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

International Summit
of Cooperatives
Five trends and their
implications for
agricultural coops
October 2012
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Copyright © 2012. All rights reserved

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

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

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

Farming 2.0: new Digitization and automation of farms are profoundly changing
3 technologies, new farming operations. Farm operations are being revolutionized by a host
markets of new technologies and new ownership models

From push to pull: the Market dynamics are transforming the agricultural value chain.
4 upheaval of the Increasingly demanding consumers are gaining power by shifting the
agriculture value chain value chain from being supply-driven to demand-driven

Big agriculture: As farms consolidate, farmers will need to evolve their
5
getting bigger management skills to successfully handle large-scale operations

McKinsey & Company
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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 trends

Detailed questions for agricultural coops

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

Context Implications
Feeding the planet: the
1
productivity imperative ▪ Historically, yield increase has ▪ Developing new land will be
been the main driver of difficult, expensive and may
production growth rather than conflict with political or
The rising priority: area harvested, but a decline in environmental goals
2 government’s food yield improvements has been ▪ In emerging markets,
agenda observed in recent years productivity solutions will
▪ This decline may be due to need to be adapted to the
– Land degradation, which unique circumstances of each
Farming 2.0: new already affects 25-35% of the region
3 technologies, new land under cultivation ▪ More widespread use of
markets – Insufficient global water available inputs in emerging
supplies to meet the markets will help bridge the
expected growth of the yield gaps
From push to pull: the agricultural sector
4 upheaval of the ▪ Climate change could
agriculture value chain potentially reduce global
productivity by up to 16% by
2080
Big agriculture: – Particularly in South Asia
5
getting bigger and Sub-Saharan Africa

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

Global yield
MT/ha
3.5
1.2%

Global grain and oilseeds 3.0
output2 63% of the growth
63% of the growth
Billions of metric tons 2.5 in global output
1997 2002 2007 in global output
2.5 comes from
1.9% comes from
2.0 X increase in yield
increase in yield
and 37% from
and 37% from
1.5 Global area planted
increase in area
increase in area
1.0 Millions of hectares planted
1997 2002 2007 planted
700 0.7%
600
500
400
300
1997 2002 2007

1 Trend observed in developed markets
2 Includes wheat, corn, barley, sorghum, soybeans, rapeseed, sunflower and palm

McKinsey & Company
SOURCE: Food and Agriculture Organization of the United Nations Statistical Division (FAOSTAT) | 5

1 However, a decline has been observed in yield improvements 1970s
2000s
in recent years

Cereal production1
Exacerbating factors
Ton/ha, percentage change in yield over selected period ▪ Overall worldwide
productivity growth
North East Asia
America has slowed over time
3.6 – 1970s: 2.7%
2.8 2.5 – 2000s: 1.3%
1.0 ▪ Several factors will
further exacerbate
yield improvements
70s 00s 70s 00s
– Decrease in public
agriculture R&D
South spending
South Asia
America European Sub- Middle East
and North – Increase in soil
Union Saharan
Africa degradation
Africa
2.1 1.7 1.6 – Increase in water
1.2
2.5 2.7 2.7 scarcity
1.3 1.7 1.3 – Climate change
70s 00s 70s 00s
70s 00s 70s 00s 70s 00s

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

McKinsey & Company
SOURCE: Food and Agriculture Organization of the United Nations Statistical Division (FAOSTAT) | 6

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

Degradation of land under cultivation

Millions of hectares, percent
Key facts
Land under cultivation Degraded land1 under cultivation
▪ Globally, 5 million to
100% = 1.5B ha 100% = 375M–525M ha 10 million hectares of
arable land are lost
Limited Severe each year
degradation degradation
▪ Degradation drivers
16 include
25-35 Degraded 33 – Misuse of
fertilizers, irrigation,
and machinery
– Climate change
65-75 (e.g., erosion,
desertification)
52
Moderate
Not degradation
degraded

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

SOURCE: International Soil Reference and Information Centre, Oregon State University; Resource Conversation McKinsey & Company
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and Food Security Copyright © 2012. All rights reserved

1 Yield declines may also be due to insufficient global water supplies to
meet the expected growth of the agricultural sector
Agriculture-related water needs will continue to This increase in need will not be met by existing water
increase supply and will lead to shortage situations
Estimated global water withdrawal demand Cereal and tuber production by basin type
km2/year Million metric tons of rice equivalent

