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Rabobank view onFood & Agribusiness 2004

Changes in the global food system

2 Rabobank Food & Agribusiness 2004

© Rabobank, 2004

Title Rabobank view on Food & Agribusiness 2004

Changes in the global food system

Authors Eric Baas, Paul Braks, Stephane Delodder, Maya Donceva, Andy Duff, Susan Hansen,

Michiel Klompenhouwer, Marieke de Rijke, Cindy van Rijswick, Gillian Turco,

Mark Voorbergen, Adrie Zwanenberg.

Date September 2004

Copyright No part of this publication may be reproduced in any form by print, photo print,

microfilm or any other means without written permission of Rabobank.

Disclaimer Neither Rabobank, or other legal entities in the group to which it belongs, accept

any liability whatsoever for any direct or consequential loss howsoever arising

from any use of this document or its contents or otherwise arising in connection

herewith.

Contact adress Rabobank Internationalfor this publication F&A Research and Advisory

Telephone + 31 30 216 1178

Fax + 31 30 216 1920

E-mail [email protected]

Website www.rabobank.com/far

3Rabobank Food & Agribusiness 2004

Foreword 5

Summary and Outlook 6

1 Shifts and changes in global food and agribusiness 8

1.1 Food & Agribusiness: a global complex 8

1.2 Land, labour and farm inputs determine farm production system 9

1.3 New superpowers in agricultural production are emerging 12

1.4 Food and agri processing quest for growth 15

1.5 Food retailing (power) is on the rise 19

1.6 Food consumption patterns show universal shifts 20

1.7 Latin America, North America and Oceania profit from growing F&A trade 22

2 Animal protein 26

2.1 Controlled best farm practices: forced by consumers and processors 27

2.2 Processing – ongoing integration from farm to fork 28

2.3 Shifting demand differs per region 30

2.4 Trade positions continuously under attack 31

3 Cocoa 33

3.1 Cocoa production increasingly dependent on West Africa 34

3.2 The cocoa industry develops fast and partly shifted to countries of origin 34

3.3 Increasing demand for chocolate confectionery 35

3.4 International cocoa trade switching from beans to products 36

4 Coffee 38

4.1 Brazil,Vietnam and Colombia will continue to be dominant

in coffee production 39

4.2 Global concentration in trading and roasting 39

4.3 Coffee consumption remains flat, growth opportunities are limited 40

5 Cotton 42

5.1 Room to improve current practices, limited room to expand production 43

5.2 Ongoing optimisation of existing practices 44

5.3 Rising competition from man-made fibres 45

5.4 Cotton trade flows 45

Table of contents


6 Dairy 47

6.1 Milk production is growing strongly in non-traditional production areas 48

6.2 Processors try to combine cost reduction with finding new ways to add value 49

6.3 Demand for dairy products grows and changes 49

6.4 Will Asia Pacific be able to satisfy the growing import requirements of Asia? 50

7 Fruit and Vegetables 52

7.1 Fruit and vegetables production outpaces population growth 53

7.2 Processing: answer to perishable nature of F&V and search for added value 54

7.3 China catching up on Fruit and Vegetable trade 55

7.4 Appetite for convenience yet freshness and health 56

8 Grains 57

8.1 Grain production competing with other more profitable crops 58

8.2 The grain processing industry in search of new markets and products 58

8.3 More demand for consumer products and industrial applications

containing grain 59

8.4 Grain trade flows are shifting 60

9 Oilseeds Complex 62

9.1 Soybeans and palm oil dominate the oilseeds complex 63

9.2 The processing industry expands and faces major regional shifts 64

9.3 Demand for vegetable oils and protein is exploding in developing countries 65

9.4 Palm oil and soybeans: the winners in world trade 66

10 Sugar 68

10.1 Production: a decade that belongs to Brazil 69

10.2 Processing: A regional business 70

10.3 Demand: Asia – the biggest market, the most promising prospects 70

10.4 Trade – Brazil powers ahead, trade liberalisation inches forward 71

11 Rabobank 73

11.1 Rabobank Group: largest financial service provider in the Netherlands 74

11.2 Rabobank Group: the global leader in food & agri financing 74

11.3 Rabobank Group: growing international retail banking in rural areas 76

11.4 Rabobank: rural banking and managing commodity risks in

developing countries 77


Feeding the world’s population is a huge challenge. As the population keeps

growing, agricultural production has at least to keep pace with this growth.

Producing food and delivering that food to all the consumers of the world takes a

complex, global and efficient food & agribusiness chain including agriculture, food

processing, trade and food retail.

This is the world of Rabobank.We are the partner in business for farmers, for

producers of seeds and manufacturers of tractors and fertilisers, for the companies

that process milk, sugar, grains, oilseeds, for the meat companies, for the traders

who organise the huge flows of produce and foods across the globe and for the

companies that deliver food to the end consumers.

A fascinating world, continuously shifting and changing.We follow the shifts and

changes, we analyse them and we try to help our clients throughout the food

chain to find answers to the challenges facing them. In this special report you will

read about world agriculture, about the food industry and global trade flows, with

specific details on beef, pork, poultry and seafood, on milk and cheese, on grains

and oilseeds, on cotton, coffee and cocoa, on sugar, fruits and vegetables.

In the last chapter of this report we describe Rabobank’s role in the global food &

agribusiness, the financial services we deliver to numerous F&A companies, our

“country banking”strategy to expand in rural banking, our new initiative of a Rural

Development Programme to give small agricultural companies access to

affordable credit in order to stimulate economic development.

This study has been published in line with Rabobank’s long-term commitment to

the international food and agribusiness. It is one of a series of publications

undertaken by the global department of Food & Agribusiness Research and

Advisory.

Bert Heemskerk

Chairman of the Executive Board

Rabobank Group

Foreword

Foreword


Producing food and delivering that food to consumers all over the globe involves

a complex, global and efficient food & agribusiness chain, which includes agricul-

ture, food processing, trade and food retail. But to satisfy the increasing and chan-

ging demands for food is not enough. At the same time the quality of our soil,

water and air must be sustained.This world of food and agri is the world of

Rabobank, operating as a financial business partner.When Rabobank looks at the

global food and agri chain, it sees some significant shifts and changes.

Growth in food demand is shifting to emerging regions like Latin America and

Eastern Europe and countries like China and India. Food demand is expanding in

particular for meat, milk, vegetable oils and all kinds of processed and prepared

food products. Income and population growth are key factors behind the

increasing demand for food. In contrast, food consumption growth has stagnated

in developed markets like the US, Europe and Japan. Growth is now taking place

in innovative food products: high value products, prepared products, out of home

consumption, healthy foods. All the links in the value chain have seemed to be

very successful in providing a large variety of relatively cheap food items. And yet,

there is a paradox: with over 800 million people still undernourished, the most

serious threat to the health of Europeans and Americans is obesity.

Not surprisingly, the emerging countries in food consumption are becoming

major import markets. In absolute numbers, Japan, Europe and the US are still

world’s main food importers. Europe and the US also dominate global food and

agri exports, but Brazil, the Netherlands and Australia top the list regarding the

agricultural trade surplus.The star of Brazil as food and agri exporter has risen

rapidly. It is expected that emerging regions like Latin America, Eastern Europe

and Asia will benefit most from further liberalisation of trade, not the countries

with mature markets nor the poorest countries.

Farm production is largely driven by these trends in consumption and trade as

well as by processing and retail.The shift that Rabobank sees in consumption is

largely paralleled by a shift in production too. Over the last decade, agricultural

production worldwide has had no problem in keeping up with the population

increase. And the increasing demand for animal proteins has caused livestock

production to expand faster than crop production. More specifically, the

production of fruit and vegetables, oilseeds, chicken and pig meat, fish, and coffee

and cocoa beans has expanded strongly since 1990. Rice, corn, beef, milk, and

cotton production have increased as well, but at a slower pace. In the same

period, production of beet sugar and wheat and barley has been decreasing. In

matured markets like Europe, North America and Japan, growth in agricultural

production has been somewhat stagnating. In Africa, production has just been

Summary and Outlook

Summary and Outlook


able to keep up with population growth. Farm production has been booming and

is likely to continue to grow in certain parts of Asia, Latin America and the former

Soviet Union, which seems to have resumed its past grain belt reputation.The

shift to the emerging countries is not only driven by cost advantages in

production but also by the growing domestic market and improved climate for

food and agri, literally and figuratively (politics, economics, logistics, knowledge

etc.).

Rabobank sees that it is not only farm production that is shifting towards

countries with growing consumption. Processing and services like R&D, with lower

costs and potential in terms of human capital, are also on the move, with Brazil,

China, India and Russia as attractive destinations. An increasing share of

agricultural products is processed and sold through large multinational

companies, mainly rooted in the US, Europe and Japan. Driven by maturing

markets, the growth strategy of many companies has led to a wave of mergers,

acquisitions and alliances. Consolidation activities are increasingly cross-border

and even cross-continental. Markets such as India, China, Brazil and Russia will see

further internationalisation of food multinationals, processors as well as retailers

and food providers trying to penetrate these markets in their search for growth.

Furthermore, food and agribusiness is looking for opportunities to produce more

value-added products and improve efficiency to survive competition with low-

cost producers in emerging countries. Companies are more and more doing what

they really excel in.There is a tendency to focus on a limited number of activities,

either in the upper or lower part of the value chain and either in food and agri or

other industries. And growing for the sake of growth is out of question.

No matter how the world of food and agribusiness is viewed, one cannot escape

the conclusion that changes in the global food system are being dictated by the

emergence of new markets. Emerging not only in terms of consumption, but also

in terms of production, processing and technological innovation.These key shifts

are generating plenty of opportunities for companies throughout the value chain

and farmers, traders and food companies are adjusting their strategies to be able

to take advantage of them.To be successful, F&A companies must specialise and

fine-tune their operations. Be flexible enough to adjust strategy when necessary,

form partnerships with international companies and local companies in emerging

markets. Certainly, the global top 25 food and agri companies will not stay the

same in the long term. And new companies from emerging countries will

manage to secure a position between the current leading companies.

Summary and Outlook


1 Shifts and changes in global food and agribusiness

While the growth in total agricultural production has kept pace with population growth in the last decade, food supply is still

distributed very unevenly throughout the world. Driven by an increasing demand for animal protein, livestock production is

growing faster than crop production. Latin America is responsible for the majority of growth in both agricultural production

and trade. And in Asia, production and consumption of animal products have almost doubled since 1990. Improved

technologies in production, processing, distribution, packaging and storing etc. have boosted international trade, processing

and retailing of food. Future agribusiness will continue to a be a dynamic growth sector thanks to continually changing

consumer preferences, new technologies in all parts of the value chain and ever altering natural, socio-economic and

political conditions.

Figure 1.1 Food & Agribusiness: a global complex

Source: Rabobank, 2004

Land, labour and farm inputs

Farm production Trade and distribution

Processing Wholesale and trade

Food retail

Food service

Non Food

Consumers

1.1 Food & Agribusiness: a global complexAgribusiness is much more than farming Feeding a world population that increases by tens of millions of people per year

and providing industries with various raw materials are immense challenges.This

requires a complex system from farm to consumer.The food and agribusiness

complex includes all economic activities supporting, processing and handling

farm production for both food and non-food users (figure 1.1). Apart from the

necessity for human life, the agribusiness complex has major significance for the

global economy: 44% of the economically active people in the world are working

in agriculture and the share of agriculture in global GDP and total merchandise

trade are 6% and 7% respectively (source: Food and Agriculture Organization of

the United Nations (FAO)).To give an indication of the economic significance of

the whole agribusiness complex: in the US, the share of agriculture in GDP is only

1%, whereas the share of agribusiness is about 14%; in Brazil these shares are an

estimated 9% and 38% respectively.

Global Food and Agribusiness


1.2 Land, labour and farm inputs determine farm productionsystem

Agriculture land use is shifting towards Total agricultural land use in the world measured 5 billion hectares in 2002 as fruit, vegetables and oilseeds opposed to 4.9 billion ha in 1990. Asia and Latin America are responsible for this

slight increase. One third of agricultural area is located in Asia, 22% in Africa, 16%

in Latin America, 10% in North America, 9% in Oceania and 4% in Europe. Across

the regions there is much diversity in the use of land. Livestock production is the

world’s largest user of land, either directly through grazing or indirectly through

production of feed grains. Asia demonstrates a very eye-catching shift towards

the land use for pasture. On a global scale, the shares of crops and pasture in the

total area have not changed during the last decade. However, among the types of

crops there have been some remarkable shifts. An increasing share of agricultural

land is used to grow vegetables, fruit, mushrooms, tree nuts and soybeans. On the

other hand, the area of wheat, barley, tobacco and fibre crops has decreased since

1990. Land is an important factor in the competitive advantage regions have in

farming. Land abundant countries, like Brazil, the US and Australia, have a

comparative advantage in large-scale arable farming. In densely populated

countries like Singapore, Japan and the Netherlands, land is relatively expensive.

Consequently, these countries generally specialise in farming that generates a

high value per hectare, like vegetable growing in greenhouses and intensive

livestock farming.

In developing countries, agricultural Total agricultural labour is showing a decreasing trend worldwide, with the labour is still rising exception of Africa and Asia, where the number of people working in agriculture

has been increasing by a respective 23% and 10% since 1990.This is related partly

to the increase in total agricultural production, the low costs of labour and the

lack of other employment opportunities.The average labour utilisation in the

world is 0.87 person per hectare (pph) of cropland. But this varies widely

according to wage rates, production structure and technologies, etc. In the land-

abundant, high-income regions with extensive animal production and arable

farming, such as North America and Oceania, the average labour input is only 0.01

and 0.06 pph respectively. In North America, Europe and Oceania, where labour

costs are comparatively high, farmers are encouraged to substitute labour for

machinery. In most regions, the pph ratio has been fairly stable since 1990, with

the exception of Western Europe, where the pph has decreased by 31%.This

indicates that labour productivity has risen sharply in the EU. It is expected that

the input of labour in farming will continue to decline.

In Asia, tractor use is still growing; Another indication of the high capitalisation of agriculture in the industrialised worldwide, growth has come to a standstill countries is the use of farm equipment, specifically tractors. As a global average,

there are 57 hectares of cropland per tractor. In the highly capitalised agriculture

of Western Europe and North America there are about 12 and 40 hectares per

tractor respectively but in countries with large-scale cropping, such as Australia,

the number of hectares per tractor is large. In Africa, Latin America and Asia, where

incomes are relatively low, labour costs are also low, and farms are smaller, there

are about 387, 95 and 77 hectares per tractor respectively.The global use of

tractors has been fairly stable since 1990, though in Asia, the use of tractors has



grown steadily. It should be mentioned that, of course, the number of tractors is a

very simplified indicator.The technology associated with tractors and other

agricultural equipment (GPS systems etc.) has increased productivity significantly.

Fertiliser use affected by farm incomes, Fertilisers are a key factor in increasing productivity in agriculture. Global fertiliser production structure, and consumption amounted to nearly 142 million tonnes in 2002 and has been

innovations in fertilisersfluctuating since 1990.The fall in fertiliser consumption at the beginning of the

1990s was due to the decline in fertiliser consumption in the countries of Central

Europe and the former Soviet Union.This was mainly caused by the collapse in

agricultural production and deterioration in the cost-price ratio, which made it

unattractive to buy fertilisers.The intensity of global fertiliser use is 90 kg/hectare.

In Africa, only 20 kg of fertilisers are used per hectare, whereas in Western Europe

this amounts to 175 kg. In part, a low level of fertiliser use is related to low income

and in part it is linked to the production structure. For some crops the application

rate is higher than for others. Moreover, there have been huge developments in

fertilisers with appropriate properties for different crops, soil types etc. Partly

thanks to these innovations it has become easier to take account of the

environmental impact of fertiliser use and to increase the efficiency of nutrient

use. Hence, it is expected that fertiliser use will show no further growth in the

industrialised countries.

Box 1 Few countries dominate GM crop growing

Genetically modified (GM) crops have received a great deal of attention in the politicaland public arenas. Proponents of GM crops argue that biotechnology can speed upconventional breeding and provide farmers with planting materials which create cropswith higher yields, resistance against pests and diseases, and replace toxic chemicals thatharm the environment and human health. Furthermore, GM could improve thenutritional quality of staple foods and create new products for health and industrial uses.Opponents of GM crops stress the impact on and risk to the environment andbiodiversity. Public opinion research has revealed that, in general, people from theAmericas, Asia and Oceania are far more optimistic about the future of biotechnologythan Africans and Europeans are. GM crops were grown commercially in 18 countries ona total of 67.7 million hectares in 2003, up from 1.7 million in 1996. Just six countries andfour crops make up 99% of global GM crop production.The US plants almost two-thirdsof the GM crops grown worldwide, but the shares of Argentina, Brazil, Canada, China andSouth Africa have increased rapidly.The most widely grown GM crops are soybeans,maize, cotton and canola.With the exception of those in China, transgenic cropscommercialised to date are developed and distributed by companies like Monsanto,Bayer CropScience, Syngenta, DuPont (Pioneer). Despite the fast growth of GM cropplantings, the short-term future remains filled with challenges including re-establishing aconnection and positive perception in the eyes of mainstream consumers. Over thelonger term, as more tangible benefits of the technology are provided in market-readyproducts, it is expected that the production and use of GM crops will be morewidespread and readily accepted throughout the food chain.

Sources: Rabobank, 2002/2004; Food and Agriculture Organization of the United Nations,

2004; ISAAA, 2004



Chemical use in farming has A key strategy in improving agricultural output is to limit losses from the effects of decreased in recent years pests, diseases and weeds. Global estimates of agricultural chemical use suggest

that use rose during the mid 1990s but has been decreasing since 1999. Adverse

weather conditions, reduced plantings of important crops (including cereals, rice

and cotton) and a growing area of herbicide tolerant and resistant (GM) crops

have negatively influenced the demand for ag. chemicals.The weak economic

situation in some countries (in Latin America, Africa) has also affected the use of

ag. chemicals.

R&D in seeds has shifted from In the first half of the 20th century, agricultural productivity growth was principally the public to private sector driven by innovations in mechanical inputs that replaced labour. In the second

half of the century seeds, among other things, became increasingly important.

R&D spending on seeds is moving more and more from the public to the private

sector.The large investments needed for R&D have played a role in the

consolidation of the seeds industry. Over the last decade, biotechnology has

become increasingly important in both the breeding process and transgenic

seeds (Box 1). It is important to distinguish between crop seeds (for widely

cultivated commodities like maize, soybean, etc) and vegetable seeds. Although

US and European companies are still in the lead, emerging countries like China

and India are becoming increasingly prominent in the seeds business (Figure 1.2).

It is expected that R&D spending on seeds will increase further and contribute to

agricultural productivity growth, processing requirements and the fulfilment of

ever-changing consumer demands.

