developing land, technology, and infrastructure

▪ Credit constraints

▪ Small domestic markets

▪ Land clearing and soil fertilization of cerrado in Brazil cost ~USD 500/ha

▪ AGRA estimates that an African “Green Revolution” will cost USD 1 billion to 2 billion per year

Economic

▪ Areas are remote, with little or no infrastructure

▪ Landlocked countries or regions with little or no port access

▪ Road haulage in Central Africa costs 2-3 times as much as in Asia

▪ Near-defunct ports and railways in Angola, DR Congo, Bolivia

Logistical

▪ Protected or wilderness areas

▪ Loss of biodiversity

▪ Deforestation, with ensuing GHG emissions and changes in rainfall

▪ Korean land deal in Madagascar included protected land

▪ New plantations in Indonesia led to deforestation and peat burning

Environ-mental

▪ Existing land users (smallholders, pastoralists) may hold prior claims

▪ Potential backlash against land sales to urban elites or foreigners

▪ Conflict between pastoralists and investors in Sudan

▪ Protests against Korean land deal led to change of government in Madagascar

Political

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To raise productivity, emerging markets will increasingly explore innovative solutions addressing barriers to growth

1

Innovation ExamplesDetails

▪ India – Internet kiosks set up by ITC in villages

to transmit data on markets, legislation,

weather, and prices to local producers

▪ Alternative channels for information

and telecommunications delivery

▪ Ghana – Government and private investment

to establish storage and logistics “corridor” for

commodity aggregation

▪ Public-private partnerships for

integrated infrastructure and

logistics development

Infra-

structure

▪ Brazil – Unilever established model farms to

teach efficient irrigation, pest management,

and soil health practices

▪ Extension services provided

through working pilot farms

▪ India – Livelihood training (farm and off-farm)

and socio-behavioural skill building with rural

women organizations

▪ Women- and minority-targeted

training services

Training

and education

▪ Kenya – Subsidized weather “microinsurance”

offered by the Syngenta Foundation to mitigate

the risk of investments in inputs

▪ Non-traditional financing

mechanisms for low-income

individuals and families

▪ Senegal – Farmers and fishermen receive

commodity prices by mobile phone

▪ Low-margin, high-volume

information services

Business

model

▪ Africa – KickStart sells for-profit foot-operated

irrigation pumps

▪ Low-cost, innovative design for

irrigation and mechanization

▪ Africa – Monsanto collaborates to develop GM

cassava

▪ High-resistance, high-productivity

staple crops

Technology

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Industry stakeholders will be ready to engage with governments on their food agenda



1

2

Farming 2.0: new

technologies, new markets3


4


5

Context

▪ Worldwide, food consumption is increasing due to a rising middle

class in the emerging markets and

an increase in total population

▪ Countries will keep putting mechanisms in place to ensure

their national food interests are protected from increased volatility

– Developed markets will remain

primarily concerned with

ensuring the safety and quality

of the food

– Emerging markets will be

focused on assuring food

security, particularly in light of

the recent crises

▪ Governments are increasinglytrying to secure food supplies

and play a strategic role in the

food industry

Implications

▪ Industry stakeholders need to understand regulations that affect them

– Governments, particularly in

emerging markets, will

increasingly pursue public-

private partnerships to meet

their food agenda

– Agricultural players will have

become accustomed to dealing,

negotiating, and influencing

governments and will thus be

ready to engage with them on

their food agenda

▪ In the face of important external pressures, countries in

emerging markets need to create innovative platforms to support agricultural transformation

2

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40

60

80

100

120

140

160

180

200

220

240

260

280

Jan-2009Jul-2008Jan-2008Jul-2007Jan-2007Jul-2006Jan-2006

Grain

Dairy

FPI

Worldwide, countries will keep putting mechanisms in place to ensure their national food interests are protected from increased volatility

SOURCE: Food and Agriculture Organization of the United Nations food price index; press search

Food-price index

2006-20092002-2004 = 100

Jul: World Bank report

links food prices to increased biofuel

production

Food cost may force rethink on biofuel

Financial Times, April 2008

Corn-Based Ethanol Tied

to Higher Food Costs

Wall Street Journal,

April 2008

The end of cheap foodThe Economist, Dec 2007

Fertilizing profit, sowing miseryHindu, June 2008

May: World Bank announces USD 1.2 billion

Global Food Crisis Response Program (GFRP)