Unsustainable sourcing approaches exacerbating water
scarcity: dam construction, excess withdrawal from
5,235 rivers, excess application, ground-water overdraft
1.1%
3,438
4,432 3,208
2,811 Serious water
3,788 30%
26% deficit1
61% Agricultural 15%
3,175
64%
66% 34%
67% 49%
Moderate water
63%
deficit2
22% Industrial
20%
20% 51%
22% 12% Municipal Sufficient
11% 25%
7% 9% Reservoirs water supply3
4% 5% 5% 5% 7%

1980 1995 2010 2025 2010 2020 2030

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

SOURCE: UNESCO; McKinsey global water supply/demand model; agricultural production based on IFPRI computed McKinsey & Company
| 8
general equilibrium model base Copyright © 2012. All rights reserved

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

Impact of climate change on agricultural productivity without carbon fertilization
Percent

Latin America: By ~2050, increases in temperature and Africa: By 2020, yields from Asia: By ~2050, fresh-
associated decreases in soil water are projected to lead rain-fed agriculture could be water availability in
to savannah gradually replacing the tropical forest in reduced by up to 50% in many Central, South, East, and
eastern Amazonia. Semi-arid vegetation will tend to be countries. Agricultural Southeast Asia, particularly
replaced by arid-land vegetation. Productivity of production and access to food in large river basins, is
important crops is projected to decrease and livestock are projected to be severely projected to decrease
productivity to decline compromised

SOURCE: CGD – Global Warming and Agriculture: New Country Estimates Show Developing Countries McKinsey & Company
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Face Declines in Agriculture Productivity, 2007 Copyright © 2012. All rights reserved

1 Developing new land will be difficult and expensive, and it may conflict
with political or environmental goals
Constraints faced Illustrative examples
▪ High cost of developing land, ▪ Land clearing and soil fertilization of
technology, and infrastructure cerrado in Brazil cost ~USD 500/ha
Economic
▪ Credit constraints ▪ AGRA estimates that an African
“Green Revolution” will cost
▪ Small domestic markets
USD 1 billion to 2 billion per year
▪ Areas are remote, with little or no ▪ Road haulage in Central Africa costs
infrastructure 2-3 times as much as in Asia
Logistical
▪ Landlocked countries or regions ▪ Near-defunct ports and railways in
with little or no port access Angola, DR Congo, Bolivia
▪ Protected or wilderness areas ▪ Korean land deal in Madagascar
Environ- included protected land
▪ Loss of biodiversity
mental ▪ New plantations in Indonesia led to
▪ Deforestation, with ensuing GHG
deforestation and peat burning
emissions and changes in rainfall
▪ Existing land users (smallholders, ▪ Conflict between pastoralists and
pastoralists) may hold prior claims investors in Sudan
Political
▪ Potential backlash against land ▪ Protests against Korean land deal
sales to urban elites or foreigners led to change of government in
Madagascar

SOURCE: World Bank/Food and Agriculture Organization of the United Nations “Awakening Africa’s McKinsey & Company
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sleeping giant”; Alliance for a Green Revolution in Africa (AGRA); McKinsey analysis Copyright © 2012. All rights reserved

1 To raise productivity, emerging markets will increasingly explore
innovative solutions addressing barriers to growth
Innovation Details Examples

▪ Low-cost, innovative design for ▪ Africa – KickStart sells for-profit foot-operated
irrigation and mechanization irrigation pumps
Technology
▪ High-resistance, high-productivity ▪ Africa – Monsanto collaborates to develop GM
staple crops cassava

▪ Non-traditional financing ▪ Kenya – Subsidized weather “microinsurance”
Business mechanisms for low-income offered by the Syngenta Foundation to mitigate
model individuals and families the risk of investments in inputs
▪ Low-margin, high-volume ▪ Senegal – Farmers and fishermen receive
information services commodity prices by mobile phone

▪ Alternative channels for information ▪ India – Internet kiosks set up by ITC in villages
Infra- and telecommunications delivery to transmit data on markets, legislation,
structure weather, and prices to local producers
▪ Public-private partnerships for ▪ Ghana – Government and private investment
integrated infrastructure and to establish storage and logistics “corridor” for
logistics development commodity aggregation