Figure 1.2 Major seed companies

Company Seed sales over 2003 Country of origin Type of seeds

(in USD million)

1 Pioneer (Dupont) 2,297 US Crop seeds

2 Monsanto 1,385 US Crop seeds

3 Syngenta 1,071 Switzerland Crop & vegetable seeds

4 Limagrain 746 France Crop & vegetable seeds

5 Seminis 477 Mexico Vegetable seeds

6 Advanta 447 Netherlands Crop seeds

7 KWS 445 Germany Crop seeds

8 Bayer CropScience 306 Germany Crop & vegetable seeds

9 DLF 249 Denmark Crop seeds

10 Dow AgroScience 208 US Crop seeds

Sources: Phillips McDougall and various annual reports



Rising temperatures are not A distinguishing feature of agriculture is its dependence on natural conditions.detrimental to farming per se…. There are huge concerns about the potentially threatening effects of climate

change, and global warming in particular.Will this affect the availability of food?

Agricultural systems are most sensitive to extreme climatic events such as floods,

storms and droughts as well as to seasonal variability such as periods of frost, cold

temperatures and changing rainfall patterns. For agriculture, rising temperatures

are not necessarily harmful. Changing patterns of precipitation, temperature and

length of growing season resulting from a doubling of atmospheric

concentrations of carbon dioxide would tend to increase agricultural production

in temperate latitudes and decrease it in the tropics (mostly developing

countries). All in all, though, global crop production would be little affected.

Indeed, agricultural systems are managed. Farmers have a number of risk

management options for adaptation, such as selecting other crops, consuming

water for irrigation, using fertilisers, choosing tillage practices, insurance against

production risk, price risk hedging, etc. However, for farmers in developing regions

many of these options are hardly affordable.

...but water is increasingly becoming Water shortages are perhaps more of a burning issue than climate change.The a strategic asset in agriculture worldwide use of water has increased sixfold during the 20th century, whereas

the population has ‘only’ tripled.The distribution of water resources is very

uneven, with 40% of the global population living in places where water is scarce.

Agriculture is the main user of water, as three-quarters of the water abstracted

worldwide is used for agricultural purposes. But agriculture is facing increasing

competition from other users of water (manufacturing industry, households).

Water scarcity problems in agriculture prevail in regions like northern Africa,

western Asia, northern China, southern Europe, western United States, Mexico and

parts of Australia. In addition to water scarcity, agriculture has affected water

quality with its intensive use of inputs (pesticides and fertilisers) and manure

surpluses from livestock farming, particularly in certain areas of the US, Australia,

New Zealand and Europe. It is to be expected that water shortages will cause

water prices to increase and that this may change global production patterns. All

in all, water is increasingly becoming a strategic asset in agriculture.

1.3 New superpowers in agricultural production are emergingIn Asia, Latin America, Oceania and Since 1990, global agricultural production has grown by about 30%. At the same North America, production growth time, the population has risen by 20%, so production is easily capable of keeping

exceeds population growthup with demand (Figure 1.3). Of course, there are huge differences from region to

region. Asia, Africa, Latin America and Oceania showed more than average growth

rates in farm production (60%, 42%, 50% and 33% respectively). For Africa, this was

just enough to keep up with the population growth. In both Western and Eastern

Europe, agricultural production has not paralleled population growth. In the EU,

policy measures have been taken to restrict production. In Eastern Europe,

agricultural produce collapsed after the transition to a market economy in the

early 1990s. Agricultural produce will probably keep growing in line with global

demand, though the pace of growth might slow down in response to declining

population growth rates and fairly high levels of per capita food consumption

having already been reached in many countries.



Livestock production is on its way Driven by an increasing demand for animal proteins (meat, dairy), livestock to surpass crop production production has expanded a little faster than crop production since 1990.This is

particularly true for Asia, North America and Latin America.What strikes one most

is Asia, where animal production has grown twice as fast as crop production since

1990. However, crop production still accounts for an estimated 60% of the global

gross value of agricultural production. In industrial regions, the share of livestock is

more than half; in the least developed regions only one third. In Europe, livestock

has always been relatively important, though it has been subject to more and

more restrictions in the last two decades (milk quota, environmental regulations,

etc.). In Oceania, crop production has increased comparatively fast (51%) since

1990. Compared with livestock production, crop production is very sensitive to

weather circumstances and market conditions, resulting in relatively large

fluctuations in output, even on a global scale (Figure 1.3).

Figure 1.3 Development of global population and agricultural production

Source: Food and Agriculture Organization of the United Nations, 2004

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Crop production Livestock production Population

Index (1990=100)

130

125

120

115

110

105

100

Figure 1.4 Change in global production volume of selected products


-20% -10% 0% 10% 20% 30% 40% 50% 60% 70%

total % change between 1993 and 2003

Milk

Beef

Poultry meat

Pigmeat

Vegetables (incl. melons)

Fruit

Oilseeds

Coffee (green)

Cocoa beans

(seed) cotton

Sugar beets

Sugar cane

Cereals



Poultry and oilseed production Regarding the products selected in the following chapters of this report,have grown worldwide vegetables, poultry meat and oilseeds show the largest increase in production in

the period 1993-2003 (Figure 1.4). On regional levels, the overall picture is similar.

To illustrate some of the differences between regions, we will mention the

product category that recorded the highest growth rate as well as the category

that showed the slowest growth rate (or largest decline) during the period 1993-

2003. In Africa, poultry meat production grew by 56%, whereas coffee bean

production did not grow at all. In Asia, vegetable production peaked (90%)

whereas sugar beet production fell (-19%). In Europe, production went down for

various crops (sugar cane -54%, beef -25%, sugar beets -22%, cereals -14%), but

poultry meat production increased significantly (60%). In Latin America, sugar

beet and cocoa bean production showed a decrease in production volume

(-38% and -28% respectively), whereas oilseed production grew by 117%. In North

America, production of coffee (274%) poultry meat (40%) and fruit (1%) catch the

eye. In Oceania, all product categories showed growing output (oilseeds most

with 68% growth), except for cotton (-13%).

Figure 1.5 Agricultural production in selected countries

Source: World Bank, 2004

Ch

ina

Un

ited

Sta

tes

Ind

ia

Jap

an

Fran

ce

Ind

on

esia

Ital

y

Bra

zil

Mex

ico

Ger

man

y

Turk

ey

Spai

n

Ko

rea,

Rep

.

Ru

ssia

Nig

eria

Can

ada

Egyp

t

Un

ited

Kin

gd

om

Iran

Au

stra

lia

USD billion

1990 2002

200

180

160

140

120

100

80

60

40

20

...and many Asian and Latin countries Three countries alone account for about 40% of the total value of agricultural are on their way up as producers production in the world, which amounted to USD 1,179 billion in 2002. China tops

the list of agricultural producers, followed by the US and India (Figure 1.5).Though

many European countries still rank high in the list of top agricultural producing

countries, their share in global production is decreasing. On the other hand,

impressive growth rates in agricultural production value can be seen for a

number of Asian and Latin American countries for the period 1990-2002: for



example,Vietnam (222%), Suriname (181%), Dominican Republic (168%),

Nicaragua (129%), Peru (117%), Cambodia (116%), China (103%) and Chile (100%).

A favourable policy environment, stable political conditions, economic growth,

high population growth and the availability of good and sufficient farm inputs

and natural resources can boost agricultural production. Among the countries

that have seen their agricultural production value go down between 1990 and

2002 are Russia (-77%), Ukraine (-72%), Georgia (-72%),Tajikistan (-70%), Angola (-

52%) and Ethiopia (-46%). Many of the production decreases are related to politics

and the policy environment as well as the economic conditions: civil wars and

poverty in Africa, transition from a communist system to market economy in

Eastern Europe and the former Soviet Union, and the restriction of production

through agricultural policy measures in the EU. It is to be expected that more and

more agricultural activity will shift to Asia and Latin America in the future. Broadly,

these regions have cost advantages (in labour and land) and growing domestic

markets since incomes and population are growing.

Policy remains a crucial force In addition to the quality and quantity of natural resources and farm inputs, there behind agricultural production are dozens of other major challenges and constraints that will shape future

farming, at both ends of the value chain. Livestock farming especially will be

increasingly affected by (epidemic) animal diseases as well as animal welfare and

food safety as the number and density of animals increase. Innovation is vital to

the future of farming. Biotechnology may bring new solutions for further

productivity growth and more efficient use of pesticides and water. As more and

more agricultural produce is processed, farming is being driven to an increasing

extent by large multinational processing companies. Consolidation is also

prevailing in the farm input industry and in retail, resulting in diminishing power

of farmers and increasing necessity of cooperation with other links in the value

chain. One major force, linked to the agricultural value chain, is policy. Government

policies influence markets directly by controlling the availability of produce

through supply management tools such as production quotas or border

measures such as tariff rate quotas, or indirectly through their influence on prices.

Policy is a major influence in Europe, North America and some Asian countries,

Japan in particular. Renewed progress in the agricultural negotiations underway

as part of the WTO (World Trade Organisation) would be an important

contribution to a reduction of trade distorting policies. However, a complete

abolition of agricultural policy remains a utopia.

1.4 Food and agri processing quest for growthContinuous adaptation... An increasing share of farm production is undergoing some kind of processing

before it is distributed to the end consumer. Processors face several challenges in

their business environment. Consumer demands have rapidly changed over the

years and processors have adapted their products accordingly. In addition,

processors have to adapt to volatile raw material prices, changing sourcing areas,

and a continuing trend of consolidation and internationalisation in their

distribution channels.



Figure 1.6 World’s largest food and agri companies

total food & semi- bakery bever- dairy & meat & prepared edible sugar & others

sales agri finished/ ages ice fish foods, oils & confec-

(in USD sales industrial cream snacks fats, tionery

billion) (in USD products sauces,

billion) condi-

ments

1 Nestlé (CH) 65.4 54.3 * *** *** ** ** ** ***

2 Cargill (US) 59.9 53.9 *** ** **

3 Kraft Foods (US) 31.0 31.0 ** ** *** * *** * ** *

4 ADM (US) 30.7 30.7 *** *

5 Unilever (GB/NL) 48.6 27.2 * ** * ** *** *** ***

6 PepsiCo (US) 27.0 27.0 ** *** **

7 Tyson Foods (US) 24.5 24.5 *** *

8 Bunge (US) 22.3 22.3 *** ***

9 Coca-Cola Company (US) 21.0 21.0 ***

10 ConAgra (US) 19.8 19.8 * * * *** * *

11 Diageo (GB) 15.4 15.4 ***

12 Danone (FR) 14.9 14.9 * * ***

13 Kirin (JP) 13.8 12.1 *** *

14 Anheuser-Busch (US) 14.1 11.7 ***

15 Mars (US) 14.0 11.2 * * * * ***

16 Interbrew AmBev (BE/BR) 10.7 10.7 ***

17 Asahi (JP) 11.0 10.6 *** *

18 Cadbury Schweppes (GB) 10.5 10.5 *** ***

19 General Mills (US) 10.5 10.5 *** * * *

20 Heineken (NL) 10.5 10.5 ***

21 Suntory (JP) 11.4 10.3 *** *

22 Sara Lee (US) 18.3 9.7 *** *** *** ***

23 Smithfield Foods (US) 9.3 9.3 *** *

24 Dean Foods (US) 9.2 9.2 * *** *

25 Kellogg (US) 8.8 8.8 *** * * *

Food and agri sales are estimates; tobacco companies are excluded; ranking is based on food and agri sales; * indicates relative importanceof segment in company’s business portfolio.

Source: Rabobank, 2004 (latest data available)

Categorisation of food market changed The categorisation of the food market has changed.The basic material

categorisation – meat, vegetables, dairy and grains – has expanded to include a

categorisation that targets fundamental issues associated with food, such as

convenience, indulgence, health, ethics, variety, value-for-money. In addition,

incidents with food have resulted in raised consumer awareness regarding food

safety. Revenue growth will be associated with product innovation and food

substitution for products with higher added value. Food processors have

responded to these developments by adapting and investing in their product

portfolio.



The industry is scaling up Driven by maturing markets the growth strategy of many companies has led to a

wave of mergers, acquisitions and alliances. Increasingly, these consolidation

activities are cross-border and even cross-continental. Although the number of

mergers and acquisitions is still substantial, there is a trend towards qualitative

rather than quantitative growth and the disposal of many non-core assets to

streamline business portfolios. Growth for growth’s sake seems out of fashion.

Acquisitions now have clear motives – the main ones being to increase cost

efficiency through synergy, to gain new market opportunities and to obtain brands.

Diverse set of activities The world’s largest food processors are very diverse in the segments in which they

operate and in their level of internationalisation (Figure 1.6).The majority is, to a

certain extent, active in beverages ranging from water and soft drinks to alcoholic

beverages. Companies, such as Asahi and Tyson are highly specialised whereas

Nestlé and Kraft Foods operate in many business segments ranging from coffee

to confectionery. Companies such as Unilever and Sara Lee have significant non-

food operations too.

Growing core focus In the last two decades, there has been a tendency to focus on a limited number

of activities. Food processors in the US and Europe have been selling activities,

especially non-food business units that are not considered core business.

Furthermore, the characteristics of lengthy value chains, such as oilseeds and

grains, have stimulated concentrating on few activities within the value chain. For

grains and oilseeds, it takes many stages of collection, trading, processing and

further processing before these raw materials are finally turned into an end

product for retail shelves or foodservice. In addition, substantial scale is required to

perform in the first stages of the value chain (up and including the first line of

processing). Companies such as ADM, Cargill and Bunge focus on grain handling,

flour milling, corn refining and/or malting, whereas companies like Unilever, Kraft

Foods and Kellogg start from there, focusing on (branded) end products.The latter

type of company usually considers that building and maintaining brands is

incompatible with lower margin activities upstream. Of course there are always

exceptions to the rule, for example ConAgra, a company that is still active in

different stages of the value chain.

Future specialisation of conglomerates In emerging countries, very diversified large agglomerates such as COFCO in emerging countries? and TATA are more prevalent than in the US and Europe. Sales of COFCO are an

estimated USD 13 billion, ranging from finance and hotel business, to cereal

trading to food processing.The Indian TATA operates in various industry sectors,

including financial services, car engineering, communications and consumer

goods, including tea and coffee. Examples of more specialised companies that see

their star rising in emerging countries are found in Brazil and Russia. Sadia is

Brazil’s largest meat processor with sales growing steadily and amounting to more

than USD 1.8 billion now. It is to be expected that in the future, an increasing

share of these companies will follow the development path of agribusiness

companies in the matured markets.They will specialise in certain activities at

certain stages in the value chain.They will do this by selling activities and either

cooperating with or buying up other companies.



Internationalisation continues The 25 largest food and agri companies are rooted in the US, Europe, and Japan

(Figure 1.6).Whereas most of the Japan originated companies have still a strong

focus on their homeland, many European companies have increased their

presence abroad. Kirin has relatively limited foreign exposure with 4% of sales

abroad if compared with European counterparts like Unilever, which generates

58% of sales outside Europe.The international movement of food processors has

been triggered by home market maturity, global market liberalisation,

internationalisation of food retailers, improved distribution channels and

consolidation. As a result, the availability of compounded food products in

developing regions has increased. Markets such as India, China, Brazil and Russia

will see further internationalisation of food multinationals in their markets as they

search for growth.

...and alliances with local producers are Many food processors have been focusing on a limited number of products and set up to secure a gateway to markets in order to become the number 1 or number 2 player in their market.

the consumer marketsHowever, some food markets are dominated by local food processors that have a

very diversified product range.This especially concerns markets with a less

developed retail channel or smaller markets that are geographically isolated from

the mainstream countries, thus raising logistics issues. Examples are Norway and

Croatia.The increasing awareness of the strengths of local producers and their

knowledge of the local market has led to a decrease in ‘greenfield operations’.

Instead of building new production facilities in their own right, many food

multinationals set up alliances with local producers and distributors to secure

their gateway to the local consumer.

Brands losing out to private label? A strong brand undeniably generates added value and strengthens a processor’s

market position. However, building and sustaining a brand takes enormous

investment without any promise of guaranteed success. In general the number 1

and 2 brands gain market share, but the remaining brands are severely

pressurised by retailers’ private labels. Brand marketers invest in strong and

distinctive brands in an attempt to halt the rising power of private labels. Retailers

have strengthened their positioning by successfully focusing on the quality and

upmarket image of the private labels. A narrowing in the price differential

between brands and private labels as well as increasing acceptance of private

labels by consumers indicates the reduced ability of brands to charge a premium.

The limited number of large manufacturers and the growing needs of retailers

have resulted in consolidation in the private label manufacturing industry. It is

expected that this consolidation will be ongoing as the smaller companies

cannot meet the stringent retailer requirements and larger companies run into

capacity constraints.The increase in scale should help maintain the balance of

power between the manufacturers and retailers.

Non-food and industrial While agricultural raw materials are usually processed into food products, there application are on the rise are various non-food applications too: textile fibres (flax, cotton and hemp), starch

for industrial use, oleochemicals and pharmaceutical products, to name but a few.

Great potential exists for more non-food applications, including biofuels and

bioplastics.That new applications have been limited for some decades is due to



production costs, a lack of support or incentives. But the tide is turning as a result

of oversupply of traditional food-crops, changing agricultural policy, development

of new technology (e.g. in processing, biotechnology in farming) and

sustainability concerns. A clear example is ethanol; there is nothing new about

ethanol but the fact that legislation on biofuels has been put in place in various

parts of the world has raised new possibilities for this product, as well as for

biodiesel (produced from vegetable oil).

1.5 Food retailing (power) is on the riseOrganised food retail is on the rise at Worldwide, the sale of food through organised retail outlets has been on the rise the expense of independent grocers in recent years.The advent of modern technology has facilitated large-scale

retailing through the manageability of cold chain facilities and sophisticated

logistic systems, etc. Procurement synergies have allowed large retailers to offer

competitive prices and wide choices to customers.The share of retail in total food

sales, valued at USD 4,375 billion, amounted to about 72% in 2003.The capital

intensity of the business has led to the decline of independent grocers. In the

Netherlands, for example, the spending on food through supermarket chains rose

to 83% in 2003 as compared to 77% in 1995.

Figure 1.7 Top 10 food retailers by grocery sales

Retailer Country of origin Food sales

in USD billion, 2003

1 Wal-Mart US 112

2 Carrefour France 62

3 Ahold The Netherlands 53

4 Kroger US 38

5 Tesco United Kingdom 38

6 Aldi Germany 34

7 Rewe Germany 33

8 Metro Group Germany 31

9 ITM France 29

10 Schwarz Group (Lidl) Germany 28

Source: M+M Planet retail, 2003

Food retail is increasingly consolidating Figure 1.7 indicates the global top 10 food retailers, based on grocery sales. Most of

them originate from Western Europe, but US based Wal-mart is world’s largest.The

US retailers are active mostly in the North American region, with the exception of

Wal Mart, which also operates in Latin America, Asia and Europe. Carrefour has

managed to have a diversified portfolio. Metro is also present in many countries.