Apr: UN establishes High-Level Task Force

(HLTF) on the Global Food Crisis

Feb: FAO announces 36 countries in crisis as

protests sweep the globe

Jun: FAO declaration on

world food security crisis

Oct: Kofi Annan accuses rich countries of reneging on

promises to help feed the hungry

Apr: Kazakhstan

bans wheat exports (5th largest wheat exporter)

Mar/Apr: Cambodia and Egypt ban rice exports, with India,

the 3rd largest rice exporter, quickly following suit for non-basmati rice

Mar: Vietnam caps rice exports to 4M tons

Dec: Russia applies 40% export tax on wheat

2

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Copyright © 2012. All rights reserved14|SOURCE: United Nations Economic Commission for Africa (UNECA); government speeches; press search

Ghana: The northern region Ethiopia: Agricultural growth program

Tanzania: Kilimo Kwanza Growth Corridor

▪ Ghana is committing 10% of its

national budget to agriculture

▪ Targeting the northern region for ~USD 700 million public-private

investment to transform

agriculture there

▪ Expected impact: 250,000

farmers; rice self-sufficiency

increased to 70%; USD 500 million

per year agriculture GDP

▪ Ethiopia is committing 13% of its


▪ National strategy (PASDEP) calls

for accelerated market-based

development

▪ ~USD 800 million partnershipwith World Bank, GoE, USAID,

and other donors in the

agricultural growth program toincrease productivity and

market access

▪ Expected impact: ~2 million

households; ~10 million people

▪ Tanzania is committing 9% of its


▪ Targeting the Kilimo Kwanza Growth Corridor – public-

private partnership to promote

“clusters” of profitable

agricultural farming and service

businesses

▪ Expected impact: ~1.5 million

people; 30,000 smallholder

farmers

In the face of external pressures, countries in emerging markets are creating innovative platforms to support agricultural transformation

NATURAL/ORGANIC MARKET - TRACEABILITYNATURAL/ORGANIC MARKET - TRACEABILITY

2

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Digitization and automation of farms are profoundly changing farming operations – 1/2

The rising priority:

governments’ food agenda


1

2


3

From push to pull: the

upheaval of the agriculture value chain

4


5

Context

▪ Digitization and automation of farms are profoundly changing farming operations

– From labour-intensive to

capital-intensive

– Better-informed decisions

through data analysis

– Tailored approach to land

management

▪ The technology revolution will enable a new paradigm in

productivity improvements, quality

control, and production resilience

of farms through

– Advanced automation

– Advanced sensing and

analytics

– Microsegmentation

Implications

▪ To stay competitive, developed markets will need to rapidly deploy advanced farming technologies to improve

productivity

– E.g., GPS soil sampling,

satellite imagery, and yield

monitoring data analysis

▪ To adapt to the revolution,

farmers will need to develop their skills along 4 dimensions

– Management skills

– Financial risk management

skills

– New technologies

– Advanced analytics

3

McKinsey & Company


Digitization and automation of farms are profoundly changing farming operations – 2/2

Land management is evolving from the same approach for the entire farm to one that is tailored to each parcel of land

▪ To maximize land productivity, a granular approach is increasingly adopted

▪ Land characteristics and needs are assessed on a granular basis

▪ Solutions are determined exclusively for a given parcel of land

▪ Sophisticated equipment will administer the tailored solution to the targeted parcel of land

▪ Sensors are increasingly used to gather a wide range of data points (e.g., weather, land yield, production output)

▪ Software solutions are used to process the data, track them in real time, and generate insights, all of which enables farmers to compare their operations with those of their peers as well as improve their decision making

An increased amount of data is being gathered and analyzed, enabling farmers to make better informed decisions

▪ Traditional equipment (e.g., tractors) is being augmented with new technology to be remote-controlled or fully automated

▪ New equipment (e.g., drones) is being used to perform tasks that farmers could not have done on their own (e.g., pictures of land or parcels of the land)