▪ Extension services provided ▪ Brazil – Unilever established model farms to
Training through working pilot farms teach efficient irrigation, pest management,
and and soil health practices
education
▪ Women- and minority-targeted ▪ India – Livelihood training (farm and off-farm)
training services and socio-behavioural skill building with rural
women organizations

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

1
productivity imperative ▪ Worldwide, food consumption is ▪ Industry stakeholders need to
increasing due to a rising middle understand regulations that
class in the emerging markets and affect them
an increase in total population – Governments, particularly in
2
The rising priority: ▪ Countries will keep putting emerging markets, will
governments’ food agenda mechanisms in place to ensure increasingly pursue public-
their national food interests are private partnerships to meet
protected from increased volatility their food agenda
– Developed markets will remain – Agricultural players will have
Farming 2.0: new primarily concerned with become accustomed to dealing,
3
technologies, new markets ensuring the safety and quality negotiating, and influencing
of the food governments and will thus be
– Emerging markets will be ready to engage with them on
focused on assuring food their food agenda
From push to pull: the
4 upheaval of the agriculture security, particularly in light of ▪ In the face of important external
value chain the recent crises pressures, countries in
▪ Governments are increasingly emerging markets need to
trying to secure food supplies create innovative platforms to
and play a strategic role in the support agricultural
Big agriculture: food industry transformation
5
getting bigger

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2 Worldwide, countries will keep putting mechanisms in place to ensure
their national food interests are protected from increased volatility
Feb: FAO announces Apr: UN establishes May: World Bank Jun: FAO
36 countries in crisis as High-Level Task Force announces USD 1.2 billion declaration on
Food-price index protests sweep the (HLTF) on the Global Global Food Crisis world food
2006-2009 globe Food Crisis Response Program (GFRP) security crisis
2002-2004 = 100
Oct: Kofi Annan
280 accuses rich countries
260 of reneging on
promises to help feed
240 the hungry
220
Jul: World Bank report
200 links food prices to
180 increased biofuel Grain

160 production

140 FPI
Mar/Apr: Cambodia and Egypt
120 ban rice exports, with India, Apr: Kazakhstan Dairy
100 Dec: Russia applies Mar: Vietnam caps the 3rd largest rice exporter, bans wheat
40% export tax on rice exports to 4M quickly following suit for non- exports (5th largest
80 wheat tons basmati rice wheat exporter)
60
40
Jan-2006 Jul-2006 Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009

The end of cheap food Corn-Based Ethanol Tied Food cost may force Fertilizing profit, sowing
The Economist, Dec 2007 to Higher Food Costs rethink on biofuel misery
Wall Street Journal, Financial Times, April 2008 Hindu, June 2008
April 2008

McKinsey & Company
SOURCE: Food and Agriculture Organization of the United Nations food price index; press search | 13

NATURAL/ORGANIC MARKET - TRACEABILITY

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

Ghana: The northern region Ethiopia: Agricultural growth Tanzania: Kilimo Kwanza Growth
program Corridor

▪ Ghana is committing 10% of its ▪ Ethiopia is committing 13% of its ▪ Tanzania is committing 9% of its
national budget to agriculture national budget to agriculture national budget to agriculture
▪ Targeting the northern region for ▪ National strategy (PASDEP) calls ▪ Targeting the Kilimo Kwanza
~USD 700 million public-private for accelerated market-based Growth Corridor – public-
investment to transform development private partnership to promote
agriculture there ▪ ~USD 800 million partnership “clusters” of profitable
▪ Expected impact: 250,000 with World Bank, GoE, USAID, agricultural farming and service
farmers; rice self-sufficiency and other donors in the businesses
increased to 70%; USD 500 million agricultural growth program to ▪ Expected impact: ~1.5 million
per year agriculture GDP increase productivity and people; 30,000 smallholder
market access farmers
▪ Expected impact: ~2 million
households; ~10 million people

McKinsey & Company
SOURCE: United Nations Economic Commission for Africa (UNECA); government speeches; press search | 14