Tesco is increasingly expanding outside its home country. Food retail continues to

consolidate, especially in the developed food markets. For instance, in the

northern European countries sales through food retail are as much as 75% while

in developing economies such as India, sales are predominantly effected through



500,000 retail outlets spread throughout the country and organised retail

constitutes only 2% of food sales.The fastest growing areas in retail are Central

and Eastern Europe and parts of Asia.

Retailers have strong bargaining Growing consolidation has shifted power from food processors to retailers as they power in the food chain accumulate demand and acquire scale and financial power. Retailers are

attempting to streamline the chain to cut costs from the system and to fulfil

changing and relentless consumer demand for value and a wide choice of fresh

and convenient food solutions.

Foodservice forms 28% of Foodservice (restaurants, catering) constitutes the spending on food outside of total global food sales home and includes catering services, fast food outlets and restaurants.The

emergence of modern infrastructure facilities has helped foodservice players to

operate efficiently on a larger scale through setting up central commissaries and

logistics facilities which service standardised outlets. Demand is high with the

rising affluence and changing lifestyle of people, such as rising time pressure and

more women working out of home. Going forward, we expect eating out-of-

home trend to pick up for the organised sector in the developing regions, as large

companies have entered developing countries in search of growth. Companies

with high impact on the food service sector include McDonalds,Yum brands,

Compass and Sodexho.

1.6 Food consumption patterns show universal shiftsTechnology use has widened consumer At the end of the food value chain is the consumer, both the driving force behind

food choices and lowered food prices many developments in the value chain and the recipient of them. Agricultural

productivity growth and the application of science to food production has led to

the introduction of sophisticated food products and wide consumer choice.

Moreover, food has been available at fairly stable prices whereas the consumer

price index for household purchases has been increasing steadily (Figure 1.8).

Consequently, the consumer has profited substantially from the productivity and

efficiency gains within the food value chain.

Figure 1.8 Trend in food prices versus consumer prices

Source: IMF, 2004

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Food price Consumer price

Index (1990=100)

400

350

300

250

200

150

100

50



Global diet is shifting from Two fundamental shifts are perceptible in global food consumption.The first vegetable to animal products universal shift, taking place at low-income levels, is that towards more energy

intake.The additional calories come mainly from cheaper foodstuffs, mostly

vegetable products.The second shift, which is often country specific and

influenced by cultural and religious food traditions, is a shift from carbohydrate

staples (such as cereals, roots and tubers) to calories from animal sources,

vegetable oils and sugar.These two shifts mainly take place in developing

countries.

Figure 1.9 Evolution of food demand


Surviving

food perception

Mass-market ConvenienceFoodservice

SnackingInternational

QualityIndividualised

Health

High tech

food items income development

Diet food, functionalfood, organic food

Fresh & convenient,segmented meals

Prepared meals, snacks

Eggs, meat, dairy, sugar,processed mass-market

food, soft drinks

Carbohydrate staples(grains, roots, tubers)

China

North America

Africa(Sub-Saharan)

Japan

Eastern Europe

Latin America

India

Western Europe

Australia

Consumption of animal products Both the increase in energy intake and the shift to animal products intake are has been skyrocketing in Asia shown in FAO data on the global daily per capita supply of food. From 1990 to

2002, total energy supply increased by nearly 4%, to 2804 calories per person per

day.The calorie intake from vegetal products grew by 2% (to 2336), whereas the

calorie intake from animal products grew by 12% (to 466). In Africa, most people

are still making the shift to more vegetable calorie intake, as vegetal products

account for the total growth in energy intake: vegetal calorie intake grew from

2152 to 2250 cal whereas animal calorie intake declined from 180 to 175 per day.

Growth in the consumption of animal products was particularly pronounced in

Asia, where calorie intake from animal products has risen by 49% since 1990. It is

expected that Asian consumption of animal products will continue to grow, but at

a slower pace. In Latin America, the increase in meat and milk consumption is also

projected to continue.

Income growth and urbanisation There are several factors that have determined the transition to increasing energy have aided consumption intake, mainly from meat, dairy and processed foods: socio-economic variables

(income growth, more women with paid jobs, globalisation), falling food prices



through increased agricultural productivity, demographic variables (population

growth, age structure, and urbanisation), food industry and state intervention, and

cultural and religious variables.The increase in income has contributed

significantly to the change in food consumption habits. Urbanisation has been

the other critical factor in shaping eating habits.

Rising need for customised food In developed markets, food consumption patterns shifted beyond the two solutions, functional & organic food fundamental shifts taking place in developing countries. In the industrialised

countries, there are now several relatively cheap options for eating out of home,

where there is often a time constraint for preparing meals, for those whose

lifestyles have become hectic and where women work outside the home.

Consumers with lack of time, rising affordability and exposure to global media are

all creating global food market segments. Convenience, snacking and individual

portions are gaining consumers’ interest. Furthermore, there are niche segments

developing. For instance, demand for functional foods is on the rise in developed

markets with ageing populations and high incomes. Organic food containing

natural nutrients is increasingly being demanded by health-conscious consumers.

Obesity is a growing concern due to A cause of concern, however, with the rise in mass food processing and need for easy accessibility of cheap calories & competitively priced food products is that they are often low in nutrients and

sedentary lifestyleshigh in fat and sugar content. However the sedentary lifestyles of consumers do

not often sustain such high energy and low fibre intake and could lead to obesity

and related health risks.Today, more people are considered overweight than

undernourished. Roughly 300 million people are considered obese, and around

one billion people are rated as overweight.The problem of overweight is taking

epidemic proportions.This can have immense consequences for the food

industry.

…but the problem of Despite the rapid developments in food markets and dietary shifts, we must not undernourishment is still huge forget that food availability is distributed very unevenly throughout the world.

FAO estimates the number of undernourished people in the world at 842 million,

60% in Asia and 24% in sub-Saharan Africa. Over the past two decades, progress

has been made in reducing undernourishment in the developing countries. In

1980, about 28% of the global populations were undernourished, twenty years

later 17%. However, as a result of population growth, the decline in absolute

numbers has been slower.

1.7 Latin America, North America and Oceania profit from growingF&A trade

Agricultural trade is stagnant after Improved distribution, packing, storing, processing and payment facilities as well strong expansion in the early 1990’s as increasing internationalisation of economies have paved the way for a rise in

food and agri trade. Nevertheless, food and agri exports have been growing

slower than total merchandise trade and account for about 7% of total

merchandise exports now. Global food and agri exports increased from USD 326

billion in 1990 to USD 442 billion in 2002. After a relatively strong expansion in the

mid 1990s, global food and agri exports declined in value terms from 1997 to

2000.This was mainly due to strong price decreases for various agricultural

commodities. Since 2001, food and agri trade has been growing again.



Processed food products show The main items in food and agri trade are shown in figure 1.10. Grain has always highest growth in trade been a significant commodity traded, but now more grain is traded for feed and

less for food.The picture for fruit and vegetables is diverse. Some items are traded

substantially and globally (such as bananas, citrus fruit, onions), but many items

are traded mainly with neighbouring countries (lettuce, spinach, etc.). Driven by

higher incomes and changing lifestyles, processed food and agri products, such as

beverages, vegetable oils and chocolate products, have shown an increase in

trade above average. Declining demand and, partly as a result, prices are largely

responsible for a marked decrease in the trade value of cotton, beef and wool. In

contrast to beef, poultry and pig meat trade did register an increase.

Figure 1.10 Composition of food and agri export (showing the categories with highest share in trade)


USD billion

1990 2002

Bev

erag

es

Cer

eals

an

d

pre

par

atio

ns

Dai

ry a

nd

eg

gs

Fru

it &

veg

etab

les

Mea

t an

d

pre

par

atio

ns

Oil

seed

s

Sug

ar

Tob

acco

Pas

try

Ch

oco

late

pro

d.

Co

tto

n li

nt

Oil

of

Pal

m

Soy

bea

n c

ake

Oth

er

100

90

80

70

60

50

40

30

20

10

Latin America wins ground in Latin America has by far the largest agricultural trade surplus (export-import),food and agri trade... followed by Oceania. Brazil and Argentina contribute greatly to the Latin

American trade surplus. Owing to Japan, Asia has the largest trade deficit of all

regions.Western and Eastern Europe as well as Africa have trade deficits too. Brazil

is at top of the list of countries with the largest trade surplus, closely followed by

the Netherlands and Australia. In figure 1.10, the ten countries with the largest

trade surplus in global agricultural trade, as well as the countries with the largest

trade deficit, are ranked. In most of the countries shown in figure 1.11, both exports

and imports have been increasing since 1990. An exception is Russia, which

managed to diminish its dependence on imports after the economic and political

turmoil following the transition to a market economy. In the US, a striking increase

in exports as well as imports can be seen.This development is closely related to



income growth and increased openness of trade, within North America as well as

on a global scale.The agricultural trade of countries like Australia, New Zealand,

Mexico and Thailand has also been highly fuelled by open trade regimes.

Figure 1.11 Food and Agri trade from selected countries

Source: calculated from Food and Agriculture Organization of the

United Nations data, 2004

-50 -40 -30 -20 -10 0 10 20 30 40 50 60

USD billion

1. Brazil

2. Netherlands

3. Australia

4. US

5. Argentina

6. France

7. New Zealand

8. Thailand

9. Denmark

10. Canada

1. Japan

2. UK

3. Germany

4. Russia

5. Korea, Republic of

6. Italy

7. Saudi Arabia

8. Hong Kong

9. Mexico

10. Algeria

Top-10 countries with largest trade deficit

Top-10 countries with largest trade surplus

2002 import 1990 import 2002 export 1990 export

Import Export

...and there is a clear boost in At a rough estimate, about half of global trade flows are regionally contained,intra-regional trade partly as a result of regional agreements and partly as a result of the nature of

agricultural products (sometimes perishable).The global trading system has seen

a sharp increase in regional trade agreements (RTAs) over the past decade. A total

of 259 RTAs had been notified to the WTO by the end of 2002, although only

176 RTAs are currently in force. An additional 70 RTAs are estimated to be

operational but not yet notified by WTO and about 70 are under negotiation.

A well-known example of regional trade is formed by Western Europe (mainly the

EU), where three quarters of agricultural trade is within the region. Another

successful example of a regional trade agreement is NAFTA (North American Free

Trade Association), as the share of agricultural trade marketed within North



America increased from 22% in 1992 to 33% in 2002. In Asia, the share of regional

trade has been fairly stable at about 63%. In Africa and Latin America, relatively

few agricultural exports (roughly 15%) are directed to countries within the region.

Global food and agri trade is likely In addition to the various regional trade agreements, there are ongoing becoming more liberalised thanks to negotiations on global trade liberalisation taking place within the WTO,

new WTO agreement...which will continue to exert pressure to boost trade liberalisation. One important

development in the WTO discussions is the emergence of the group of G-20, a

grouping of developing countries led by Brazil, China, India and South Africa,

which have asked for greater policy reforms and market liberalisation on the part

of the developed world. At the Geneva meeting of the WTO, in the first weekend

of August 2004, a major breakthrough was achieved.The members agreed on a

further reduction of overall trade-distorting domestic support, the elimination of

all forms of export subsidies and a reduction of import tariffs using a tiered

formula to cut higher tariffs more than lower tariffs.The EU already anticipated this

by drastically reforming its Common Agricultural Policy (CAP). It includes

adjustments to the common market’s organisations for crops, beef and dairy as

well as the introduction of single farm payments, largely de-coupled from current

production decisions. It is not clear yet if these adjustments go far enough to be

in line with the new WTO agreements and whether more countries need to

adjust their agricultural policy.

...but still, exchange rates are not Besides agricultural policies, trade arrangements and consumption and a negligible factor in global production conditions, the macroeconomic environment also significantly

agricultural trade influences trade.Variables such as income growth and exchange rates particularly

affect world trade. Since 2001, partly as a result of the economic slowdown, world

trade has been stagnant compared to the growth in world trade during the first

half of the 1990s. Changes in currency rates also have their effect on trade as price

ratios between countries are changed directly. Research from the Economic

Research Service of the United States Department of Agriculture showed that

movements in exchange rates have accounted for approximately 40% of the

change in the real value of US agricultural exports.



In general, developments in the global animal protein market are closely related to changes in demand in each region,

fuelled principally by population growth, income changes and the process of urbanisation in developing countries. Industrial

societies consume by far the highest levels of animal protein, but have not been the most important in terms of growth.

Growth in production and consumption has been highest in developing countries like China and Brazil.These countries

remain the most promising territories and it is here that future production growth can be expected.While production chains

in Europe and North America have become highly efficient, their scope for further volume growth is limited. Instead the

knowledge accumulated here can now be used to create efficient chains in other developed regions. Meanwhile, trade

environments will continue to be influenced more powerfully by animal diseases in the coming years.

Figure 2.1 Major trade flows and production areas of animal protein, 2003

Source: USDA, Food and Agriculture Organization of the United Nations, Rabobank estimates, 2004

Beef Pork Poultry Seafood Production, % of world total (2001)

Total animal protein production: 367,000,000 tonnesTotal animal protein trade: 76,300,000 tonnes

Russian Federation

NorwayIceland

JapanKorea

Australia

Middle East

China32%

3%

16%

13%

6%2%

EU-25Europe

US

Canada

BrazilPeru

Thailand2%

India3%

3%

2%Mexico

2%Indonesia

1%

2%

2 Animal ProteinWho is your competitor in the animal protein industry?

Animal Protein


2.1 Controlled best farm practices: forced by consumers andprocessors

Income and population An increasing global market for animal protein products has forced farmers all control the industry over the world to optimise their farming methods. Population growth continues

to stimulate demand and in most parts of the world competition for land use is

another factor forcing farms to increase their output significantly. Furthermore,

growing trade volumes have increased the risk of animal disease, forcing farmers

to introduce best farm practices.

Major problem is “Fishing While aquaculture is an industry with a long track record, the rapid developments down the food chain” in the recent decades have prompted similar widespread upgrading of farm

practices in the industry.The industrialisation of aquaculture has resulted in an

increase in its share in total animal protein production from below 1% in 1980 to

9% today. Aquaculture has strengthened its position and is forecast to increase its

share of total animal protein production to almost 15% by 2015. Overfishing of

natural stocks is a major problem driving the production of seafood towards

aquaculture.The abundance of larger and more valuable species has declined,

and the catch is focusing increasingly on smaller fish, a phenomenon known as

´fishing down the food chain´.

Figure 2.2 Production of animal protein % of total production/year

Source: USDA, Food and Agriculture Organization of the United Nations, 2004

26%17%

37%

8%

30%

14%

7%

24%

28%27%

21%

7%

42%

4%

18%

11%

41%

25%

2%

18%

4%

44%

40%

1%

37%

14%19%

20%

12%

Africa(17,147,462 tonnes)

Europa(67,703,132 tonnes)

Asia(167,568,245 tonnes)

Oceania(6,456,739 tonnes)

North-America(56,125,084 tonnes)

South-America(42,026,238 tonnes)

Beef/veal Pork Poultry Mutton / goat Seafood

% of total production/year

Animal Protein


Backyard farming still dominant While farming in Europe, North America and Oceania has become highly

modernised and efficient, backyard farming still dominates primary production in

Asia as well as other parts of the developing world.This is worth noting because

Asia is by far the most important producer of animal proteins, both seafood and

meat.Today, the knowledge accumulated in Europe and North America is being

used in developing countries to construct a farming industry able to meet the

growing demand in these economically expanding countries.

Disruption by animal diseases In the last decade, several animal diseases have disrupted animal production all

over the world, more than normal due to a growing dependency on global trade

markets. At the beginning of this year, Avian Influenza had a severe impact on the

Asian poultry industry.The outbreaks of Foot and Mouth Disease in Europe in

2001 and white spot disease in the Ecuadorian shrimp industry are stunning

examples of how an infectious animal disease can disrupt the total animal protein

value chain in a particular country and region.While animal diseases cannot be

prevented, up-to-date and well-founded and implemented control systems are

essential to minimise the impact of an outbreak.Well-functioning control systems

can hasten a region’s recovery from the crisis.

Sustainability a global prerequisite Two key issues in the future of industrialised aquaculture and animal farming are

animal health and sustainability. Although the animal health and welfare debate

was a typically western affair, the global animal protein market has nevertheless

felt the impact and developing production areas have had to adapt their

practices to retain the right to supply western retailers. Although sustainability is

an important element in intensive animal farming methods, using natural fishing

stocks for seafood consumption and wild caught fish as fishmeal in the

manufacturing of animal feed have been surrounded by sustainability issues. In

addition, aquaculture in fragile coastline environments has often been the subject

of discussion due to its depletion of mangrove forests.

2.2 Processing – ongoing integration from farm to fork Because of the globalisation of the animal protein market, there are two trends

appearing in the industry.The first of these is the rise of poultry and aquaculture

production and the second is a growing focus at costs forcing processors to

source and or invest in low cost production regions, where cheap labour and land

and the availability of animal feed inputs are important factors.

Aquaculture the will fuel AP industry At the global level both meat and seafood production have grown much faster

than the world population, which has resulted in a 70% increase in animal protein

consumption per capita in the last 40 years. Aquaculture is already responsible for

33% of total seafood production and the current status of natural stocks will

increase this percentage. By 2015, aquaculture’s share of the total production of

fish products for human consumption will increase to 52%.

Animal Protein


Can poultry continue to grow? Poultry meat production has increased by 150% over the last two decades,

whereas the production of pork meat and seafood has increased by only 70% in

the same period. Beef production has suffered from unfavourable cost

competitiveness, seeing its 21% share of total animal protein production fall to its

current level of 15% in the same period. Poultry has been responsible for 43% of

the increase in total meat production in the last two decades and its growth has

largely been at the expense of beef. However, this impressive growth is not

expected to continue throughout the next ten years. Nonetheless, poultry will

stay the most important growth category in meat, with pig-meat its close

competitor.Today, pig-meat is still the main meat product, responsible for a

quarter of all annual animal protein production.

Land and animal feed inputs This second shift is the search for relatively new production areas. Brazil is a a competitive advantage perfect example of where both the meat and seafood industries benefit from

advanced production methods.The abundance of land and animal feed inputs

creates sufficient opportunities for Brazilian and foreign companies to use this

competitive advantage. In addition to these advantages, more important for the

seafood industry are the positive sanitary status and excellent climate conditions

that create an even more attractive investment climate. Another interesting

region is China, where the combination of economic development and a rapidly

growing population creates significant market opportunities. China’s dilemma is

how to supply this growing demand for grains; the industrialisation process of

both the aquaculture and meat industry has more opportunities than the

fragmented Chinese grain plantations and there is a lack of potential land.