▪ Routine tasks are being increasingly automated (e.g., measurements, soil preparation)

Automation and new equipment are transforming farming from a labour-intensive to a capital-intensive industry

Example

Software solutions can identify areas with a below-average yield and help adjust fertilizing and watering accordingly

Example

Yield monitors and variable-rate application control systems represented ~45% of the USD 1.2 billion spent on precision agriculture in 2011

Example

Remote-controlled tractors enable a single individual to oversee the farming of larger portions of land

3

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The technology revolution will enable a new paradigm in productivity improvements, quality control, and production resilience of farms

Advanced sensing and analytics

▪ Real-time tracking of production KPIs

▪ Micro-optimization of genetics, irrigation, and fertilization

▪ Advanced forecasting

Microsegmentation

▪ Granular view of the farm’s activity (land characteristics, crops, and animal health)

▪ Granular and tailored intervention (feed, fertilizer)

▪ Global positioning of equipment

Advanced automation

▪ Automated and selective harvesting

▪ Automated measure-ments (land and product characteristics)

▪ Automated soil pre-paration and weeding

SOURCE: McKinsey analysis

▪ Productivity

▪ Quality control

and standardization

▪ Resilience

Farms’ new paradigms

3

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Case examples of technology revolutions in farming

Specific examples

Advanced

sensing and

analytics

Micro-

segmenta-tion

Advanced

automation

SOURCE: McKinsey analysis

▪ The cow-milking process is being automated

– Milking conditions are assessed by a computer

multiple times per day

– Issues are relayed to farmers through alerts to

their mobile devices

▪ Unmanned aerial or ground vehicles are used to

perform traditional farming tasks (e.g., applying

chemical products)

▪ An increased amount of data (e.g., nutrients in the

soil, humidity, density of weeds) is gathered and

analyzed to assess the optimal use of chemical

products

▪ A wide range of sensors have become instrumental, e.g.,

– Temperature control during storage and

transportation

– Soil respiration and moisture

▪ Land is broken into multiple parcels, each of which

is optimized according to its requirements

– Data is gathered to understand the land’s

performance

– Sensors and GPS-tracking are leveraged to

administer chemical products in the right

quantity to the right land parcels

3

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To remain competitive, farmers will need to develop their skillsalong 4 dimensions to adopt the technology revolutions

Understanding new

technologies

Improved management skills Financial risk management skills

Farmers must adapt to remain

competitiveAdvanced analytics

Similar to industries in other sectors of the economy, farm operations are becoming increasingly data-driven; tomorrow’s farmers will have learned to gain access and capitalize on this unexploited asset to measure their operations, benchmark against peers, and make better informed decisions

Farm sizes are changing, with large-scale operations increasingly replacing family-size ones; farmers will need to gain more advanced management skills to control and optimize the output of large operations

Pricing of agricultural commodities will become increasingly volatile; to smoothen out the impact, while ensuring the stability of operations and of their financial performance, farmers will need to master hedging techniques

From automation to genomics, new technologies are emerging and evolving extremely fast; farmers, primarily those in mature agricultural markets, will need to embrace this new reality and rapidly develop the corresponding knowhow and capabilities

3

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Market dynamics are transforming the agricultural value chain



1

2


3


4


5

Context

▪ The agricultural value chain is shifting from being supply-driven to demand-driven

– Consumers, desiring a healthier lifestyle, will assert their needs and expectations to the agricultural industry

– Retailers will increasingly be in a position to shape the direction in which the industry is headed based on their own strategic agenda

▪ Market dynamics are increasingly blurring the lines between key functions along the agricultural value chain

– Input manufacturers will begin to deal with farmers directly

– Secondary processors will integrate upstream to secure a supply of good quality food

Implications

▪ Competitive landscapes will evolve both upstream and downstream from farming activities

▪ Consumers will become increasingly demanding regarding food quality, price, and sourcing practices

– As an example, Walmart differentiates itself from its competitors by actively promoting sustainable products

4

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The agricultural value chain is shifting from being supply-driven to demand-driven; market dynamics are increasingly blurring the lines between key functions along the chain

Consumers, desiring a

healthier lifestyle, will assert their needs and expectations to the agricultural industry