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

1
productivity imperative ▪ Digitization and automation of ▪ To stay competitive, developed
farms are profoundly changing markets will need to rapidly
farming operations deploy advanced farming
– From labour-intensive to technologies to improve
The rising priority: capital-intensive productivity
2
governments’ food agenda – Better-informed decisions – E.g., GPS soil sampling,
through data analysis satellite imagery, and yield
– Tailored approach to land monitoring data analysis
management ▪ To adapt to the revolution,
Farming 2.0: new ▪ The technology revolution will farmers will need to develop
3
technologies, new markets enable a new paradigm in their skills along 4 dimensions
productivity improvements, quality – Management skills
control, and production resilience – Financial risk management
From push to pull: the of farms through skills
4 upheaval of the agriculture – Advanced automation – New technologies
value chain – Advanced sensing and – Advanced analytics
analytics
– Microsegmentation
Big agriculture:
5
getting bigger

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3 Digitization and automation of farms are profoundly changing
farming operations – 2/2
Automation and new An increased amount Land management is
equipment are of data is being evolving from the
transforming farming gathered and analyzed, same approach for the
from a labour- enabling farmers to entire farm to one that
intensive to a capital- make better informed is tailored to each
intensive industry decisions parcel of land

▪ Traditional equipment (e.g., ▪ Sensors are increasingly used to ▪ To maximize land productivity, a
tractors) is being augmented with gather a wide range of data points granular approach is increasingly
new technology to be remote- (e.g., weather, land yield, adopted
controlled or fully automated production output) ▪ Land characteristics and needs are
▪ New equipment (e.g., drones) is ▪ Software solutions are used to assessed on a granular basis
being used to perform tasks that process the data, track them in real ▪ Solutions are determined
farmers could not have done on time, and generate insights, all of exclusively for a given parcel of
their own (e.g., pictures of land or which enables farmers to compare land
parcels of the land) their operations with those of their
▪ Sophisticated equipment will
▪ Routine tasks are being peers as well as improve their
administer the tailored solution to
increasingly automated (e.g., decision making
the targeted parcel of land
measurements, soil preparation)

Example Example Example
Remote-controlled tractors enable Yield monitors and variable-rate Software solutions can identify
a single individual to oversee the application control systems areas with a below-average yield
farming of larger portions of land represented ~45% of the and help adjust fertilizing and
USD 1.2 billion spent on precision watering accordingly
agriculture in 2011

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

Farms’ new paradigms
Advanced automation Advanced sensing and
▪ Productivity analytics
▪ Automated and selective
harvesting ▪ Quality control ▪ Real-time tracking of
production KPIs
▪ Automated measure- and standardization
ments (land and product ▪ Micro-optimization of
characteristics)
▪ Resilience genetics, irrigation, and
fertilization
▪ Automated soil pre-
paration and weeding ▪ 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

McKinsey & Company
SOURCE: McKinsey analysis | 17

3 Case examples of technology revolutions in farming
Specific examples
▪ The cow-milking process is being automated
– Milking conditions are assessed by a computer
multiple times per day
Advanced – Issues are relayed to farmers through alerts to
automation 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
Advanced analyzed to assess the optimal use of chemical
sensing products
and ▪ A wide range of sensors have become instrumental, e.g.,
analytics – 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
Micro- – Data is gathered to understand the land’s
segmenta- performance
tion – Sensors and GPS-tracking are leveraged to
administer chemical products in the right
quantity to the right land parcels

McKinsey & Company
SOURCE: McKinsey analysis | 18

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

Improved management skills Financial risk management skills
Farm sizes are changing, with large-scale Pricing of agricultural commodities will
operations increasingly replacing family- become increasingly volatile; to smoothen
size ones; farmers will need to gain out the impact, while ensuring the stability
more advanced management of operations and of their financial
skills to control and optimize performance, farmers will need to master
the output of large hedging techniques
operations

Farmers must
adapt to remain
competitive
Understanding new Advanced analytics
technologies Similar to industries in other sectors of the
From automation to genomics, economy, farm operations are becoming
new technologies are emerging increasingly data-driven; tomorrow’s
and evolving extremely fast; farmers, farmers will have learned to gain access
primarily those in mature agricultural and capitalize on this unexploited asset to
markets, will need to embrace this new measure their operations, benchmark
reality and rapidly develop the against peers, and make better informed
corresponding knowhow and decisions
capabilities