Saturated markets; mechanisation The search for lower cost production areas has been particularly important for of production process companies in Western countries like those in North America and Europe where

growth potential is limited and where there is constant pressure to develop

highly efficient production chains. Labour is still an important cost factor and

differences in labour costs between regions will play an even more important role

than they have done so far. For example, a considerable percentage of fish that is

caught throughout the world is now shipped to China for further processing.

Then these consumer products are traded back to Japan, the United States and

Europe, where the input of these end products was caught. Mexico is another

example of using favourable cost levels to process raw materials. US based meat

companies make use of these low-cost levels by processing meat products in the

north western part of Mexico to transport these outputs directly back to

important consumer centres like Los Angeles and San Diego.

Position of processors is Meanwhile, animal diseases and several food safety scandals have forced the essential for safe food animal protein industry to secure safety by implementing tracking and tracing

systems throughout the total value chain; from the production of animal feed to

final consumer products. Meat and seafood processors play a key role in

coordination due to their chain position. Increasing global sourcing of animal

protein products will add extra elements to this information package.The

convenience trend is another development that will force processors to secure

their supply. Chain integration is essential; from farm to fork.

Animal Protein


2.3 Shifting demand differs per regionGrowth in volume and value; In addition to these big challenges at farming and processing level, there have

differs per region also been significant changes in consumption from the point of view of both

volume (more kilograms) and value (additional intrinsic elements). Regions like

Europe, the US and Canada, Oceania and Japan are having to deal with moderate

population and economic growth in combination with saturated consumption

volumes. Sales growth is therefore obtained by adding intrinsic values like health,

convenience and quality to the products. In lesser developed countries like China,

India, Mexico and Brazil consumption volumes are still being determined by

positive economic development and the improvement of logistics structures,

which is improving the availability of the products.

Ageing populations The growing demand for convenience and health has been met by poultry.The look for higher value industry has also been keen to use its low-cost image to differentiate itself,

especially in respect of beef.This competitive advantage was used to increase its

share of total protein consumption in just two decades from 11% to today’s 17%.

Poultry’s improving position will continue, although at a slower pace. Meanwhile,

salmon and shrimp have developed as the fastest growing seafood products on a

global scale, but new products like tilapia have also entered the market. Ageing

populations and fast-changing consumer groups – smaller households – are

forcing the industry to invest in product innovations to meet the growing

demand for convenience and health. Packaging, as well, will play a very important

role in this development.

Poultry the big winner, is seafood next? Although Europeans and Americans have consumed 23% and 17% more poultry

products respectively in the last ten years, this increase pales in comparison with

the developments in China, where poultry and pork consumption has increased

by 50%. Meat sector trends in the developing countries as a whole have been

decisively influenced not only by China's rapid growth in the last two decades,

but also by a similar performance in Brazil (per capita meat consumption from

Developing countries push 32 kg in the mid 1970s to 71 kg at present). Collapsing consumption volumes in consumption forward thet ransitional countries and the rapid decline in European beef consumption

would have been enough to sweep away the global surge in poultry

consumption.Within the European region, animal protein consumption is

expected to grow in the EU’s new member states, where economic development

is responsible for this push forward. In this region pork consumption in particular

is expected to rise by approximately 15% to 54 kg in 2011.

Food safety and health Human health issues will dominate the future consumption trends of animal

products. Firstly, health issues related to animal diseases have a huge impact on

consumption levels.The most obvious example is the decline in Japanese and

European beef consumption after the first BSE incident; several years were

necessary to get back to pre-BSE levels. Other crises like the Avian Influenza

outbreak had a significant temporary impact on consumption levels and the

effect is also being felt in other non-affected countries. Closely related to these

Reassure consumers scientific based health issues is the need to set consumers’ minds at rest again

Animal Protein


and retrieve the damaged confidence. Excessive testing could be one action to

regain control over the market; an act the European Commission instituted after

the BSE crisis by testing every head of cattle older than 30 months, a measure

which resulted in a recovery of beef consumption. Another important element in

the production of animal protein is the use of inputs (feed, medicine) in the

production process. End products may not contain residues of antibiotics or be

produced with animal feed that is not approved. Another major trend in the food

industry is the growing importance of the obesity issue.The nutritional aspects of

Communication of nutritional elements food will play a key role in consumer preferences for particular products, as will

communication specifically about these intrinsic elements. Obesity, for instance, is

not only a problem for the cultures associated with plenty; similar problems are

starting to occur in developing countries. It is a global concern and the

communication of nutritional values will be the key theme in the coming years.

2.4 Trade positions continuously under attackUsing cost competitiveness The optimum use of cost competitiveness, the inability of important consumption

areas to meet their domestic demand and a changed trading environment has

resulted in a rapid expansion of the global animal protein trade in the last decade.

Furthermore, growing competition in saturated markets like the US and Europe

has forced industrial players to optimise the output of their process. One result is

the selling of animal parts that are not consumed in the production area.These

are traded to other regions where these special products have a market. A perfect

example is the large trade volumes of poultry meat from the US to China; they

include heads and feet.These parts are treated as by-products in the US and are

sold in China as consumer products.

Big differences between volume and value All trade flows (meat and seafood) have increased significantly in the last decade,

but it is important to bear in mind that trade flows differ in volume and in value.

Japanese import flows clearly involve high-value products and the volumes will

only increase because, in general, the Japanese food and agribusiness is shrinking.

Russia and China are predominantly importing low-value products, especially

frozen poultry and pork products.

Brazil the emerging trader Brazil is a perfect example of a country that has used its competitive cost

advantage well. In just ten years Brazil has become the second largest poultry and

beef exporter and the fourth largest exporter of pork by using its abundant

availability of cheap land and animal feed inputs. Another example is Australia, the

world’s largest beef exporter with Brazil (2nd) and the US (3rd) as their main

competitors in this global market. Australia has used its competitive advantages

Japan most important importer to become an important exporter to Japan, an essential position given that Japan

is by far the most important value import market for animal protein products.The

US was, in 2003, not merely the main meat supplier to Japan but also responsible

for a quarter of the total global meat trade. But an increasing dependency on

trade also carries some significant risks. Infectious animal disease to name but

one;Taiwan (pork) and Thailand (poultry) have both been victims of this.

Animal disease status is vital Although the global meat market is still dominated by several trade support and

Animal Protein


import barriers, it is expected that the WTO negotiations will result in fewer

restrictions and less domestic support. However, this reform process will continue

to be excruciatingly slow. One important trade restriction that will stay in place,

however, is a country’s animal disease status.This status is often debated in the

political arena; decisions are sometimes driven by political relationships rather

than science.Yet all decisions have a huge impact on the industry’s future

development, especially now non-tariff and technical barriers have proliferated

even more, which will have some major consequences for cross-border

investments.This political environment will most significantly impact the group of

exporting countries. Another important development that has arisen as a

Growing anti-dumping concern consequence of these increasing trade relationships is the anti-dumping

procedures.Within the seafood industry in particular, several cases like those

involving salmon in Europe and shrimp in the US have impacted or will impact

industries as a result of anti-dumping regulations.The WTO will have to deal with

more cases involving these highly integrated animal protein value chains.

Animal Protein


Cocoa production is just above three million tonnes. It is grown on seven million hectares in a 10° zone either side of the

equator.Whilst the long-term outlook for cocoa prices is positive, it remains a highly volatile market attracting large amounts

of speculative money on the New York and London futures markets. Production in general is highly unpredictable due to

climatic uncertainties, changing input patterns and high husbandry requirements. In addition, the concentration of

cultivation into narrow geographical regions creates susceptibility to pests and diseases.The chocolate confectionery

market, on the other hand, is growing at a steady pace and is concentrated in stable and mature consuming markets.

Gradually new consuming areas have emerged in South America and lately, Asia.

Figure 3.1 Major trade flows and production of cocoa, 2003

Source: ICCO, Rabobank estimates, 2004

Cocoa beans Cocoa liquor Cocoa butter Cocoa solids

Total cocoa production: 3,300,000 tonnes Total cocoa trade: 3,000,000 tonnes

Production cocoa beans, % of world total

5%Brazil

Equador

Peru

Uruguay

Argentina

2%

1%Dominican Republic

US

Côte d’Ivoire

GhanaNigeria

Cameroon

45%

5%8%

5%

1%2%

12%Indonesia

Philippines

MalaysiaPapua New Guinea

EU-25

The Netherlands

GermanyUK

3 Cocoa Prices on an upward trend but still highly volatile

Cocoa


3.1 Cocoa production increasingly dependent on West AfricaShift of production to West Africa Production of cocoa is traditionally concentrated in a small number of countries

given the narrow climatic range 10° either side of the equator. Côte d’Ivoire

dominates, with over 45% of global production, while the ten leading producers

account for over 95% of global production.The growing of cocoa beans has

gradually become concentrated in West-Africa as Asia switched to more attractive

crops (oil palm) whilst South America has been affected by disease (witches

broom) and relatively high production costs.

Cocoa preferable to other crops The cocoa lands are mainly located in tropical areas and although expansion of

the crop has at times occurred at the expense of tropical forests, its cultivation in

general is environmentally preferable to many other forms of agriculture, like

annual crops and cattle pasture.This is because the cocoa tree traditionally is

cultivated under the shade of native trees within the agro forestry that maintains

to some extent the original forest cover.

Cocoa key to Côte d’Ivoire and Ghana Cocoa is very important to the agricultural sectors of a number of producer

countries like Côte d’Ivoire and Ghana whilst in others, including some newly

industrialised countries in Latin America and South East Asia, cocoa has more of a

regional role, providing a major source of employment in certain areas only.

Cocoa is a labour intensive crop Cocoa is a labour-intensive, smallholder crop with production spread among a

large number of farmers. After the planting of the trees, regular maintenance is

required to achieve optimal growth. Both the cocoa trees and the required shade

trees must be pruned to achieve adequate light penetration and reduce damage

from pests and diseases.Weeding must be carried out frequently and the

harvesting, fermenting and drying of the cocoa beans are also manual tasks.

Recent allegations of child and forced labour have led to a number of initiatives to

eliminate abusive labour practices in cocoa cultivation and handling.

3.2 The cocoa industry develops fast and partly shifted tocountries of origin

The cocoa processing industry The cocoa industry - traditionally located in or near the main cocoa bean has become well established importing ports - is active in the transformation of cocoa beans into industrial

products.The grinding of cocoa beans yields liquor (also known as cocoa mass).

Cocoa liquor is an intermediate product which can be used directly in the making

of chocolate; it can also be further processed, yielding two other semi-finished

products, cocoa butter and cocoa solids (cocoa cake or powder). Cocoa liquor and

butter are mainly sold to the chocolate confectioners whilst cocoa solids are an

important food ingredient for the bakery and dairy industry. A small portion of

cocoa products goes into cosmetics and pharmaceutical applications.

The chocolate industry relies Recently the chocolate confectionery industry has increasingly relied upon the on outsourcing cocoa industry to supply it with industrial cocoa products, including liquid

chocolate.This trend started a decade ago when non-chocolate industries

became involved in the cocoa value chain in a response to the outsourcing

strategy of the food industry which concentrated on branding.

Cocoa


Origin grinding developing too The trend of outsourcing by the chocolate confectioners opened up

opportunities for origin countries, in search of more value addition, to produce

and export industrial cocoa products too. Many governments provided attractive

investment schemes for cocoa processors to invest in building processing

capacity in or near export ports. As a result, the grinding of cocoa beans party

shifted from importing to origin countries and has further propelled the market

for tailor-made industrial cocoa products. It remains to be seen whether this will

be a trend or a one time effect.

Impact of CBEs on demand for Since 1973, there has been a heated international debate on the use of cocoa cocoa difficult to measure butter equivalents (CBEs). In August 2003 an EU Directive came into force,

authorizing up to 5% of repetable fats other than cocoa butter. It has been

difficult so far to measure exactly the overall effects of this regulation, particularly

in terms of potential loss in demand for cocoabeans.

The cocoa industry faces many smallholders In view of the high level of consolidation within the cocoa industry relative to the

many operators active in the production of cocoa, there have been initiatives

launched by the industry to increase the quality and production efficiency at farm

gate level, not least in the form of co-operative structures.These initiatives so far

have only yielded mixed results in view of political sensitivity and unrest

prevailing in origin countries.

3.3 Increasing demand for chocolate confectionery Indulgence influences impulse buying The confectionery market can be divided into two main segments: chocolate and

sugar confectionery.The main confectionery ingredients required for chocolate

production are cocoa, sugar and milk. Confectionery is primarily regarded as an

indulgence product. Hence, impulse purchases are an important characteristic.

Children important consumers Confectionery has a wide appeal across all of the age ranges, although children

and younger consumers form an important part of the target market.The next

biggest sector is that of adult purchases for family consumption at home.The

likelihood of buying confectionery increases if children are present in the

household.

Chocolate sales tend to be seasonal Sales of confectionery tend to be seasonal with consumption normally peaking in

winter and declining in summer. Hot weather usually has an unfavourable impact

on sales. Seasonal products such as Easter eggs and Christmas gift boxes tend to

boost sales during the first and last quarter of the year.

Chocolate confectionery a global industry The confectionery industry has become increasingly global as the world's leading

confectionery businesses, faced with growing maturity in their home markets,

look for future growth in emerging markets. In the mature markets, slow growth,

increasing market concentration and hefty retail power are hitting prices and

margins hard.

Cocoa


Exploiting brands is gaining importance Global brands are the answer to mature markets in the confectionery industry

and are exploited in innovative ways.The familiarity of the brand is being

exploited through extending the brand from confectionery into other sectors

(brand stretching), increasing emphasis on seasonal promotions and special

flavours such as mint or orange flavoured chocolate.

Premium chocolates on the increase An important trend in chocolate confectionery is the move to premium chocolate

products.These are luxury items, which include filled tablets, boxed chocolates

and pralines. Chocolates with liquor are also generating interest. Popular flavours

include caramel and anything with peanuts such as peanut butter/chocolate

combinations as well as toffees, brittles and crunches. Premium chocolates allow

consumers to express individuality as well as lifestyle.

Emerging markets rapidly growing Confectionery demand in emerging countries like Brazil, the CIS and certain parts

of Asia is developing fast thanks to global brands entering into their market.

However, local companies continue to play an important role too, as they are

attuned to local tastes and have learnt from the successes of multinational players

in terms of marketing strategy and high product quality.

3.4 International cocoa trade switching from beans to productsAfrica main exporter of cocoa The bulk of the cocoa beans are transformed in the traditional consumer markets

situated in Europe and the US with Africa the main supplier in terms of exportable

surplus.The growing demand for chocolate confectionery in South America and

Asia has a direct impact on the exportable surplus of cocoa with some producing

countries even becoming a net importer.

Processors focus on sourcing and logistics In recent years, the origination of cocoa has been affected by trade liberalisation

leading to a glut of cocoa coming on the market at once during the peak of

harvesting due to the seasonality of production. As a result the availability of good

quality cocoa beans in the right quantity has become a major concern of the

cocoa industry and, as a consequence, the collection and logistics of cocoa beans

in origin countries an important driver of the industry’s overall procurement

strategy.

Bulk shipments entered the stage As a result of the involvement of the cocoa industry in the logistics process a

significant change occurred in the physical process of transporting cocoa beans

as gradually more beans are shipped in bulk rather than in bags.This first took

place through the successful introduction of bulk containers containing 20

tonnes and lately break-bulk vessels carrying quantities ranging from 3,000 to

10,000 tonnes of cocoa.The cost savings from bulk transport are considerable.

Shift from trade in cocoa beans Another development that may affect cocoa trade in the future is the shift in to cocoa products trade volumes from beans to products.This will depend to what extent origin

processing develops further.The current political climate in West Africa is not

conducive for new investments in processing plants. Should additional processing

capacity be built in origin countries than the relative amounts of cocoa bean

Cocoa


trade would diminish to the advantage of industrial cocoa products. In fact, trade

volumes of cocoa beans have remained stable over the past decade as a result of

capacity expansion in origin countries with higher volumes of cocoa products

being traded as a result.

Falling stocks-to-use ratios The stocks-to-usage ratio of cocoa is traditionally high (40-50%) compared to

other commodities like grain or oilseeds because of the seasonality of both

production and consumption as well as the long distance to market. However,

with the chocolate industry to a large extent outsourcing its cocoa requirements,

the continuous availability of good quality cocoa beans has now become the

major concern for the cocoa industry.

Cocoa


The coffee market is struggling to rebalance itself following deregulation and a period of substantial oversupply.

Concentration of production in countries with inherent cost advantages has sustained the oversupply situation with coun-

tries like Brazil and Vietnam still able to expand production despite record low prices.Technology improvements in the

roasting and manufacturing activities have also allowed for a higher proportion of lower grade coffee to be accepted by the

international trade. Consumption remains flat in the large and mature markets, including the US and Western Europe. Room

for substantial consumption growth exists in non-traditional markets, yet there are both cultural and demographic issues

that will have to be overcome in order for this growth to eventuate.

Figure 4.1 Major trade flows and production areas of coffee, 2003

Source: International Coffee Organisation (ICO), 2004

Total coffee production: 101,324,000 (60 kg bags) Total coffee trade (from member countries): 84,980,853 (60 kg bags)

Production coffee, % of world totalArabica Robusta

28%

3%

EU-25

Poland

Brazil

Uganda12%Colombia

4%Mexico

US

3%Honduras3%

GuatamalaIndia Vietnam

Indonesia

4%

6%

11%

4%Ethiopia

4 CoffeeNot yet out of the crisis

Coffee


4.1 Brazil, Vietnam and Colombia will continue to be dominant incoffee production

World production has doubled in 40 years World production of coffee has doubled since the 1960s, peaking in 2002/03 at

127 million bags (1 bag = 60kg). Since then production has continued to exceed

100 million bags, with 2004/05 production expected between 110 -115 million

bags.This is despite rising price volatility and depression which has been a

characteristic of the coffee market for the past four years but first became

phenomenon following marketing deregulation in 1989. It is generally accepted

that there is room to expand coffee production further, yet any such expansion

will only take place in those countries with the ability to further exploit any

inherent cost advantages in production.

There are two main types of coffee; arabica There are significant variations in annual production due to crop cycles and and robusta with Brazil and Vietnam climatic instability. Broadly speaking, there are two main types of coffee; arabica

respectively key producers and robusta. Arabica is produced at higher altitudes and is generally considered

to be better quality than robusta. Arabica production is dominated by Brazil with

Vietnam the key player in the supply of robusta.While arabicas are of naturally

higher quality, production practices, roasting techniques and manufacturing

technologies are bridging the quality gap. Colombia also holds a strong position

in the market for premium-grade arabica coffee types. Arabica coffees trade at a

premium relative to robusta types, but there is evidence that this premium is

narrowing.