Retailers will increasingly be

in a position to shape the direction in which the industry is headed based on their own strategic agenda

▪ Consumers, leveraging the democratization of information brought by the internet and social media, will become increasingly knowledgeable about food benefits and the sourcing practices in place

▪ Driven by the desire for an improved lifestyle, sophisticated consumers will demand that their food be healthy, organic, safe, and sustainably sourced

▪ Owning the relationship with consumers, retailers are best positioned to understand rapidly changing needs and expectations in the market

▪ Leveraging their powerful position along the value chain, retailers will increasingly steer the industry in the direction that suits their strategic agenda

4

Input manufacturers will begin to deal with farmers directly

▪ Input manufacturing will be dominated by a handful of players

▪ Yet product differentiation will remain limited and input manufacturers will look to solidify their ties with the growing proportion of large-scale farms

▪ Input manufacturers will thus often bypass distributors

and deal directly with farms

Secondary processors will integrate upstream to secure their supply of good quality

food

▪ As the food supply continues to tighten, secondary processors will become increasingly concerned with sourcing food of high quality in large quantities and at a reasonable price

▪ Consequently, they will move upstream along the value chain to secure their own food supplies

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The competitive landscape will evolve both upstream and downstream from farming activities

Farming and land

Secondary processing

Inputs Retail and distribution

Input distribution

Trade and primary processing

Key players

Wholesale supply of inputs

to farms

Production of crops and livestock

Storage and wholesale trade of crops and livestock

Preparation and processing for retail

Manufactured inputs and capital goods for agricultural production

Storage, trade wholesale and

retail of final agricultural products

Description

Evolving market dynamics

Input manufacturers will deal directly with large-scale farms to solidify influence on inputs used and sell more value-added services

Secondary processors will move upstream to secure food supplies in good quantity, quality, and price

4

Competition will become increasingly integrated along the agricultural value chain

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Consumers will become increasingly demanding regarding food quality, price, and sourcing practices

SOURCE: McKinsey-International Food and Agribusiness Management Association (IFAMA) Agribusiness

& Food Survey, 2012, carried out among 117 members of IFAMA

▪ Purchasing habits primarily driven by the

producers and food available in markets

▪ Consumers having limited access to information about product characteristics or how

they were produced

▪ Food often sourced locally

▪ Whereas food quality remains important, it is not a key concern for consumers

▪ Consumers facing an ever-growing selection of food

▪ Consumers having access to a wealth of information on food, including

– Ingredients and additives used

– Nutritional value

– Sourcing practices

▪ Increasingly diverse varieties of food available to

consumers

▪ Increasingly globally sourced food

▪ Consumers will become increasingly demanding on several fronts

– Food quality and attributes

– Sourcing practices

– Food price (value for the money)

Resulting changes

From To

In the future, it will become

increasingly difficult to distinguish

consumer-driven demands from

initiatives promoted by retailers

looking to differentiate themselves

from their peers

4

McKinsey & Company


As farms consolidate, farmers will need to evolve their management skills to successfully handle large-scale operations

The rising priority:

governments’ food agenda


1

2


3

From push to pull: the

upheaval of the agriculture value chain

4


5

Context

▪ A significant portion of farmersin developed countries will have retired by 2020, implying

important consolidation in land

ownership and operations

▪ The global population is forecasted to grow by 10% this decade, with ~90% of the growth coming from emerging markets

– Emerging markets will continue

to significantly increase their

food consumption and drive the

~70% growth in global

consumption between 2000

and 2050

▪ Emerging markets’ agriculture production is expected to grow the fastest

– However, they will still face

shortages in many food

categories

Implications

▪ Farm consolidation will continue enabling the emergence of large-scale operations

– Global agriculture and livestock

land acquisitions are expected

to continue to increase

▪ The primary acquisition targets

will remain emerging marketsdue to the large amount of

potentially available arable land

5

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Copyright © 2012. All rights reserved25|SOURCE: United States Department of Agriculture (USDA); Ministère de l'Agriculture, de l'Alimentation,

de la Pêche, de la Ruralité et de l'Aménagement du Territoire (MAAPRAT, France)

A significant portion of farmers in developed countries will have retired by 2020, implying an important change in land ownership