McKinsey & Company
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4 Market dynamics are transforming the agricultural value chain

1
productivity imperative ▪ The agricultural value chain is ▪ Competitive landscapes will evolve
shifting from being supply-driven both upstream and downstream
to demand-driven from farming activities
– Consumers, desiring a healthier ▪ Consumers will become
The rising priority: lifestyle, will assert their needs increasingly demanding regarding
2 and expectations to the food quality, price, and sourcing
governments’ food agenda
agricultural industry practices
– Retailers will increasingly be in a – As an example, Walmart
position to shape the direction in differentiates itself from its
Farming 2.0: new which the industry is headed competitors by actively promoting
3 based on their own strategic sustainable products
technologies, new markets
agenda
▪ Market dynamics are increasingly
blurring the lines between key
From push to pull: the functions along the agricultural
4 upheaval of the agriculture value chain
value chain – Input manufacturers will begin to
deal with farmers directly
– Secondary processors will
Big agriculture: integrate upstream to secure a
5 supply of good quality food
getting bigger

McKinsey & Company
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4 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 Retailers will increasingly be
healthier lifestyle, will assert in a position to shape the
their needs and expectations direction in which the
to the agricultural industry industry is headed based on
their own strategic agenda

▪ Consumers, leveraging the democratization of ▪ Owning the relationship with consumers, retailers are
information brought by the internet and social media, will best positioned to understand rapidly changing needs
become increasingly knowledgeable about food benefits and expectations in the market
and the sourcing practices in place ▪ Leveraging their powerful position along the value
▪ Driven by the desire for an improved lifestyle, chain, retailers will increasingly steer the industry in
sophisticated consumers will demand that their food be the direction that suits their strategic agenda
healthy, organic, safe, and sustainably sourced

Input manufacturers will Secondary processors will
begin to deal with farmers integrate upstream to secure
directly their supply of good quality
food

▪ Input manufacturing will be dominated by a handful of ▪ As the food supply continues to tighten, secondary
players processors will become increasingly concerned with
▪ Yet product differentiation will remain limited and input sourcing food of high quality in large quantities and at a
manufacturers will look to solidify their ties with the reasonable price
growing proportion of large-scale farms ▪ Consequently, they will move upstream along the value
▪ Input manufacturers will thus often bypass distributors chain to secure their own food supplies
and deal directly with farms
McKinsey & Company
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4 The competitive landscape will evolve both upstream and downstream
from farming activities
Trade and
Input Farming and Secondary Retail and
Inputs primary
distribution land processing distribution
processing

Description Manufactured Wholesale Production Storage and Preparation Storage, trade
inputs and supply of inputs of crops and wholesale and processing wholesale and
capital goods to farms livestock trade of crops for retail retail of final
for agricultural and livestock agricultural
production products

Key players

Evolving Input manufacturers will deal directly with large- Secondary processors will move upstream to secure
market scale farms to solidify influence on inputs used food supplies in good quantity, quality, and price
dynamics and sell more value-added services

Competition will become
increasingly integrated along
the agricultural value chain

McKinsey & Company
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4 Consumers will become increasingly demanding regarding food
quality, price, and sourcing practices

From To
▪ Purchasing habits primarily driven by the ▪ Consumers facing an ever-growing selection of
producers and food available in markets food
▪ Consumers having limited access to ▪ Consumers having access to a wealth of
information about product characteristics or how information on food, including
they were produced – Ingredients and additives used
▪ Food often sourced locally – Nutritional value
▪ Whereas food quality remains important, it is not – Sourcing practices
a key concern for consumers ▪ Increasingly diverse varieties of food available to
consumers
▪ Increasingly globally sourced food

Resulting changes In the future, it will
become
lt to distinguish
▪ Consumers will become increasingly demanding on several fronts increasingly difficu
demands from
– Food quality and attributes consumer-driven
by retailers
initiatives promoted
– Sourcing practices iate themselves
looking to different
– Food price (value for the money) from their peers

SOURCE: McKinsey-International Food and Agribusiness Management Association (IFAMA) Agribusiness McKinsey & Company
| 23
& Food Survey, 2012, carried out among 117 members of IFAMA Copyright © 2012. All rights reserved