Coffee industry in the midst Coffee production has undergone profound change with the winding down of of a profound crisis… market intervention and the rapid expansion of production, especially in robusta

types.With more coffee supplied to the market, prices have fallen sharply, overall

quality has fallen and returns for farmers have suffered immensely. Production is

… mainly driven by an ongoing estimated to have exceeded consumption by an average of 10% per annum supply-demand imbalance during the late 1990s.

Need for a long term sustainability plan The ‘coffee-crisis’, the direct result of an ongoing supply imbalance, is the single – that will work for all biggest issue dominating the industry. Solutions offered range from the

development of specialty coffee supply chains to certification schemes such as

Fair Trade. Enmeshed in this is another issue - the development of a long-term

sustainability plan for impoverished farmers that covers environmental, social and

biodiversity aspects.

4.2 Global concentration in trading and roastingMarket deregulation has lead Following deregulation, the coffee industry continues to experience further to commercial consolidation consolidation in trading and roasting activities.The four biggest trading houses

account for an estimated 45% of trade flows as parastatal organisations have been

unravelled and the government’s role in agri-industry has contracted. In a similar

situation the five biggest roasting companies now account for close to 50% of the

annual roasting activity. Roasting is concentrated in the country of destination

(final consumption), with over 90% of coffee exported in a green bean state.

Europe and the US are implicitly important roasting locations.

Coffee


Economies of scale and competitive Trading coffee is increasingly dependent on bulk shipments as the relative costs strength are critical in international trade for international shipping have fallen over the past decade, albeit freight rates

during 2003. Internal costs of road or rail transport have fallen in selected

countries yet differences in economic developments have limited this in other

countries. Economies of scale have enhanced the competitive position of the

larger trading organisations, yet the consolidation seen in coffee trading

operations is likely to have peaked.

Changes in location of production The emergence of Asia as a coffee producer has also influenced coffee trade flows have influenced import relationships given the regional proximity to major shipping routes.The traditional import

relationships are no longer applicable as commercial interests in the coffee sector

have risen.The volume of trade from Brazil has increased steadily in line with

production and Brazil remains the price-marker for coffee. In addition, it has been

estimated that over 90% of coffee beans are exported in a green bean state,

limiting the potential add value at origin.

Technology has allowed more low As noted, the production balance has shifted in greater favour of robusta types. At quality coffee to make market grade the same time low global prices have reduced the incentive for ongoing

investment into arabica production, lowering the overall quality of coffee in

general.Technology in processing and product manufacturing has evolved to a

level where quality for standard coffee is not as important as it once was, with the

exception being in developments relating to specialty coffees or gourmet sales.

Margin pressure is an issue While the consolidation in both trading and roasting appears to have reached a

plateau, margins in both activities are expected to come under pressure from the

consumer market as has been evidenced in other commodity transformation

businesses.

4.3 Coffee consumption remains flat, growth opportunities arelimited

Largest consumption markets It is estimated that over 75% of consumption is reliant upon importing markets.are also very mature markets Key regions include North America and Western Europe. According to data from

the International Coffee Organisation, the US, Germany, France and Japan

consume more than 50% of the world’s coffee exports. Brazilian consumption has

recovered some lost ground after dropping from the 1970s through to the late

1980s. Similar consumption growth is unlikely to be matched by other producing

countries.

A shift away from coffee as Consumption of coffee in traditionally large markets has flattened, exacerbating an everyday drink the oversupply impact on prices. Lagging demand also reflects a demographic

movement in which of young consumers are turning away from coffee towards

alternative drinks.This will continue to limit growth opportunities for future coffee

consumption.

Coffee


Emerging markets face both Central and Eastern Europe, China and India have all been highlighted as potential cultural and income hurdles sources of consumption growth.While inroads have been made, significant

cultural and income hurdles have to be overcome in order encourage widespread

demand for coffee. An ongoing westernisation of eating and drinking habits in

China could stand to have a significant impact on world coffee balances.

Consumption growth limited but there Stimulating consumption faces many challenges from health, convenience and are niche opportunities lifestyle factors. Alternative drinks, particularly flavoured tea have managed to

attract traditional coffee drinkers. Smaller segments within coffee, such as de-

caffeinated, gourmet or three-in-one preparations can claim success in

consumption but on a relatively small scale to the entire industry. Research into

finding healthy attributes, benefits of drinking coffee and developing alternative

food uses for coffee in mature markets will be critical in not only sustaining

consumption but for setting a future platform for growth.

Coffee


Even as a mature commodity market the cotton industry continues to evolve. Production remains concentrated in the

northern hemisphere but an increasing supply of exports are sourced from southern hemisphere countries. Cotton faces a

number of environmental stewardship issues and must retain its focus on supplying a quality product to market.The share of

cotton in end-use textiles has fallen due to an oversupply of man-made fibres, and this has seen prices fall to record low

levels, challenging producer margins. Emerging markets for cotton include regenerating interest in Central and Eastern

Europe as well as supporting incremental growth in mature markets such as the US and Western Europe.Trade flows in

cotton are expected to increase as demand from large consuming nations such as China rises.

Figure 5.1 Major trade flows and production areas of cotton, 2003

Source: International Cotton Advisory Counsil (ICAC), 2004

Total cotton production: 20,430,000,000 tonnes Total cotton trade: 7,129,000,000 tonnes

Production, % of world totalAll cotton

JapanKorea

Malaysia

Indonesia

Australia

China26%20%

4%

4%

EU-25

US

Brazil

West AfricaIndia12%

Pakistan9%

Uzbekistan5%

Turkey5%

Greece2%

2%

5 CottonStaying competitive across the value chain

Cotton


5.1 Room to improve current practices, limited room to expandproduction

The top five producing countries Cotton production remains concentrated in countries of the northern account for 70% of annual supply hemisphere, with China, the US, India, Pakistan, Uzbekistan and Turkey significant

producers.The top five producing nations account for an estimated 70% of

production. In the southern hemisphere, which only accounts for an estimated

10-15% of production, Australia and Brazil are the major players. Cotton

production has expanded over the past ten years, a trend that looks to set to

continue albeit at a marginally slower rate.

The split between irrigated and Approximately 2.5% of the total arable land use is dedicated to cotton production non-irrigated production has stabilised and there are distinct differences in production methods depending upon

geographic location and whether the system is irrigation based or based on

seasonal rainfall only.The shift towards irrigated production systems over rain-

based acreage appears to have halted with approximately 45% of the total cotton

acreage dependent upon irrigation for success.

There is a strong correlation between There is only limited room to expand the arable area dedicated to the production irrigation and quality of cotton and it is widely accepted that in the future gains will be concentrated in

yield improvement over gains in dedicated cotton acreage. High yielding

countries including Australia, Israel, Syria and Turkey are all wholly dependent

upon irrigation. In addition, there has traditionally been a very strong link between

quality and irrigation, with the aforementioned countries key suppliers of high

quality cotton. Brazil for example has enormous unfulfilled potential within the

cotton industry, yet quality issues some of which are derivatives of rain-

dependency (i.e. lint discolouration) have restricted growth opportunities in the

past.

Water use for cotton production From an environmental perspective cotton has a poor public image as a large is improving consumer of water.This is somewhat misguided since significant improvements

in water use technology have lowered (in many cases) the total water

requirement for cotton production. Chemical use (insecticides and herbicides) is

another inherent issue for cotton with an estimated one pound of chemical use

Cotton is a chemical heavy crop required for every three pounds of cotton lint produced.The intensity of chemical

use in cotton has in some regions been overcome by the introduction of

genetically modified (GM) varieties into the system. In addition, widespread

adoption of Best Management Practice (BMP) or Integrated Pest Management

(IPM) systems has reduced the need for chemicals in some countries including

Australia,Turkey and the US.

Access to water is a critical issue... Water availability will continue to be a critical issue for cotton; further gains in

efficiency will be paramount as will incorporating greater environmental

stewardship relating to water resources. GM varieties have been introduced

successfully into the cotton complex, with an expectation that new varietal

innovations will be introduced and that GM varieties will be approved in a wider

Cotton


number of countries in the coming years. Finally, to maintain market share in an

... as is the ability to compete age of technologically superior man-made fibres, lifting the overall quality with man-made fibres performance of the cotton lint is a critically important issue for the industry.

5.2 Ongoing optimisation of existing practicesGinning methods vary with the Ginning, the process of separating the cotton lint from the seed can significantly

type of cotton produced affect the lint’s fibre length, uniformity, short fibres, neps and trash content.The

two ginning practices that typically have the greatest effect on fibre quality are

the regulation of moisture throughout ginning and the rate of cleaning used on

the cotton lint. Ultimately striking a balance between the producers’ need to

maximise income and the spinners’ need for a consistent, clean, quality fibre is a

difficult practice, and ginning has been the source of antagonism for many in the

industry.There are two main methods of ginning; saw ginning for mainstream

upland cotton grades and roller ginning, which is used for extra-long staple (or

PIMA) cottons.

Cottonseed oil has many industrial Lint, the major product of ginning is distributed into the textile system and and food applications processed further into a wide array of apparel and non-apparel goods.

Cottonseed, the other product will be used in both animal feed or processed

further for oil. Cottonseed oil is used in a diverse range of consumer products

including, cooking oil, soap additives, paint-base formulations and cosmetic

products.

For consistency there is a push to Cotton is usually ginned at origination, in conformity with international trade universalise testing and grading of cotton demands. During the processing stage, cotton is assigned a grade.There has been

a global push for the introduction of universal standards, so as to make

comparisons between regions more transparent.The main standard for

classification of cotton is the HVI (high volume instrument) system and the

implementation of this is seen as key in ensuring consistency across borders for

trade.

Ginning can enhance returns when Spinning cotton for yarn depends upon consistency across a number of optimised but cannot improve categories including, length, strength, colour, trash content, seed-coat fragments,

inherent quality neps, stickiness, uniformity and micronaire. In separating the role of ginning from

quality control, it is critical that the industry appreciate that while ginning can

only preserve pre-existing fibre quality, mechanical optimisation can greater

enhance the fibre value to the textile chain.

Ginning has become a foal point Finally, as the cotton sector has mechanised in large producing markets so the of the cotton value chain performance of gins has come under greater scrutiny.This is because with

mechanical harvesting, more trash is picked up which consequently increases the

cleaning demands on cotton as it passes through the gin. Optimising the

harvesting technologies with gin performance will remain an issue for the cotton

sector in the future. As with all processing industries, emission control, waste

management control and fuel efficiency will be important issues to address in line

with global environmental standards.

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5.3 Rising competition from man-made fibresConsumption has expanded, even Cotton consumption is a derivative of textile consumption, which in turn is

though price competitiveness has fallen influenced by the level of disposable income and economic growth (GDP). Global

growth during the 1980s and 1990s, particularly in the US, supported an

expansion of cotton consumption even as cotton’s price competitiveness

compared to man-made fibres was falling at the same time. Cotton consumption

is expected to grow, albeit at a slower pace to man-made fibres.The direct impact

of this will be that cotton’s market share will decline in the coming decade.

Large producers have also Traditionally the largest producing countries have also been the major consuming been large consumers markets for cotton. India, Pakistan,Turkey and Brazil have huge local demand

given climatic factors and population growth. However, China has now emerged

as an importer of significance, to service both domestic demand and export

markets. Demand from China is expected to rise over the long term as their textile

industry expands.

Cotton's market share has fallen It has become clear that end-use cotton consumption is heavily dependent on

mature markets, such as the US and Western Europe for growth.The fall in market

share for cotton end-use consumption has been greatest in developing countries

that at the same time have experienced rapid expansions in man-made fibre

capacity and product availability. Promoting cotton consumption in Central

Europe, Eastern Europe, Russia and South America is seen as the next step in

ensuring cotton’s longevity in the textile system. In these markets, where price

discretion is greatest, cotton apparel goods have had less success in competing

with locally produced man-made apparel products.

Competition from man-made fibres Competition from man-made fibres, particularly polyester will increase over the will increase over time coming decade. Cotton prices have reached historical lows in recent years, yet this

has not been enough to stop spinners and manufacturers choosing

technologically superior fibres for their product mix.The end-user is increasingly

demanding fibre performance and one approach for keeping a preference

amongst spinners for cotton is to promote the use of cotton blended products,

which contain the natural properties of cotton yet benefit from the advances in

man-made fibres. Competitive pressure for consumer market share will influence

the entire cotton complex, particularly if it translates into a direct fall in farm-gate

prices.

5.4 Cotton trade flowsThe relative volume of cotton traded With an estimated 35% of annual production, the relative volume of cotton traded

exceeds that of many other commodities internationally supersedes many grains and oilseed products. Its is common for

cotton to shift between three or four countries as it moves through the value

chain from raw material to finished product, which is influenced in turn by

regional tariffs and quota access for consuming markets.

The US is the biggest exporter The volume of trade has increased over the past decade with the role of the US

changing from being a key processor of cotton to now being the major exporting

nation, capturing nearly 40% market share of global exports. China, which once

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used to swing between importer and exporter, has now become established as

an importer in the light of the unsurpassed growth experienced by the local

textile industry. Uzbekistani exports have fallen on the back of lower production

and higher local demand for further processing. Australia is expected to remain a

key export player despite exports having suffered recent years due to serious

Australian exports set to rebound shortages in water supplies.

China and India are the main South East Asia was a key region for cotton imports during the 1990s yet textile economies economic instability and less cost efficiencies marginalised their role in the

system. Demand from this region is expected to remain steady in the coming

decade. As the textile industry faces the last round of deregulation in accordance

with the Agreement on Textiles and Clothing (ATC) it has become apparent that

China and India will be the key in future price determination. Demand from

countries including the former Soviet Union states will be strong but focused on

servicing regionalised demand over global market penetration.

Traditional exporters such as Australia,West Africa and the US can expect rising

competition from Brazil, where both area and yield have unfulfilled potential.

Trade policy is in the spotlight with Trade policy in cotton remains in the spotlight as Brazil has won an the US appealing the WTO decision unprecedented case against the US in regard to domestic farm policies.While

in favour of Brazilthere is still an appeal pending from the US, it represents a significant departure

for the WTO as it has focused on the impact of specifically domestic programmes

on global prices.

Coffee


The world’s main dairy markets in value terms are still the EU and the US. However, in terms of growth, the markets of Asia,

Latin America and the Middle East are expected to grow more quickly. Milk production in these regions is growing faster

than the global average, but supply is still outpaced by the growth of local demand.The resulting import requirements are, to

a large extent, satisfied by the three main oversupply regions of Australia, New Zealand and the EU.The EU’s role in global

dairy trade will further diminish, providing opportunities for other potential dairy exporters like Argentina, Uruguay and the

Ukraine. Dairy companies looking for growth have one of two options.They can distinguish themselves in the competitive

markets of the EU, the US and Japan through innovative products targeting health, convenience and taste or they can take

part in the growth markets of Asia, the Middle East and Latin America through direct investments and joint ventures with

local partners.

Figure 6.1 Major dairy trade flows and production areas, year 2002

Source: Dutch Dairy Board, 2003, IDF, 2004

Dairy trade flows (>500,000 tonnes milk equivalent) Milk production, % of world total

Total trade: 37,000,000 tonnesTotal milk production: 508,000,000 tonnes

Russian Federation

JapanChina3%

28%

15%

5%

US

Brazil

7%

Argentina

Mexico

India

Algeria SaudiArabia

Turkey

Ukraine

17%

3%

2%

EU-25

2%

Indonesia

Australia

Philippines

New Zealand

3%

Malaysia

6 DairyNon-traditional dairy regions drive growth

Dairy


6.1 Milk production is growing strongly in non-traditionalproduction areas

Asia is driving growth of global In the last decade global milk production has risen from 450 million tonnes to 508 milk production million tonnes, which means an average growth of just above 1% year on year.

This growth is not so much driven by the traditional dairy regions in the Western

world but by Asia, with India and China as the two key contributors.

Milk production growth in the Asia Pacific region was seriously hampered by the

recent drought in Australia. Milk production growth in North America is below the

world average and Europe’s proportion of global milk production is steadily

decreasing. In Western Europe milk production has remained more or less flat for

20 years due to the quota regime and in Central and Eastern Europe milk

production even decreased after the collapse of the traditional structures at the

beginning of the nineties.

Quality of milk has different dimensions The quality of raw milk remains an important issue worldwide. However, the

dimensions of the ‘quality’ concept differ around the world. For instance, in most

nations in Asia, the Middle East and North Africa, quality is still mainly about

getting the milk from the farm to the factory with the least possible quality loss.

Technology enables processors to recombine many dairy products from

imported milk powders with a consistent quality and so this represents a

competitive threat to the local dairy farmers. It is very important for local dairy

farmers, therefore, to boost the competitiveness of their local milk by improving

quality. In the Western world the quality concept has moved beyond the intrinsic

quality of the milk. In the EU, for instance, issues like sustainability of production,

animal wellbeing, and tracking and tracing are becoming increasing central to the

overall quality concept and are thus a significant factor in the overall image of the

dairy chain.

Different farming systems around the world Environmental conditions such as climate, the availability of feed grains and cost

of labour tend to determine the type of farming systems found across the globe.

Extensive pasture-based dairy farming systems are mainly found in New Zealand,

Uruguay and Argentina. Owing to the extensiveness of these systems, yields per

cow are relatively low and the impact of seasonality is often quite strong, but still

this type of farming is considered the global benchmark in terms of cost

efficiency. In Australia and Europe, dairy farming is still mainly pasture-based but

cows also get supplementary concentrate feed. Although the need for cost

reduction will push a significant number of farmers towards the ‘corporate farm’

with hundreds of cows and hired labour, the traditional family farm currently

remains the dominant farm type. In the US the ‘corporate farm’ is also gaining

popularity, especially amongst farmers who have left the Mid-West area, which is

dominated by traditional family farms, to start up new farms in California or more

recently in regions like north-west Texas, New Mexico and Idaho. In the rest of the

world dairy farming is mainly dominated by either ‘self-sufficient’ farmers or family

farms that have grown beyond the level of self-sufficiency to specialising in

earning a living from milk. However, more and more countries around the world

are also becoming familiar with large-scale operations.

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6.2 Processors try to combine cost reduction with finding newways to add value

Shifts in power in the value chain The corporate strategies of dairy-processing companies have been changing due

to various shifts that have occurred in the sector, including dairy demand, milk

production, dairy policies and, more importantly, power in the dairy value chain.

In the past, dairy-processing companies controlled the entire value chain and

established the rules, but today food retailers and consumers are determining the

rules.The growing power of retailers and food manufacturers is putting significant

pressure on their suppliers who have to be innovative and create strong brands or

be cost leader and secure their place on the retail shelves by offering the lowest

prices.This pressure has pushed a growing number of dairy manufacturers to

position themselves as cost-efficient, private-label producers. Others opt for a

stronger focus on brands, but most processors around the world do both, with

different priorities in individual product groups.