56%51% 38%30%Portion of farmland owned by farmers above 55

3336

3726

60 and over

50 to 59

40 to 49

Less than 40

2007

6

32

2000

5

25

3028

20 16

65 and over

55 to 64

45 to 54

Less than 44

2007

29

27

2000

26

25

Share of farmland by owner age and countryPercent

5

Portion of farmland owned by farmers above 50

Age Age

Farmers that will likely retire by 2020

McKinsey & Company


Global population

Change2010-2020

7.8%

12.4 %

5.2%

Key facts

▪ By 2020, the global population will have increased by 10% and exceed 7 billion people

▪ More than 90% of that growth will come from developing countries

The global population is forecasted to grow by 10% this decade, with ~90% of the growth coming from emerging markets…

SOURCE: World Market Monitor (Global Insight); McKinsey analysis

1990 2000 2010

India/China

Otheremergingcountries

Developedcountries

41%

44%

15% 14%

4,910

40%

45%

5,750

39%

47%

14%

6,499

2020E

39%

48%

13%

7,208

5

Millions

Percent

McKinsey & Company


…whose population will continue to significantly increase their food consumption…

SOURCE: Food and Agriculture Organization of the United Nations; McKinsey analysis

2000 2005 2010 2015 2020

150

145

140

135

130

120

115

110

105

100

70

125

Oceania

Asia and Pacific

Sub-Saharan Africa

North Africa/Middle East

Eastern Europeand Central Asia

Western Europe

Latin America

North America

9.8%

6.5%

16.8%

9.4%

9.0%

3.5%

2.2%

2.5%

Change2010-2020ForecastHistorical

Net agricultural per capita food consumption index, by region

Per capita food consumption will rapidly increase in emerging markets, because of a

▪ Switch from staple food to processed food

▪ Increased consumption of meat, mainly poultry

▪ Increased calorie intake

Key facts

5

Index 2000 = 100

Percent

McKinsey & Company


… and drive ~70% growth in global consumption between 2000 and 2050

10.2

6.0

+70%

20502000

Global annual food consumptionkcal consumption, quadrillions Examples of global growth

~1.5 X more cereals

~2 X as much meat

~2 X as much dairy

Drivers

▪ Population increase by 2050: 2.6 billion, of which 1 billion are middle class

▪ Urbanization:70% of 2050 population

▪ Higher calorie consumption and diet shifts:more wealth = more protein

SOURCE: Food and Agriculture Organization of the United Nations World Food and Agriculture to

2030/2050; FAO expert meeting on How to Feed the World in 2050

5

McKinsey & Company


▪ Developing countries will experience the fastest growth in agriculture production given the existing productivity gaps

▪ Among the developed regions, North America will capture most of the global food demand growth

Key facts

Emerging markets’ agriculture production is expected to grow the fastest

SOURCE: Food and Agriculture Organization of the United Nations; McKinsey analysis

2000 2005 2010 2015 2020

190

180

170

160

150

140

130

120

110

100

90

70

Oceania

Asia and Pacific

Sub-Saharan Africa

North Africa/Middle East

Eastern Europeand Central Asia

Western Europe

Latin America

North America

21%

28%

25%

21%

17%

6%

13%

11%

ForecastHistorical

Change2010-2020

Index 2000 = 100

5

Net agricultural and fish production, by region

Percent

McKinsey & Company


Cereals

Soybeans

Oil

CerealsLarge deficit increase in

ME/NA and SE/East Asia, to be filled by US and Western Europe surpluses

SoybeansLarge US and Latin American surplus to support growing deficit in Western Europe and SE/East Asia

Oil Western Europe and Sub-Saharan Africa with opportunities to export to South, Southeast and East Asia

SOURCE: International Food Policy Research Institute (IFPRI) – IMPACT model

Deficit

2020

1997

South AsiaWestern Europe

Latin America

Southeast and East Asia

Sub-Saharan Africa

Middle East/North Africa

Eastern Europe

United States Other1

Milk

-109

8

-47-23-62-7-57

112

-32-161

-4-79-46

-123-41-45

212

-34

-35-8-9

23

-35-44

2023

-4

-76

-8-20

50

-62-77

-20

4220

However, emerging markets will still face shortages in many food categories

56

-1-60-76

-1

44

-153

249

75

-1-13-3

-169

-6

140

-195

320

174

-70-435

-132-272-29-135

313

934

-440

83

-731-273

-756

-215-35

295

1,193

Supply/demand characteristics in crop commodities, by geography

1 “Other” includes additional developing and developed countries not included in other categories