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

1
productivity imperative ▪ A significant portion of farmers ▪ Farm consolidation will continue
in developed countries will have enabling the emergence of
retired by 2020, implying large-scale operations
important consolidation in land – Global agriculture and livestock
The rising priority: ownership and operations land acquisitions are expected
2
governments’ food agenda ▪ The global population is to continue to increase
forecasted to grow by 10% this ▪ The primary acquisition targets
decade, with ~90% of the growth will remain emerging markets
coming from emerging markets due to the large amount of
3
Farming 2.0: new – Emerging markets will continue potentially available arable land
technologies, new markets to significantly increase their
food consumption and drive the
~70% growth in global
consumption between 2000
From push to pull: the
and 2050
4 upheaval of the agriculture
value chain ▪ Emerging markets’ agriculture
production is expected to grow
the fastest
– However, they will still face
Big agriculture: shortages in many food
5
getting bigger categories

McKinsey & Company
| 24

5 A significant portion of farmers in developed countries Farmers that will likely
retire by 2020
will have retired by 2020, implying an important change
in land ownership
Share of farmland by owner age and country
Percent

Age Age

Less than 44 20 16
26
Less than 40 37
28
45 to 54 30
36
40 to 49 33
27
55 to 64 25

50 to 59 32
29 25
65 and over 26
60 and over
5 6
2000 2007 2000 2007
Portion of farmland Portion of farmland
owned by farmers 51% 56% owned by farmers 30% 38%
above 55 above 50

SOURCE: United States Department of Agriculture (USDA); Ministère de l'Agriculture, de l'Alimentation, McKinsey & Company
| 25
de la Pêche, de la Ruralité et de l'Aménagement du Territoire (MAAPRAT, France) Copyright © 2012. All rights reserved

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

Global population

Millions
Change
2010-2020
7,208 Key facts
Percent
6,499 ▪ By 2020, the
global population
5,750 will have
39% India/China 7.8%
increased by 10%
4,910 39%
and exceed
40% 7 billion people
41% ▪ More than 90% of
Other that growth will
48% emerging 12.4 % come from
47% developing
45% countries
44% countries

Developed 5.2%
15% 14% 14% 13% countries

1990 2000 2010 2020E

McKinsey & Company
SOURCE: World Market Monitor (Global Insight); McKinsey analysis | 26

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

Net agricultural per capita food consumption index, by region
Index 2000 = 100 Change Key facts
Historical Forecast 2010-2020
Per capita food
Percent consumption
150 Eastern Europe
and Central Asia 16.8% will rapidly
145 increase in
emerging
140
markets,
135 because of a
130 ▪ Switch from
North Africa/Middle East 9.4% staple food to
125 Latin America 9.8% processed
120 Asia and Pacific 9.0% food
115 Sub-Saharan Africa 6.5%
▪ Increased
consumption
110 of meat,
Western Europe 3.5%
105 mainly poultry
Oceania 2.2%
100 North America ▪ Increased
2.5%
calorie intake
70
2000 2005 2010 2015 2020

McKinsey & Company
SOURCE: Food and Agriculture Organization of the United Nations; McKinsey analysis | 27

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

Drivers Global annual food consumption
kcal consumption, quadrillions Examples of global growth
▪ Population
increase by 10.2
2050: 2.6 billion, ~2 X as
of which 1 billion much
are middle class dairy
+70%
▪ Urbanization:
70% of 2050 6.0
population ~1.5 X
more
▪ Higher calorie cereals
consumption
and diet shifts:
more wealth =
more protein ~2 X as
much
meat
2000 2050

SOURCE: Food and Agriculture Organization of the United Nations World Food and Agriculture to McKinsey & Company
| 28
2030/2050; FAO expert meeting on How to Feed the World in 2050 Copyright © 2012. All rights reserved

5 Emerging markets’ agriculture production is expected to grow the
fastest
Net agricultural and fish production, by region

Index 2000 = 100 Change Key facts
2010-2020 ▪ Developing
Historical Forecast
Percent countries will
experience
190 Latin America 21% the fastest
180 Sub-Saharan Africa 28% growth in
Eastern Europe agriculture
170 25% production
and Central Asia
160 21% given the
North Africa/Middle East
150 existing
Asia and Pacific 17% productivity
140 North America gaps
11%
130 ▪ Among the
120 developed
Oceania 13%
regions, North
110 Western Europe 6% America will
100 capture most
90 of the global
food demand
70 growth
2000 2005 2010 2015 2020