Several options to add value Processors looking for options to add value to their products have several

opportunities. New product launches in areas such as health, convenience, taste

and packaging as well as value-added nutrition applications (IMF, calcium

enriched, sports nutrition, nutrition bar fortification) are just a few examples of

innovative opportunities attracting consumer attention. Food safety, traceability

and sustainability are becoming important elements of corporate strategy

because, in a way, these issues also provide a means to add value for the

consumer and stand out from the competition.

Increased consolidation To respond to these pressures, dairy-processing companies have looked for

opportunities to penetrate new markets, achieve synergies and cost efficiency, to

modify relationships in the value chain or to boost market share.These strategies

have led to a sizeable wave of mergers, acquisitions and alliances in the global

dairy industry. Dairy conglomerates have been formed in the three main dairy

regions, Europe, the US and New Zealand. Examples are Arla Foods and Friesland

Coberco Dairy Foods1 in Europe, Dean Foods in the US and Fonterra, the world’s

largest dairy exporter, in New Zealand.

6.3 Demand for dairy products grows and changesDemand highest in Asia... World demand for dairy products has been growing at 2% annually, though there

is some diversity in the rates of growth, from around 1% in high-income regions

to between 2% and 4% in low and middle-income countries and regions such as

China, South Asia and South East Asia.

...with many factors contributing Rising disposable incomes combined with growing urbanisation, better to this growth distribution systems and availability and increased exposure to Western and

international cuisines through travel are the main drivers of the increased

consumption of dairy products in these regions. In addition, governments in these

regions are also promoting dairy consumption through nationwide promotion

1 As of 1 January 2005, Royal Friesland Foods will be the new name of Friesland Coberco Dairy Foods

Dairy


and school-milk programmes. China, with per capita urban dairy consumption

increasing at 22% per annum over the last five years, is the fastest growing dairy-

consumption region in the world.

Globally, foodservice and food Foodservice and food-processing industries all over the world are driving the processing are driving growth demand for dairy products. In the developed world, demand is increasing for

cheese as an ingredient and, to some extent, for cream, while in the developing

world, the foodservice and food-processing industries have made many new

consumers acquainted with dairy products and are, indeed, the major driving

force behind overall dairy consumption.

Growing factory sales of liquid milk There has been a shift in the consumption of liquid milk, from on-farm to factory

sales.This trend is especially strong in the Asian region, but also in the new EU

member states. In the Asian region there is also an evident shift from powder-

based products to ready-to-drink dairy products. In China, the geographic

mismatch between the dairy belt and the major consumer locations has made

UHT milk the fastest growing product. In the developed world, liquid milk has

turned into a zero-growth, low-margin business with major retailers offering

products under private labels.

Global market growth for most Fresh dairy products have the highest growth rates with yoghurt consumption dairy products increasing in both the developed and developing world.The main shift in fresh

dairy products has been a positioning of them as convenient and healthy foods.

Demand for cheese is driven worldwide by the growing use of the product in

pizzas, snacks and other processed foods. National economies in the main

importing countries strongly determine global demand for SMP, and the current

favourable economic development in Asia has provided a strong impetus for

global SMP demand. And with a major shift in developing countries to higher-

value-added, milk-powder-based food products, global demand for WMP will also

continue to grow. Global demand for butter is at best stagnant, mainly because

price competition from other fats and oils is strong.

6.4 Will Asia Pacific be able to satisfy the growing importrequirements of Asia?

EU's diminishing role provides Between 1995, when the WTO took a big step forward in efforts to opportunities for others liberalise trade, and 2002 world dairy trade increased from 27.6 million to 36.7

million tonnes of milk equivalents, a compound annual growth rate of 4.2%. Also

during this time, a change in the key players occurred.The declining role of the EU

was assumed by Australia and New Zealand, both of whom are clearly better

equipped to address the growing demand for dairy ingredients in Asia.With

European milk increasingly remaining inside the new EU-25, the world’s importing

nations will have to rely to an even greater extent on the weather-dependent

supplies from Australia and New Zealand.This will probably provide opportunities

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for potential alternative exporters, like Argentina, Uruguay and the Ukraine,

especially as importers have a tendency to want to diversify their supply base.

Growing import demand could even temporarily outpace production growth in

the main exporting regions. However the resulting rise in world market prices will

probably trigger latent production and export potential in countries like the US

and India.This will prevent dairy commodity prices from remaining above the

USD 2,000/tonne mark for any length of time.

Economic growth main condition In the main dairy-importing regions local production cannot keep up with the for import demand growth growth in dairy consumption. Although it would be relatively easy to set up a

state-of-the-art processing plant, it would take a long time to boost local

production to achieve higher milk productivity. Dairy demand in this region is

strongly related to overall economic growth but if the present positive economic

conditions in Asia and the Middle East continue, import demand will continue to

grow and this will boost the volume of global dairy trade. Between 1995 and 2002

the volume of global SMP trade, for instance, grew by a CAGR of 4%. Assuming the

same pace of growth, this means that by 2010 the current trade volume of a little

over one million tonnes will have grown to 1.5 million tonnes.The potential of

exports of cheese to the Asian region is probably even bigger. Japan has already

been the world’s major destination for cheese for years and South Korea is also

amongst the biggest cheese importing nations, but the potential in the

remainder of the region is still largely unexplored.

WTO will continue to exert pressure Developments in the current round of WTO negotiations will have a strong to improve market access impact on the overall global trading environment. Most of the major dairy

importers and all but one of the major exporters are WTO members. Both the EU

and the US are more likely to consent to export restitutions than to import access.

Both will try to negotiate a lower tariff quota than the 10% of domestic

consumption, which was proposed in the Harbinson paper. Most dairy-importing

WTO members will try to hang on to some kind of local protection in order to

enable local dairy production to grow.

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Production levels of Fruits and vegetables (F&V) worldwide have been growing at a rate of 3.4% annually, thereby surpassing

consumer demand in terms of volume. As a result, many producers are forced to look for new markets for their products,

either in terms of new export countries or in terms of new added value products. At the same time consumers, in particular

the more affluent, require a wider choice of F&V, available year round and preferably in fresh and convenient format. As a

result, F&V either processed or fresh are shipped all over the globe and the level of trade is only increasing.

Figure 7.1 Major trade flows and production areas of fresh fruit and vegetables, 2002/2003

Source: Food and Agriculture Organization of the United Nations, UNCTAD, EUROSTAT, 2004

Total vegetables production in volume: 842,204,019 tonnesTotal fruit production in volume: 480,249,500 tonnesTotal potatoes production in volume: 310,810,336 tonnes

Total vegetables trade: 24,900,745 tonnesTotal fruit trade: 43,162,791 tonnesTotal potatoes trade: 7,981,079 tonnes

Production fruit, % of world total

Production vegetables, % of world total

Production potatoes, % of world total

Fruit: Bananas

Fruit: Citrus Fruit

Fruit: Apples and Pears

Fruit: Grapes

Vegetables: Tomatoes

Vegetables: Onions

Vegetables: Carrots

Vegetables: Potatoes

Vegetables: Sweet peppers

Vegetables: Cabbage

Vegetables: Cucumbers

& Gherkins

PhilippinesIndia

22%15%49%China

8%10%10%

US

Canada

7%6%4%

Spain4% 1%

Italy3%

Iran1%3%

Turkey3%2%

12%2%

Mexico3%

Egypt2%

Ukraine6%

Belarus3%

Poland4%

Germany3%

Netherlands2%

France2% Japan

1%

3% 2%

Brazil

Argentina

Chile

South Africa

Equador

ColombiaCostaRica

7%

Russian Federation

EU-15

7 Fruits and VegetablesTrade growth will continue

Fruit and Vegetables


7.1 Fruit and vegetables production outpaces population growthVegetable production outpaces fruit Global annual production of F&V (excluding potatoes) amounts to over 1.3 billion

tonnes and has grown at the rate of 3.4% CAGR (compound annual growth rate)

over the last decade. Interestingly enough, the production of vegetables has

grown at a much faster rate (5.1%) than fruits (2.1%) and currently the volume of

vegetable production is almost twice that of fruits.This relates to the fact that

vegetable production has become more efficient: production growth in terms of

volume has outpaced the increase in acreage. Growth in fruit production in terms

of volume is in line with the increase in acreage. In this section we consider

potatoes as a separate category and so it is not included in the group of

vegetables. Nonetheless, the production of potatoes is substantial with annual

production of over 300 million tonnes.The world’s major F&V crops concern

tomatoes, followed by citrus fruit and watermelons.Vegetables are more

fragmented, the five major vegetables crops accounting for 43% of total

vegetables, while the five major fruits account for 65% of the fruit total.

Figure 7.2 World production of fresh fruit in tonnes, 2003


Apples & pears 16%

Bananas 14%Grapes 13%

Other 23%

Plantains 7%

Mangoes 5%

Citrus fruit 22%

Figure 7.3 World production of fresh vegetables in tonnes, 2003


Tomatoes 10%

Watermelons 8%Cabbages 6%

Other 39%

Dry onions 5%Cucumbers & gherkins 3%

Potatoes 27%

Carrots 2%



China dwarfs the world China dominates the production of F&V and is responsible for over a third of total

global F&V production. In particular China’s vegetable production growth is

nothing short of spectacular at 240% over the last decade: nowadays half of the

world’s vegetables are grown in China! Four countries – China, India, the US and

Turkey – are jointly responsible for two-thirds of global vegetable production.

China has also replaced India and Brazil as the world’s largest producer of fruits,

accounting for 15% of global fruit production. For potatoes, again, China is the

world’s leading producer, having increased its production over the last decade by

45%; Russia is the world’s second largest producer. A striking fact is that Poland,

once the world’s third largest producer, saw its potato production dwindle by

two-thirds in a decade.

Covered production successful Calculations reveal that nowadays 1-2% of global F&V acreage is cultivated under

some sort of cover, which leaves the majority of fruits and vegetables grown in

open fields. Covered cultivation varies from small plastic tunnels to heated state-

of-the-art temperature controlled glasshouses, although glasshouse area on a

global scale is minimal. Covered cultivation of crops, vegetables in particular, has

contributed to higher yields per acreage, but also to higher quality crops and the

possibility for seasonal extension, sometimes even year round production. China’s

fabulous growth in vegetable production is strongly linked to the use of covers,

especially plastic tunnels. Given the expansion and success of covered crops over

the last decade, it is likely that we will see more of it in the near future.

Production hugely fragmented In general, F&V are labour intensive crops grown by many millions of (family)

growers as well as large commercial plantations (in particular banana and citrus).

Depending on land availability and suitable climate, production of F&V can take

place at minimal cost. However, inputs such as seeds, water, fertiliser and crop

protection largely determine the quantity and quality of output. Improved inputs

in combination with improved agricultural equipment, cultivation and harvesting

techniques are major contributors to global production growth. A considerable

share of production involves home-grown production for own consumption or

sale to the local community; in particular in developing countries self-sufficiency

of F&V is very important as first source of food intake. However, more and more

F&V are grown commercially, with a trend towards larger, specialised farms.

7.2 Processing: answer to perishable nature of fruit and vegetablesand search for added value

Processing increases shelf-life The perishable nature of fresh fruits and vegetables requires consumption shortly

after harvest.The shelf life of fresh produce (though not for all) can be increased

by storing it under climate controlled conditions even though in the end

deterioration is inevitable. Processing of F&V provides a more firm answer to

increased shelf life. It enables producers to store their products for longer periods

and distribute over longer distances without the need for expensive climate

controlled conditions. Also from a consumer perspective processed F&V have

certain advantages over fresh products; not only can products be kept longer in

the cupboard but they generally require less preparation for consumption.



New technology preserves Processing with the aim of increasing shelf life involves many methods including original nutritional values drying, pasteurising, salting, pickling, sweetening and freezing. Processed F&V

intended for further processing in the food industry are usually packaged in large

drums or containers. Processed F&V for end consumers are packed in cans or glass

containers, or in frozen packages. Pre-cutting is a form of processing as well,

fulfilling the consumer’s demand for convenience. New processing techniques

enable processors to maintain most of the healthy aspects of fruits and

vegetables.What’s more, tomatoes in processed form provide healthy substances

not available in raw tomatoes.

Tomatoes most processed of all Tomatoes are processed more than any other fruit or vegetable. A quarter of

global tomato production is processed into concentrates, pastes and juice, is

diced or peeled, and much is used as ingredient in the food industry for the

production of soups, sauces and pizzas. A wide range of fruits, vegetables and

potatoes are preserved in the form of freezing; potatoes, beans, peas, sweet corn,

spinach and berries are but a few examples. Examples of canned vegetables are

tomatoes, beans, peas, cabbages and mushrooms, and canned fruits include

pineapples (mainly from Thailand), mandarins, peaches, pears and fruit cocktails.

Citrus fruits tend to be processed into juices, especially in the form of frozen

concentrate.The largest producers are Brazil and the US, which together produce

2.4 million tonnes, or 90% of the world’s orange juice.

The search for how to appeal In its ongoing search for the best way of preserving F&V, the processing industry is to consumer desire now searching for added value products that appeal to the consumer’s desire for

fresh and healthy yet convenient solutions. Examples are fresh pre-cut F&V,

possibly in the form of a meal component or a meal. Both new processing and

packaging technology enable fresh products to be presented in a convenient

format (e.g. pre-cut or pre-cooked) while maintaining aspects of health and

freshness. Positive developments are expected in the category of deep frozen

products, which maintain not only original levels of nutritional value but can be

kept for longer periods. Processed F&V, either fresh or with extended shelf life are

widely used in the foodservice industry, which takes an increasing share of the

consumer’s food dollar.

7.3 China catching up on fruit and vegetable tradeFruit trade worldwide In contrast to production, trade is more dominant in fruit compared to vegetables;

fruit accounts for about 60% of total trade and vegetables 40%. Bananas are by far

the world’s most traded fruit accounting for over a third of global fruit trade, in

which Central and South America play a pivotal role as the world’s largest

exporters. Bananas together with citrus and apples and pears account for 75% of

global fruit trade. Over the last decade no major shifts have taken place in the

type of traded fruits, though there is a slight rise in trade of tropical fruits such as

mangoes and avocados.The EU accounts for nearly half of the world’s imports of

fruit, which makes the EU the world’s largest fruit importer.



China more dominant in vegetables export In contrast to fruit, the trade of vegetables is more regional and mainly concerns

tomatoes, onions and watermelons.The limited shelf life of fresh vegetables also

inhibits shipments over longer distances. In the last decade China has become a

more dominant player in the exports of vegetables (mainly to Japan), in contrast

to exports from the EU which have decreased. In that same time span, the US has

shifted from a net exporter to a net importer of vegetables, in which Mexico

serves as a major supplier (in fact the US purchases almost all of Mexico’s

vegetables exports). Japan remains a major net importer for both vegetables and

fruits.

Trade growth will continue The vast majority of F&V are still consumed close to the place of production;

global trade of F&V accounts for just over 5% of global production. Current

volumes of F&V trading amount to 70 million tonnes and has grown by half over

the last decade, more rapidly than trade in any other agricultural commodity. A

large share of F&V trade concerns fruit which is traded from the southern to the

northern hemisphere in order to provide the consumer with fresh produce year-

round, e.g. two-thirds of global banana trade is going from the southern

hemisphere to the north. Given the limited shelf life, trade of fresh F&V require

well-organised supply chains in which logistics service providers, whether sea,

land or air transport, play a crucial role.The consumer’s appetite for new varieties

in combination with falling transportation costs, improved logistics and the trend

towards a more liberal international trade climate are favouring the continuation

of international trade in fruits and vegetables.

7.4 Appetite for convenience yet freshness and healthTime poor cash rich consumers Over time, increasingly sophisticated supply chains have provided the consumer

with a wide choice of F&V, available all year round, in different grades and often

with organic alternatives. Retailers try to cater as much as possible to consumers’

desire for fresh, tasty and high quality F&V. Moreover, as consumers tend to spend

less and less time for preparing a meal, they want convenience. Fresh-cut F&V and

clever meal solutions, either fresh or processed, are the desired alternatives for

unprocessed produce. In particular, the consumer’s snacking habits have inspired

companies to provide on-the-go solutions.

Consumption levels should be higher Interestingly, consumers often have a schizophrenic relationship with F&V. On the

one hand there is very clear perception of the healthy aspects of the intake of F&V

while on the other hand consumption levels are often far below recommended

intake levels. Not only private sectors but also governments signal these trends

and respond with supporting campaigns.

Presentation more important Assortments, quality levels (including food safety) and availability of F&V will keep

on growing. However, consumer preferences for specific types of fruits and

vegetables will only change gradually. Often the consumer has a preference for a

fixed basket of F&V, complemented with a variable basket where tropical fruits

alternate with local seasonal fruits. Changes will become more visible in the way

F&V are presented to the consumer including different packaging, pre-cut, single-

portioned and organic alternatives.



Global grain consumption has exceeded production for several consecutive years with global stocks reaching historical lows

as a result2 . Increased demand as a result of economic and population growth mainly in emerging markets is driving this

development for food grains. A higher standard of living is triggering the demand for feed grains as the consumption of

meat products increases. Industrial applications of grain are increasingly becoming common too in the mature markets of

the EU and the US.To be able and supply this extra demand, the production of grains will have to grow by means of yield

improvement and/or area expansion. As a result new origins are making their (re-) appearance and trade flows of grains and

grain products gradually shift.

Figure 8.1 Major trade flows and production areas of grains, 2002

Source: IGC, 2004

Total grains production: 1,522,800,000 tonnes Total grains trade: 240,000,000 tonnes

Production rice, % of world total

Production barley, % of world total

Wheat (> 2,000,000 tonnes)

Corn (> 2,000,000 tonnes)

Rice (< 500,000 tonnes)

Barley (> 500,000 tonnes)

Production wheat, % of world total

Production corn, % of world total

43%11%US

Canada

6%4%

3%Argentina

7%

Mexico

Brazil

EgyptAlgeriaNorth Africa

NigeriaSenegal

IvoryCoast

Morocco

EU-25

36%18%7%

9%Indonesia

6%VietnamPhilippines

Taiwan

5%Thailand

Malaysia

6%Bangladesh

23%12%India

31%16%20%China

Japan

S. Korea

Russian Federation

14%

7%

Ukraine

Russia/Ukraine8%

Turkey

Iraq

SaudiArabia

Iran

6%

3%4%Australia

2 This chapter focuses on the main grain varieties of wheat, corn, barley and rice

8 GrainsIs the tightening of the global grain market a structural development?

Grains


8.1 Grain production competing with other more profitable cropsShift of acreage from food to non-food Because economic-related events have led to a gradual, long-term reduction in

acreage of food grains, other more profitable crops have benefited such as

oilseeds and, to a lesser extent, non-food grains. Despite this reduction in acreage

the overall production of grains has risen slightly over the past decade as grain

yields improved due to the extensive use of agricultural chemicals, fertilisers and

high-yield bearing hybrids. However, grain production will need to grow more

rapidly in the near future to balance increased demand.