5

Million metric tons

McKinsey & Company


As in developed countries, farm consolidation will continue enabling the emergence of large-scale operations

SOURCE: United States Department of Agriculture (USDA); MAAPRAT; McKinsey analysis

United States2

Hectares, percent

France

Hectares, percent

Farms have been consolidating for several decades

1 Over that same period, farmland has declined by 6% in France and by 3% in the United States

2 Class sizes have been converted from acres and rounded at +/- 5 hectares for comparison between countries

Farm consolidation is expected to

continue to cope with global forces

Available land for

consolidation due to

farmer retirement and lack

of interest by younger

generation

Reduction in trade tariffs

leading to increased

competition from foreign

producers

Price pressure from end

consumers and large food

retailers

New farming technology

enabling productivity gains

Trends impacting

consolidation

Expected trend

direction

5

13

26

37

18

200 ha or more

100 to 199 ha

50 to 99 ha

20 to 49 ha

Less than 20 ha

21

37

26

11

5

55

15

13

14

3

400 ha or more

200 to 399 ha

100 to 199 ha

30 to 99 ha

Less than 30 ha

67

11

7

8

4

1978 2007

1979 2007

15% of the farms

drive 61% of the

agricultural output

5

Share of total farmland by size class1

McKinsey & Company


0

6

27

2

12

52

51

3

14

52

Rest of the world

Middle East andNorth Africa

East and South Asia

Eastern Europe and Central Asia

Latin America 123

Sub-Saharan Africa 202

Distribution of acquisitions by region, from 2000 to 2010 Number of transactions,Hectares, percent percent

Potential availability of uncultivated landMillions of hectares

SOURCE: World Resource Institute; Landportal.info; McKinsey analysis

Emerging markets will remain the primary acquisition targets given the high amount of potentially available arable land

Agriculture land availability and acquisitions, by region

0

2

28

2

9

57

5

McKinsey & Company


Detailed questions for agricultural coopsDetailed questions for agricultural coops

Overview of key trends

Contents

McKinsey & Company


How can your cooperative ensure continuous alignment with members’interests amid the upcoming ownership renewal?

1

▪ New kinds of owners,

such as investors and

governments, are

increasingly entering the

agricultural landscape for

strategic reasons

▪ At the same time, a new

generation of farmers

with different ambitions

and needs is replacing

the older generation of

farmers

▪ These new owners are

changing what members

expect of their coops

▪ To remain relevant to

each of their members,

coops will need to

manage members on a

segment-by-segment

basis

Context Questions to ponder

Is your cooperative ready to deal with a significant renewal of its

membership? How will the new farm owners change the dynamics of the

membership? How can your coop proactively manage the upcoming change

to maintain the cooperative fabric and facilitate integration?

B

A

How will your cooperative deal with the diverging priorities andinterests of members? How will your cooperative ensure it is focused on

the right issues for members? Will it be preferable to segment your member

base in order to tailor the value proposition for each? How can capital

utilization and risk taken by each member segment be taken into account

when designing the offering?

How will your cooperative need to evolve to best serve this renewed

membership? Will your cooperative need to review its decision rights? Or

its capital structure? How will your coop ensure that fair and equitable

treatment is provided to all members?

C

McKinsey & Company


Where will the next S-curve of growth come from for your cooperative?2

▪ By their nature, agricultural cooperatives are regional entities based mainly in developed countries

▪ But the fastest growth is happening in emerging markets and impacting commodity flows, pricing, and preferences

▪ Coops need to understand how emerging markets will affect their business and proactively position themselves to protect their members’interests


C

Should your cooperative explore alternative growth opportunitiesfurther along the value chain in their home markets? What capabilities does your cooperative have to become a best-in-class entity on this front and compete successfully against established players on a global scale? Could your cooperative be an international private-label provider to retailers? Could entering a new market affect performance in your home market?