McKinsey & Company
SOURCE: Food and Agriculture Organization of the United Nations; McKinsey analysis | 29

5 However, emerging markets will still face shortages in 1997
2020
many food categories
Deficit

Supply/demand characteristics in crop commodities, by geography

Million metric tons
Southeast Sub- Middle
United Western Latin and East Saharan East/North Eastern
States Europe America South Asia Asia Africa Africa Europe Other1

934 1,193 Cereals
Large deficit increase in
313 295 174
83 ME/NA and SE/East
Cereals
Asia, to be filled by US
-135 -35 -29 -215 -272 -132 -273 -70 and Western Europe
-435 -440
-756 -731 surpluses

249 320 Soybeans
140 Large US and Latin
44 56 75 American surplus to
Soybeans
support growing deficit
-1 -6 0 -3 -6 -13 -1 -1 in Western Europe and
-76
-153 -195 -169 SE/East Asia

Oil
42 50
20 23 20 23 Western Europe and
Oil Sub-Saharan Africa with
-4 opportunities to export
-20 -9 -20 -8 -8
-35 -35 to South, Southeast and
-44
-62 East Asia
-77 -76

212
112
Milk 8

-32 -34 -57 -45 -7 -41 -62 -23 -46 -47 -79 -4
-123 -109 -161

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

McKinsey & Company
SOURCE: International Food Policy Research Institute (IFPRI) – IMPACT model | 30

5 As in developed countries, farm consolidation will continue enabling
the emergence of large-scale operations
Farms have been consolidating for several decades
Share of total farmland by size class1
France
Hectares, percent
1978 2007 Farm consolidation is expected to
continue to cope with global forces
Less than 20 ha 18 5
Trends impacting Expected trend
20 to 49 ha 37 11 consolidation direction

50 to 99 ha 26 26 Available land for
consolidation due to
100 to 199 ha 13 37 farmer retirement and lack
of interest by younger
200 ha or more 5 21 generation

Reduction in trade tariffs
United States2 leading to increased
Hectares, percent competition from foreign
producers
1979 2007
Price pressure from end
Less than 30 ha 3 4 consumers and large food
retailers
30 to 99 ha 14 8 15% of the farms
drive 61% of the New farming technology
100 to 199 ha 13 7 agricultural output enabling productivity gains

200 to 399 ha 15 11

400 ha or more 55 67

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

McKinsey & Company
SOURCE: United States Department of Agriculture (USDA); MAAPRAT; McKinsey analysis | 31

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

Agriculture land availability and acquisitions, by region

Distribution of acquisitions by region, from
Potential availability of uncultivated land 2000 to 2010 Number of transactions,
Millions of hectares Hectares, percent percent

Sub-Saharan Africa 202 52 57

Latin America 123 12 9

Eastern Europe and
52 2 2
Central Asia

East and South Asia 14 27 28

Middle East and
3 6 2
North Africa

Rest of the world 51 0 0

McKinsey & Company
SOURCE: World Resource Institute; Landportal.info; McKinsey analysis | 32

Contents

Overview of key trends

Detailed questions for agricultural coops

McKinsey & Company
| 33

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

Context Questions to ponder
▪ New kinds of owners,
such as investors and How will your cooperative deal with the diverging priorities and
governments, are interests of members? How will your cooperative ensure it is focused on
increasingly entering the the right issues for members? Will it be preferable to segment your member
agricultural landscape for A
base in order to tailor the value proposition for each? How can capital
strategic reasons utilization and risk taken by each member segment be taken into account
when designing the offering?
▪ At the same time, a new
generation of farmers
with different ambitions
and needs is replacing
the older generation of Is your cooperative ready to deal with a significant renewal of its
farmers membership? How will the new farm owners change the dynamics of the
B
membership? How can your coop proactively manage the upcoming change
▪ These new owners are to maintain the cooperative fabric and facilitate integration?
changing what members
expect of their coops

▪ To remain relevant to
How will your cooperative need to evolve to best serve this renewed
each of their members,
coops will need to membership? Will your cooperative need to review its decision rights? Or
C
manage members on a its capital structure? How will your coop ensure that fair and equitable
segment-by-segment treatment is provided to all members?
basis

McKinsey & Company
| 34

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

▪ By their nature,
agricultural How should your cooperative capitalize on the growth opportunity
cooperatives are presented by emerging markets? Among the membership, what
regional entities based A appetite would exist to explore opportunities to expand in farming
mainly in developed operations in emerging markets? How could your cooperative create
countries value for members by distributing products in these growth markets?