Corn and rice acreage increase The trend of reduced grains acreage is most pronounced for wheat and barley whilst wheat and barley decrease and not so much for corn and rice. In fact, corn acreage and production have

increased steadily over the years thanks to sustained growth in animal protein

demand and more recently the growth in industrial applications such as ethanol.

It is expected for this trend to continue.The global area for rice also showed a

gradual growth over the past decade.Throughout the 1990s, global rice

production was expanding at rates that were marginally higher than those of

population growth.

New production areas in the FSU In recent years, the production of grains has seen changes and new countries

(re-)appearing on the surface.The Former Soviet Union (FSU), with countries like

Ukraine, Kazakhstan and Russia at the forefront, seems to have regained its

reputation of being a grain belt.These countries mainly produce wheat and

barley and can so at less than two-thirds the cost of US or EU farmers.Their input

and labour costs are much lower than the traditional wheat-growing regions.

Indian wheat crop is growing as well.These countries are able not only to increase

yields but can also expand production by using unutilised agricultural land.

Issues: GM and scarcity of water In an effort to realise ongoing productivity gains, the grains industry continues to

explore the potential use of biotechnology and in specific cases genetic

modification (GM). In a limited number of cases the technology has been

commercialised with the focus on production or processing improvements.The

legislative framework governing biotechnology is ever-changing and the

controversial debate on this subject is likely to keep this issue in the spotlight for

the coming decade. In addition, water scarcity will be a concern in the next 10

years and the production of grain could be hampered if water supply indeed

becomes scarce resource.

8.2 The grain processing industry in search of new markets andproducts

Grain processing increasing The global production of grains has increased in response to growing production

of grain-based products in the last few years. Global wheat flour production – the

main processed grain - is growing gradually. In the US, the production of (corn-

based) ethanol is growing by double-digit figures. In Russia, China and the new

member states of the EU, new investments in the starch and malt business are

flowing in as well, stimulating production of grain-based products. As the

production of animal proteins is growing, the feed industry is processing more

Grains


grains too. In general, economic growth and a higher standard of living in

emerging countries are and will continue to gradually increase the production of

grain-based products.

Wheat and tapioca will increase The global starch industry uses four main raw materials: corn (80%), wheat (8%),their share in the starch market starch potatoes (5%) and tapioca (5%). In terms of raw material use, Europe in

particular has undergone quite a change.Wheat is used increasingly as a raw

material by this industry in Europe and given its relatively high by-product

revenues, it is expected that the substitution of corn by wheat will continue.

Tapioca is considered the main raw material for growth potential, particularly in

regions such as Asia and Latin America, where climatic conditions are favourable

for the cultivation of the tuber.

Increased feeding efficiency In the feed business, it seems that gradually more grains are used as a result of a

rapidly growing demand for meat products in emerging countries. However the

growth in the latter will outpace the growth in demand for feed grains thanks to

improved feeding efficiency rates, as expressed by falling feed conversion ratios.

New investments in emerging countries The processing industry has expanded all over the globe in its search for locations

with either good sourcing, or good market prospects. Several wheat millers in

Europe, the US and Australia have faced decreased flour exports in the last

decade. Many traditional importers such as Africa and Asia have built processing

plants and started to import grain instead of flour. Over the past few years, a trend

is visible whereby the malt and starch industry is migrating to Eastern Europe

(mainly to the new member states of the EU and the FSU), Asia and Latin America

to supply their main end users (brewers, food and paper industry etc.) with grain

products.

Issues: food safety and industrial use Because the grain processing industry is playing a crucial role as a link in the

middle of the value chain, it has been significantly impacted by issues like food

safety, traceability and labelling that have become more important throughout

the entire food chain. A clear food safety policy framework has been set and new

institutions have been created.With a changing policy framework for bio fuels

and more demand for other non-food applications, industrial applications of

grains likely will play a much more dominant role in the future.

8.3 More demand for consumer products and industrialapplications containing grain

Demand for grain based products In line with GDP growth in emerging countries like in China, India and Eastern is expected to grow European countries, consumers in these markets enjoy higher disposable incomes

that boost demand for grain-based consumer products. By contrast, in the more

mature markets of the EU and the US, demand steadily increases for industrial

applications containing grain.

Food versus non food demand The growth in emerging markets of grain-based food products like animal

proteins, beer and bakery products are stimulating the demand for grains.The

animal protein business is the biggest user of grains.Value added products like

Grains


wheat based bakery products at the expense of rice products are getting more

popular in emerging markets. Although grains are usually perceived as food

ingredients, there are also a number of non-food applications.This has been

known for decades and grains have long been produced for some of these

applications. In recent years, government legislation has given some applications

a new impulse. A clear example is ethanol.

Increasing demand from Asia... Economic growth in China has boosted demand for grains, and it seems that

domestic production can not completely satisfy domestic demand anymore. In

India, another market of more than one billion consumers, huge population

growth is expected. It remains the question whether India is able to satisfy its

domestic demand by increasing yields and expanding its agricultural area. In the

FSU and the new member states of the EU increasing demand is also visible.With

the food and beverage industry responding to this, the demand for grain

products such as flour, malt and starch will benefit too. In the mature and

saturated markets of the EU and the US, increasing demand for non-food

applications (e.g. bio fuels, biodegradable plastics, etc.) is expected to bolster

...and Eastern Europe demand for grains.

Overweight is becoming an issue Worldwide, there are more overweight than undernourished people. Overweight

is becoming a real global food problem as well.The undernourished population is

declining to about 800 million. Conversely, about 1 billion people already are rated

as overweight, with roughly 300 million considered obese today, up 50% from 200

million in 1995.This phenomenon has developed as a result of long-term

structural changes in the way societies both live and eat on a day to day basis.

Many consumers have decided to reduce carbohydrate intake and have identified

grain-based products as a major source thereof, together with sweeteners and fat.

Thus, the negative perception of carbohydrates needs to be placed in the context

of these obesity concerns.

8.4 Grain trade flows are shiftingGrain trade is shifting Given that demand for grain-based products is increasing more rapidly than

production, global stocks reached historical lows as a result. New countries are

stepping in, notably the FSU. Although the main exporters still set the stage, a

number of emerging countries are claiming their share of global trade. As a result,

trade flows of grain are shifting.

New export countries are emerging The FSU seems to have resumed the grain belt reputation of its past and has the

potential to become a prominent player in the world market. India, a major wheat

producer, could play a prominent role in world trade too provided the required

infrastructure and storage facilities are put in place. China is another important

factor in trade but is at a turning point.Whilst it used to have a large exportable

surplus for grains, China recently has become a net importer of grain.

Agricultural trade liberalisation continues In the early 1990s, it was multilaterally agreed to liberalise agricultural trade for the

first time within WTO. A framework was set to open international agricultural

markets. In the EU for example, the CAP was therefore reformed. For grains it was

Grains


agreed in the early 1990s to reduce the EU institutional grain prices and to bring

these more in line with world market prices.The discussions - to set a next step

further to open agricultural markets and to give special attention to the position

of developing countries - are still going on within the WTO.This could set the

stage for more market access and thus bolster global trade of grains.

Freight rates reached a record high In the past decade international freight rates have been quite stable. At the end of

2002, freight prices for dry-bulk ships started to rise and more than tripled by the

beginning of 2004. On one hand, increasing global demand for freight transport

exploded driven by Chinese import demand. On the other hand, lack of

investments in new dry-bulk capacity impacted upon the availability of freight

space. For grain users, the processing industry and international traders, these

higher freight rates increased costs and put severe pressure on logistics and

processing margins. Even though freight rates have eased recently, the recent

price hike is likely to have a lasting impact on trade flows of grains and may

further increase the competition among grain exporting countries.

Grains


Within the oilseeds complex, soybean commodities (beans, meal and oil) and palm oil dominate world production,

consumption and trade. During the past 10 years the oilseeds complex has witnessed profound changes in production and

consumption areas. Previously, the US was the dominant player in the supply, processing and trade of soybeans while the EU

was by far the single largest export market.The EU was also the largest importer of vegetable oils.Today, soybean processing

in the US is more and more oriented towards the domestic market while South America continues to increase its production,

processing capacity and share of international trade. China has also steadily increased its processing capacity, and the strong

growth in demand for soybeans and vegetable oil has propelled it into being the largest importer of both commodities, just

ahead of the EU.

India is another major player in the oilseeds complex. In the past decade, India went from being a minor vegetable oil

importer to the third largest market in the world, and as a result of a constant deficit in oil supply this market will continue to

grow. Malaysia is still the world’s largest exporter of vegetable oils (basically palm oil), but Indonesia is increasingly

challenging that position.

Figure 9.1 Major trade flows and production areas of oilseeds and vegetable oils, 2003

Source: OIL WORLD Hamburg, Germany, www.oilworld.biz, 2004

Oilseeds (>3 million tonnes)

Meal (>1 million tonnes)

Vegetable oil (>1 million tonnes) Production oilseeds, % of world total

Production vegetable oils, % of world total

Total trade volume of oilseeds: 77,264,000 tonnes Total trade volume of meal: 63,806,000 tonnes Total trade volume of vegetable oils: 35,056,000 tonnesTotal production of oilseeds: 326,937,000 tonnes Total production of meal: 215,481,000 tonnes Total production of vegetable oils: 100,822,000 tonnes

Russian Federation

JapanChina

24%12%2%

5%

26%10%

16%6%

US

Canada

Brazil

12%6%Argentina

Mexico

India

Pakistan

Thailand

6%4%

2%

12%EU-25

12%Indonesia

Philippines

15%Malaysia

9 Oilseeds ComplexMajor shifts in the value chain

Oilseeds Complex


9.1 Soybeans and palm oil dominate the oilseeds complexSoybeans and palm oil The oilseeds complex comprises a large variety of oil and protein bearing crops,

dominant commodities... but four main crops have a dominant position in the market: soybeans, palm,

sunflower seed and rapeseed. During the last decade, world production of

oilseeds has increased by 44% from about 229 million tonnes to an estimated 330

million tonnes in this season (03/04), while the total production of vegetable oils

increased a stunning 58% from 67 million tonnes to about 106 million tonnes.

Production growth in the oilseeds complex is set to continue due to constant

growth in demand.

...and their share continues to grow Soybeans have consolidated their position as the world’s main source of protein

meal for animal feed (70% of total meal production). Growth in soybean area is

almost exploding, primarily as a result of the growth in animal protein

consumption. Palm oil is increasingly capturing market share in the vegetable oils

segment (from 21% to 27% in 10 years), primarily as a result of large expansions in

palm plantations area, yield increases, and the fact that palm oil is a high oil-

yielding crop. In addition, palm oil is generally traded at a discount to soybean,

rapeseed and sunflower oil. Both soybeans and oil palm experience continuous

strong investments and production expansions while rapeseed and sunflower

grow at moderate rates in comparison.

South America drives soybean For years, the US was the largest producer of soybeans; however, as a result of supply growth today massive expansion in soybean acreage, Brazil and Argentina combined have taken

up the lead position. Partly because corn production is more advantageous,

growth in the US will stay moderate. Large expansions in Brazil in particular are

planned to continue, partly as a result of government agricultural policies, but

primarily due to domestic and world demand plus a good soil and weather fit to

soybean production. Recently, the Chinese government has signalled its intention

to grow soybeans in Brazil, but the future effects of such a plan remain to be seen.

Indonesia catches up in palm Malaysia has been the largest palm oil producer for years, having about 50% share,oil production although the second largest producer, Indonesia, is gradually catching up and

now constitutes about 37% of production.

GM and sustainability issues impact In the past decade, issues that have become particularly critical for the sector are the entire value chain GM technology and sustainability. Since 1996, where GM soy was introduced, its

implementation has boomed, and today almost all of the US and Argentine soy

production is GM while about 30% of Brazilian soybeans today are recognised as

GM. Brazil claims it can grow both conventional and GM varieties and segregate

them from one another. Consumer resistance in the EU in particular in

combination with stringent EU legislation leads to challenges for the sector such

as requirements for traceability or IP (Identity Preservation). China’s GM point of

view is unclear and may become an influential factor in the near future.

Sustainability is another issue that cannot be ignored by either soybeans (due to

criticism that the Amazon area is threatened by soybean expansion) or palm oil

(due to criticism that expansion leads to disappearance of rainforest and creates

social unrest). Sustainability is being tackled by specific Round Tables; for palm oil

it is operational and for soybeans it is in the process of being set up.

Oilseeds Complex


Other issues have been yield improvements of various crops (soybeans in

particular), and currently the oil composition of an oilseed is on the agenda.

9.2 The processing industry expands and faces major regionalshifts

Expansion, concentration and consolidation Overall, but not exclusively, the processing industry (crushing and refining) has

been characterised by expansion in areas where oilseeds are grown, following the

increase in supply of raw material. Expansion is particularly ongoing in developing

markets like Brazil, India and China, while concentration and consolidation is

primarily taking place in more mature markets like the US and the EU. Industry

domination by multinationals such as Cargill, ADM and Bunge is ever more

evident throughout the world; however, regional or local players have a strong

market position in countries like Brazil (local players have market shares above

50%), Malaysia (palm oil companies are almost entirely domestically owned) or

Russia.

Soybean capacity expansion in There have been only minor changes in the composition of meal supply South America and China throughout the last 10 years. Soybeans are primarily crushed for meal; they

generally contain close to 80% meal compared with, for instance, rapeseed or

sunflower seed containing 60% and 48% meal respectively. Slightly more than

60% of total meal production now originates from soybeans (up 7% in 10 years).

The most important change in this segment is the shift in investments; while a

number of plants in the US and in Europe have closed down, new soybean

process plants are concentrated in Brazil and Argentina (huge producers) and

recently in China (huge consumer).This is largely a result of competitive

processing costs in South America. In Brazil, the growing domestic poultry

industry is also a significant demand driver.These markets will continue to attract

investments to the order of USD 1 billion in the coming two to three years.

Sunflower investments moving East Processing of sunflower seeds is shifting towards Russia and Ukraine as a result of

current major expansions. In the past couple of years, more than 30 investments in

capacity expansions, take-overs or modernisations have been announced, and this

activity seems to be ongoing.

Palm oil refining capacity increases The largest expansion in oil refining has taken place for palm oil. In contrast to in export markets oilseed processing, perishability means that palm oil milling must be located

within 24 hours of harvesting the fresh fruit bundles (FFB).Therefore, investments

in processing FFBs to crude palm oil (CPO) have only taken place, though on a

large scale, in Indonesia and Malaysia. Palm oil refining, on the other hand, may be

done everywhere in the world, and as a result of quality losses of refined oils

during protracted transport, it is in most cases more beneficial to refine close to

the consumption area. As a result, large investments in major consumer markets

have recently been made – often by Malaysian investors – in particular in India

and the EU. Further major downstream investments –in specialty fats and

oleochemicals for example – are also principally found in Asia.

Oilseeds Complex


Biodiesel large non-food opportunity New opportunities seem particularly evident in non-food applications like

biodiesel.The EU-15 has made great investments in biodiesel capacity based on

rapeseed oil (particularly in Germany) and today has the largest biodiesel

production in the world by far. Investments will continue throughout the

enlarged EU as a result of new legislation on biofuels. Many other countries like

the US, Brazil, the Philippines and Thailand have developed or are in the process of

setting up their own programmes on biofuels based on soybean oil, coconut or

palm oil.

Industry must adapt to more GM is a major issue for processors operating in or exporting to the EU as new stringent regulation. legislation imposes labelling on products with GM content. As with grains, dealing

with issues such as food safety and traceability throughout the supply chain has

become unavoidable as these issues may force processors to change their

procedures or even set up parallel supply chains.

9.3 Demand for vegetable oils and protein is exploding indeveloping countries

Demographic changes are The major drivers for consumption of meal and vegetable oils in volume terms are major demand drivers first of all overall economic development, urbanisation, and population growth in

the developing world. However, actual changes in demand pattern have been

driven heavily by issues like regional differences, food safety issues involving

animal-based products, and general health concern.These issues have a

continuous effect on developments in demand.

Soybean meal benefits from The key outlet for meal is animal protein (meat production), in particular poultry pork and poultry demand and pork.World demand for poultry and pork has driven the growth in demand

for vegetable protein. Soybean meal has been the main beneficiary throughout

the past 10 years, with an increase in demand of 67% versus 45% for meal in

general.

Soybean oil still number one On a global scale, soybean oil is the most consumed oil (30% of total), closely

followed by palm oil (27%) that is catching up quickly. Demand for specific types

of oils is primarily linked to three factors: properties of the oil (also determines the

degree of substitutability), price (differential) and tradition. Soybean oil, for

instance, is the preferred oil in the US (71%) and Brazil (83%), palm and palm

kernel oil in Indonesia (92%) and Malaysia (93%), while markets like China, the EU

and India generally speaking consume a combination of three to four major types

of oil.

Food and non-food applications Vegetable oils and fats are used in a wide range of food products and are virtually drive oil demand indispensable as an ingredient in food manufacturing and for cooking purposes.

As food demand increases, so does demand for oils and fats. An example is instant

noodles in China of which (palm) oil makes up 18%-20% of the end product. As

the industry has grown at an average rate of 30% in the past decade, it is obvious

what the effect has on demand. Not only is demand in general growing, demand

for fast food and convenience food for example is a major vegetable oil demand

driver.Vegetable oils are also used in feed – in the EU for instance that sector

consumes an estimated 13% of total. Non-food consumption will grow worldwide

Oilseeds Complex


primarily as a result of biofuel production (the type of oil dependent on the

region); currently most profoundly in the EU. Oleochemicals is another (minor)

growth sector, specifically in Asia.

China's demand has boomed Emerging economies with strong growth in population, income and the degree

of urbanisation like China and India have dominant positions in total demand.

China’s meal demand, for instance, has grown 157% in a 10-year period where

world demand increased by only 45%, surpassing the US as the second largest

consumer after the EU.The same picture arises for vegetable oil demand: China

has now become the largest consumer in the world, growing at an incredible

pace (+127%), now surpassing the US by 75% and the EU by 15% in terms of

volume. India is still the fourth largest consumer but is almost equal to the level of

the US, with an increase in demand of more than 70%.The EU and the US in

comparison, once the first and second largest vegetable oil consumers in the

world, have grown more moderately at 51% and 27% respectively.