How should your cooperative capitalize on the growth opportunitypresented by emerging markets? Among the membership, what appetite would exist to explore opportunities to expand in farming operations in emerging markets? How could your cooperative create value for members by distributing products in these growth markets?

A

What would be the best vehicle to get exposure to emerging markets?▪ Partnership with local coops in developing countries?▪ Downstream integration or acquisition into select emerging markets?

B

McKinsey & Company


Which advanced capabilities could your cooperative turn into a strategic advantage?

3

▪ The automation and “financialization” of farming is forcing farmers to develop new skills to remain competitive

▪ Coops will need to decide which new capabilities will allow them to develop a competitive advantage and better serve their members (e.g., financial risk management, advanced analytics, microsegmentation)


How can your cooperative optimally deliver value-added products and services based on your insights into your membership? What skill set or knowledge can your cooperative develop or hone to remain indispensible to members? Which of these skills/ capabilities would your cooperative be able to develop at best-in-class levels? Which capabilities or services should you develop to proactively fend off new specialized players?

A

Are there value-added services that your cooperative could offer to its members? How can your cooperative best support its members and remain relevant? Should your cooperative develop these skills and offer them to its members? Should it help its members gain these skills by offering them training, or by entering a strategic partnership with some experts?

B

How should your coop react when facing the risk of disintermediation from input manufacturers or other specialized players? Will large-scale farms that are courted by input producers continue to see value in your coop’s offering? How serious is the threat of large-scale farms bypassing your cooperative and dealing with input manufacturers directly? How would this affect the remainder of your members?

C

McKinsey & Company


How can your cooperative help members anticipate shifts in consumer tastes and coordinate production patterns to better meet demand?

4

▪ The value chain is

increasingly turned

upside down as market

power shifts to

customers and retailers

▪ As consumers are

becoming more

demanding and

discriminating, coops

will have to help their

members anticipate

consumer tastes to

maximize the value of

their products


How is your cooperative positioned to understand shifting consumer needs in a timely fashion? How does your cooperative remain abreast of the

changing consumer requirements? How does it discern consumer fads from

what consumers actually want? How does your cooperative leverage knowledge

from other stakeholders across the value chain? Should your cooperative

spearhead an initiative to ensure consumer needs are shared among partners

along the value chain? Are market intelligence and analytical capabilities

sufficient?

A

How will your cooperative best leverage market information to support

members? How can members best benefit from the gained market knowledge?

How should your cooperative go about disseminating this knowledge? Is your

cooperative in a position to influence members to change/update their

production to meet changing consumer needs and expectations? How could

your cooperative coordinate activities of all its members to ensure they are all

optimized in light of the changing market requirements?

B

Would tackling production waste be a win-win from the consumer perception and output yield perspectives? Is there an opportunity to reduce

waste among members of your cooperative? What is preventing members from

proactively tackling this issue? What value would there be in communicating

such efforts to consumers?

C

McKinsey & Company


How can your cooperative better prepare members for regulatory change?

5

▪ Many agricultural analysts agree that a revision of tariffs and quotas is critical to boost international trade

▪ Governments are increasingly playing a role in shaping market quotas, tariffs, and barriers

▪ Some countries oppose deregulation, which they believe would put their farmers at a disadvantage versus others


How can your cooperative assess the impact of changes in the international regulatory landscape and translate them into tactical actions to help your members? How can your cooperative gain a clear understanding of regulations that affect them? How would your coop assess the impact on the competitive position on its members?

A

Should your cooperative engage in lobbying efforts to play a more active role in shaping the regulatory agenda? Should it engage in training programs to help its members understand and prepare forimpending regulations? Could your cooperative participate in the creation of standards and productivity reforms?

B

Should your cooperative put in place mechanisms to ensure it understands the implications of domestic and international regulations on its members? What practices could help members anticipate the impact of regulations and position their activities?

C

Should a forum be established with other cooperatives and regulatory authorities to proactively surface issues and opportunities? Should a partnership be established with other cooperatives to share intelligence across regions?

D

Documents

Mc kinsey on cooperatives five trends and their implications for agricultural coops