▪ But the fastest growth
is happening in What would be the best vehicle to get exposure to emerging
emerging markets and markets?
impacting commodity B
▪ Partnership with local coops in developing countries?
flows, pricing, and ▪ Downstream integration or acquisition into select emerging markets?
preferences

▪ Coops need to
understand how Should your cooperative explore alternative growth opportunities
emerging markets will further along the value chain in their home markets? What
affect their business capabilities does your cooperative have to become a best-in-class entity
and proactively C on this front and compete successfully against established players on a
position themselves to global scale? Could your cooperative be an international private-label
protect their members’ provider to retailers? Could entering a new market affect performance in
interests your home market?

McKinsey & Company
| 35

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

▪ The automation and How can your cooperative optimally deliver value-added products
“financialization” of and services based on your insights into your membership? What
farming is forcing skill set or knowledge can your cooperative develop or hone to remain
farmers to develop A indispensible to members? Which of these skills/ capabilities would your
new skills to remain cooperative be able to develop at best-in-class levels? Which capabilities
competitive or services should you develop to proactively fend off new specialized
players?
▪ Coops will need to
decide which new Are there value-added services that your cooperative could offer to
capabilities will allow its members? How can your cooperative best support its members and
them to develop a remain relevant? Should your cooperative develop these skills and offer
competitive advantage B
them to its members? Should it help its members gain these skills by
and better serve their offering them training, or by entering a strategic partnership with some
members (e.g., experts?
financial risk
management, How should your coop react when facing the risk of disintermediation
advanced analytics, from input manufacturers or other specialized players? Will large-
microsegmentation) scale farms that are courted by input producers continue to see value in
C
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?

McKinsey & Company
| 36

4 How can your cooperative help members anticipate shifts in consumer
tastes and coordinate production patterns to better meet demand?
▪ The value chain is How is your cooperative positioned to understand shifting consumer
increasingly turned needs in a timely fashion? How does your cooperative remain abreast of the
upside down as market changing consumer requirements? How does it discern consumer fads from
power shifts to what consumers actually want? How does your cooperative leverage knowledge
customers and retailers A
from other stakeholders across the value chain? Should your cooperative
spearhead an initiative to ensure consumer needs are shared among partners
▪ As consumers are along the value chain? Are market intelligence and analytical capabilities
becoming more
sufficient?
demanding and
discriminating, coops
will have to help their How will your cooperative best leverage market information to support
members anticipate members? How can members best benefit from the gained market knowledge?
consumer tastes to How should your cooperative go about disseminating this knowledge? Is your
maximize the value of B cooperative in a position to influence members to change/update their
their products 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?

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

McKinsey & Company
| 37

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

▪ Many agricultural How can your cooperative assess the impact of changes in the
analysts agree that a international regulatory landscape and translate them into tactical
revision of tariffs and A actions to help your members? How can your cooperative gain a clear
quotas is critical to understanding of regulations that affect them? How would your coop
boost international assess the impact on the competitive position on its members?
trade
Should your cooperative engage in lobbying efforts to play a more
▪ Governments are active role in shaping the regulatory agenda? Should it engage in
increasingly playing a B training programs to help its members understand and prepare for
role in shaping market impending regulations? Could your cooperative participate in the creation
quotas, tariffs, and of standards and productivity reforms?
barriers
Should your cooperative put in place mechanisms to ensure it
▪ Some countries
understands the implications of domestic and international
oppose deregulation, C
regulations on its members? What practices could help members
which they believe
anticipate the impact of regulations and position their activities?
would put their
farmers at a Should a forum be established with other cooperatives and
disadvantage versus regulatory authorities to proactively surface issues and
others D
opportunities? Should a partnership be established with other
cooperatives to share intelligence across regions?

McKinsey & Company
| 38

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