Most past issues linked to the EU... Throughout the 1990s, the BSE crisis was a major issue in the EU. It led to a

substitution with meat-and-bone meal and therefore a strong increase in

demand for vegetable-based proteins.While total EU meal demand has grown by

15% in the past 10 years, demand for soybean meal has risen by 35%. BSE also led

to a substitution of animal fat with vegetable oils and fats in many markets,

. ..while current issues like health concern particularly in the EU, for foodstuffs and even in personal care products. Current are imported in all western markets issues are more related to health than safety. Consumer health concern in general

has led to a move towards using more unsaturated oils and fats instead of

saturated. Consumers in Western markets (the US and the EU) increasingly fear

food products containing trans fatty acids (TFA), forcing suppliers to adapt their

formulas. And in the EU, consumer resistance to GM food has created a large

outlet for palm oil at the expense of soybean oil. However, the effect on the global

market in volume terms is limited.

9.4 Palm oil and soybeans: the winners in world trade Trade has doubled and Since the beginning of the 1990s, total trade in the three commodities oilseeds,

the flows have changed meal and vegetable oil has doubled; trade patterns, however, are far from being

static. In combination with the shift in origination of oilseeds plus changes in

demand across regions in recent years, trade flows have changed. New producing

and consuming regions are claiming an increasingly large share of trade and may

in some cases individually even have a strong influence on commodity prices

through, for instance, unpredictable trade policies.

Soybeans and palm oil dominate trade The domination of soybeans in international oilseeds trade is ever increasing;

today this commodity represents 82% (59.3 million tonnes) of world oilseeds

trade. Rapeseed and sunflower now represent only a respective 8% and 4% of

total trade (down from 11% and 5% 10 years ago). Due to the changes in

production and consumption across regions, this trend is set to continue.Trade in

vegetable oils, on the other hand, is dominated by palm oil that represents 49%

(22.2 million tonnes) of world trade; only a marginal relative increase (+2%).

Soybean oil - the second most important – has also gained a small share, from

19% to 21%.

Oilseeds Complex


South America leads trade in Trade in the soybean complex has changed considerably in the past decade.The the soybean complex major shift has been in the domination of the US relative to Brazil and Argentina.

10 years ago, the US dominated trade of soybeans (59%) while its share today is

down to 39%. In the same period, Brazil and Argentina’s combined share of

soybean trade has more than tripled, and today they represent 52% of world

trade. South American domination is even stronger in exports of soybean oil and

meal. US exports of soybean oil and meal have declined from 15% to 4% and from

26% to 7%, respectively in the past decade. In comparison, Brazil and Argentina’s

combined share of world soybean oil and meal exports today equal 73% and 59%

respectively. Malaysia and Indonesia dominate vegetable oils trade in general

Malaysia single largest (49%) and palm oil trade (89%) in particular.The overall trend has seen Indonesia palm oil exporter catching up with Malaysia; the single largest vegetable oil exporter in the world

(29%).

China's demand growth outpaced On the import side, China, India, and the EU-25 dominate world imports of all all other markets vegetable oils and palm oil specifically.While the EU’s imports have ‘only’

increased by 61% in the past decade, China’s have increased by 130% and India’s

more than tenfold. In this period, India’s imports have increased from 7% of total

domestic consumption to 45%. Even more stunning is China’s growth in oilseeds

imports: from a mere 64,000 tonnes to 19.6 million tonnes (98% soybeans) in just

10 years! The EU, now the second largest importer, has seen imports (80%

soybeans) increase by only 14%.

Trade policies most important issue One of the most important issues in the global oilseeds complex is definitely

trade policies. In general, all producer and consumer markets have applied trade

policies that protect their domestic processing industries or stimulate supply or

demand.The EU and China, for instance, favour the import of oilseeds rather than

(refined) oils in order to protect their domestic process industry. India is another

India’s import policy may important example. Since the beginning of the 1990s, when India (partly) opened affect palm oil prices up of the vegetable oils market, imports have soared.The type of oil imported,

though, is continuously subject to the frequent changes in India’s import policies

that put very high import tariffs on refined oils, and palm oil in particular. In the

past, these measures have even proven to have a direct impact on world palm oil

prices.

GM policies and WTO progessions As a result of the expected changes in the WTO agreement, trade in general uncertain issues might change. China’s accession to the WTO is a fine example, the EU’s dispute

with the US due to the GM moratorium another, and Russia’s future accession yet

another. China’s current importance as a soybean importer may lead to unstable

markets in the future, as was seen in 2004 when the country defaulted on

imports. GM policy could also be a wildcard for trade with China, whose policy on

this issue is not fully transparent.

EU enlargement will generally have a minor impact on world trade but will

stimulate intra-EU trade.

Oilseeds Complex


Growth in sugar production over the last decade has been concentrated in a handful of industries, led by the Centre/South

region of Brazil.The expansion of this industry has made Brazil the world’s leading sugar exporter by far, a position that it is

likely to maintain in the foreseeable future. Meanwhile, global sugar demand has been growing steadily, with Asia becoming

an increasingly important consumer of sugar in terms of both volumes and growth rates. Factors such as rising population,

increasing incomes and a continuing shift in population from rural to urban areas all promise to enhance the Asian region’s

contribution to global sugar demand in the future. Lastly, though the world sugar market has seen changes over the last ten

years, some of its key characteristics remain resolutely unchanged; world market prices remain highly volatile, and sugar

continues to be a particularly difficult commodity to deal with in the context of regional and international trade

negotiations.

10 SugarBrazil booms, Asia looms

Figure 10.1 Major trade flows and production areas of sugar, 2002

Source: ISO yearbook 2002, F.O. Licht, 2004

Production, % of world totalWhite sugarRaw sugar

Total sugar production: 142,205,000 tonnes Total sugar trade: 43,808,000 tonnes

JapanS.Korea

Malaysia

Indonesia

Australia

China7%5%

17%

EU-25

US

Canada

EgyptMorocco

Algeria

IsraelSyria

Nigeria

PersianGulf

Yemen

Mauritius

Iran

Brazil

4%Mexico

Guatemala

3%Cuba

India14%

Thailand5%

Pakistan2%

13%

4%

Russian Federation

Ukraine

Sugar


10.1 Production: a decade that belongs to BrazilSugar is made from both cane and beet... Sugar is an unusual commodity in that it can be produced from two very different

crops. Sugar cane, a member of the grass family, is used for sugar production in

the tropics and sub-tropics. Sugar beet, a root crop, is almost exclusively grown in

temperate zones. It is precisely because sugar can be produced in both temperate

and tropical regions that so many countries around the world – over 130 – boast

a domestic sugar industry. Furthermore, a few countries, among them China, the

US, Iran, Japan and Egypt, have both a beet sugar and a cane sugar industry.

73% of global output is cane sugar. Over the last ten years, global sugar production has grown by 28%, from 116

million tonnes in 1994/95 to 149 million tonnes in 2003/04. Sugar produced from

cane has long accounted for the majority of global sugar output, but during the

last 10 years cane has seen its share of global sugar production continue to rise,

from 68% to 73%.This reflects the fact that the bulk of growth in sugar output

over the last decade has taken place in cane-producing countries, above all Brazil.

By contrast, global beet sugar production remained more or less static over the

same period.

Brazil is the world’s leading producer. The phenomenal rise of Brazil’s Centre/South region, from negligible exporter in

the early 1990s to its current position of the world’s leading sugar producer and

exporter, is by far the most important change in the geography of sugar

production in today’s sugar market. Conditions in the region are perfect for cane

growing, and the industry is the world’s lowest cost sugar producer. Moreover, in

contrast to the situation in many other sugar producing and exporting nations,

there remain vast unutilised areas of arable land in Brazil that are suitable for cane

production.

Global beet sugar output static The stagnation of global beet and beet sugar production reflects the fact that in

many of the key beet-growing regions (above all the EU and the US), favourable

policy measures have made domestic sales very attractive. However, demand in

these markets is virtually static, and expansion for export sales is not commercially

rewarding.Thus, while the EU has been a major exporter of sugar throughout the

last decade, production and export volumes have been stable for many years. In

response to both external and internal pressures, the EU now looks to be moving

towards a significant overhaul of its sugar policy, which could see a decline in

output and exports over the medium term.

Brazil’s importance likely to grow further The relentless expansion of the Brazilian cane industry and the prospect of a

contraction in EU beet sugar production and exports suggest that, on a global

scale, the share of world sugar production accounted for by cane will continue to

grow in the future. Meanwhile, over the medium to long term, possible declines in

beet and beet sugar production in the EU could at least be partially offset by

possible increases in output in Russia, the Ukraine and other parts of eastern

Europe, but this very much depends on the creation and maintenance of

favourable market conditions for sugar in these countries.

Sugar


10.2 Processing: A regional businessProcessing closely tied to crop production Unlike many other agricultural raw materials such as grains and oilseeds, which

can be stored after harvest for long periods of time before processing, cane and

beet must be processed immediately after harvesting.This means that the

distribution of cane raw sugar production3 and beet sugar production is identical

to the distribution of cane and beet production. Indeed, in a number of cane

industries, processors themselves produce a large proportion of their raw material.

The geographical expansion of processing capacity over the last ten years has

therefore mirrored the expansion of crop production.

Expansion of processing companies With the possible exception of Tate & Lyle, there are no sugar companies that has been largely regional could be called global. Processing companies have grown mainly on the basis of

regional expansion, particularly in Europe, but also in southern Africa and in Latin

America. Leading Brazilian companies have concentrated on consolidation and

expansion projects in new cane areas. Meanwhile, the stagnation of beet sugar

production in the EU over the last decade has forced many processing companies

to look outside the EU in order to achieve further growth.Throughout the 1990s,

many EU processing companies invested in eastern Europe, in anticipation of the

accession of new member states to the EU in 2004. In addition, a handful of EU

beet sugar companies have acquired cane sugar operations on other continents.

Boom in Middle East refining capacity A further noteworthy trend has been the global expansion of refining capacity

around the world, above all in the Middle East.This is a region that has historically

been a major importer of sugar. Over the last ten years, a number of large new

refineries have been constructed in the region (Saudi Arabia, Dubai, Algeria).This

has resulted in a substantial switch in the regions importing patterns, with raw

sugar imports on the rise at the expense of refined sugar imports.The trend is

important because it implies an expansion in market opportunities for cane raw

sugar exporters such as Brazil, Australia, South Africa and Thailand, at the expense

of beet sugar exporters in western and eastern Europe. Regular announcements

of plans to construct additional refineries in the region (where sugar demand is

growing strongly) indicate that this trend is likely to continue.

10.3 Demand: Asia – the biggest market, the most promisingprospects

Steady growth of 2% a year Global sugar consumption has risen at an average rate of around 2.0% a year in

the last ten years. However, at a regional level, trends in sugar consumption have

been different. Asia, which currently accounts for 40% of global sugar demand, has

seen its volume of consumption rise at an annual rate of 2.7% over the same

period. By contrast, western European consumption has grown at just 0.5%.

3 There are two processing stages in cane sugar production. Cane is milled to produce raw sugar, a semi-processed product that needs further processing

before it is fit for human consumption.This takes place in a refinery, where raw sugar is purified into refined sugar, a high quality white sugar suitable for

direct consumption. Refining can either take place at the mill itself (in a refinery annexed to the mill), or raw sugar may be shipped in bulk from its

country of origin to another country for refining at destination in a stand-alone refinery. By contrast, beet processing factories produce refined sugar

directly from beet, with no raw sugar stage.

Sugar


Levels of income influence The relationship between per capita income and per capita sugar consumption is sugar consumption a key influence on the development of global sugar demand. In low-income

countries, changes in the level of per capita income tend to result in a significant

change in per capita sugar demand (in economists’ jargon, the income elasticity

of sugar is high in such countries). However, in high-income economies, per capita

sugar consumption tends to stabilise, and population growth becomes the main

driver of growth in consumption. A second key trend in sugar consumption is for

the proportion of sugar consumed in sugar-containing products (confectionery,

soft drinks, biscuits, for example) to rise as incomes increase4.

High population and rising incomes Looking ahead, the projected growth in population and incomes in the Asian make Asia a key market region coupled with the trends described above imply that Asia will increasingly

dominate global sugar consumption in the years to come. Countries such as India

and China, with huge populations, increasing urbanisation and rapidly rising

incomes, are already exhibiting substantial rates of growth in sugar consumption,

and appear set to continue to do so. For companies engaged in the manufacture

of soft drinks, confectionery and other such products, a strong presence in such

markets is crucial for long-term growth prospects. In contrast, markets such as the

EU and the US are mature, and growth in sugar consumption is at best sluggish.

Slow or zero growth in sugar consumption in rich, industrialised countries is no

surprise given the relationship between income and per capita consumption

described above. However, more recently increasing concern about links between

diet, obesity and health have also stimulated interest, from consumers and food

processors alike, in specially-prepared products that are low in sugar or

sweetened by non-caloric sweeteners.The extent to which such developments

impact upon sugar consumption in the industrialised world remains to be seen.

10.4 Trade – Brazil powers ahead, trade liberalisation inches forwardInternational trade only accounts for The proportion of total global sugar production that enters international trade is

30% of world sugar output relatively small – around 70% of total sugar output is consumed in the country

where it is produced. Nevertheless, the volume of global trade in sugar has

expanded by 50% in the last ten years, and today around 45 million tonnes of

sugar are traded internationally. During this period, the key trend has been the

relentless growth in Brazilian exports, and the country now accounts for close to

30% of global sugar trade. More remarkably, this expansion has taken place in a

market that has regularly seen prices at levels below long-term trend levels,

indicating the innate cost-competitiveness of Brazil’s Centre/South region. By

contrast, industries that by the mid-1990s were well-established sugar exporters,

such as Australia, the EU, South Africa and Thailand, have experienced lesser rates

of growth or no growth at all, though they are all still major players. Meanwhile, in

Cuba, output has been in a sustained decline throughout the decade, triggered

by the dissolution of the former Soviet Union and compounded by Cuba’s

substantial exposure to world market prices.

4 Typically, in industrialised economies, 75% of sugar consumption will be in the form of products, with only 25% bought and consumed directly in the

form of sugar. In developing countries, these proportions are reversed.

Sugar


Russia is the world’s leading The dissolution of the former Soviet Union also brought Russia to prominence as sugar importer the world’s largest single importer, a position it still holds today. Although Russia

has made a habit of regularly changing the legislation governing sugar trade,

none of this has affected its annual import requirement for four to five million

tonnes of sugar, meaning that it alone accounts for some 15% of global sugar

imports. Surprisingly (because it is a major exporter of sugar), the EU is the world’s

second most important importer of sugar.The EU’s refiners import around 1.7

million tonnes of raw sugar each year, although the countries permitted to supply

this sugar are almost exclusively limited to developing countries in the African,

Caribbean and Pacific regions that have long-established sugar industries

originally developed to supply European markets.

A politically sensitive commodity Sugar has often proved to be a difficult commodity in the context of international where trade protection is widespread trade negotiations, and it is regularly referred to as the most political of

agricultural commodities. More than 130 countries, industrialised and developing,

have a sugar industry of their own, and the vast majority of these industries are in

some way protected from the world market. Such protection is usually defended

on account of the substantial investments that have to be made in agriculture

and in processing in order to establish a sugar industry (indeed, sugar production

is far more capital-intensive than many other commodity businesses). As a result,

the reduction of trade protection, either on a multilateral basis through the WTO

or through regional trade agreements such as NAFTA, Mercosur or the ASEAN

Free Trade Agreement (AFTA), has proved to be a sensitive issue. Particularly in the

case of regional trade agreements, the sugar sector has often been treated

differently from other sectors, with liberalisation of sugar trade between

participating countries either ruled out or lengthily postponed (e.g., Mercosur,

AFTA), or subject to long-running dispute (e.g., NAFTA).

EU policy reform to be a milestone At the time of writing, there appears to be a real prospect of significant change in in trade liberalisation? global sugar trade as a result of far-reaching proposals put forward by the EU for

reform of its sugar policy.The proposals represent a response to growing pressure

for policy reform from both within and outside the EU, and they seek to materially

reduce both production and exports.The issue is complex – a particular problem

is the consequence of price reductions for those developing countries with

preferential access to the EU sugar market. Nevertheless, the proposals represent

something of a milestone in the development of global trade in sugar. And the

consequences are far-reaching; if the EU really carries out profound reform of its

highly protective sugar policy, the pressure on other industries in industrialised

countries enjoying similar levels of protection will be sure to intensify.

Sugar


Rabobank's roots lie in agriculture.What began at the end of the nineteenth century as a collection of small rural banks, has

grown into an extensive financial group.Today Rabobank is owned by approximately 320 local banks which provide financial

services and products to the Dutch retail and business markets.The collection of these banks, together with Rabobank

Nederland and the following subsidiaries form Rabobank Group and establish Rabobank as an allfinanz services provider.

• Insurances, Pensions, Occupational health and safety: Interpolis

• Asset management / Investment: Robeco Group, Schretlen & Co, Effectenbank Stroeve, Alex

• Leasing: De Lage Landen

• Real estate: Rabo Vastgoed , FGH Bank

• Other: Gilde Investment Management (venture capital), Obvion (mortgage finance)

In its Dutch home market, Rabobank Group has 1.4 million members, nine million business and private customers and is

market leader in virtually every area of financial services. Outside the Netherlands, the Group has 222 offices, employing a

total of 6,532 people in 34 countries. Consistently being awarded a AAA credit rating from the leading rating agencies, the

bank's stability is further evidenced by its being named among the Top 5 World's Safest Banks by Global Finance magazine in

2001, 2002, and again in 2003.

11 RABOBANKWorld leader in food & agri financing

Figure 11.1 Global map of Rabobank Group offices


Rabobank


11.1 Rabobank Group: largest financial service provider in theNetherlands

Rabobank consists of 320 local co-ops… The Rabobank Group is the largest financial service provider in the Dutch market.

It comprises 320 independent, local co-operative Rabobanks in the Netherlands,

the central Rabobank Nederland organisation and a large number of specialist

subsidiaries.The local banks are members and shareholders of the umbrella co-

operative organisation which advises the banks and supports their local services.

Rabobank Nederland also supervises the collective of local banks on behalf of the

Dutch central bank. Rabobank Nederland further acts as a domestic and

international wholesale bank and as bankers’ bank to the Group and is the

holding company of a large number of subsidiaries.

…and a large number of The Rabobank Group’s ambition is to provide its nine million clients, both private specialist subsidiaries and business, with all possible financial products and services.To this end, it has a

large number of specialist subsidiaries and business units engaged in asset

management and investment, pension services, insurance, occupational health

and safety, leasing, venture capital, real estate and mortgages as well as corporate

and investment banking.These subsidiaries provide financial advice and products

to the local Rabobanks and their clients on the one hand and serve their own

clients directly at home and abroad on the other.

Strong market leader with Triple A status The Rabobank Group serves more than half of the Dutch population and Dutch

businesses, which makes Rabobank market leader in the Dutch market for

virtually all financial services: mortgages (26%), private savings (38%), small and

medium-sized enterprises (39%) and the agricultural sector (85%). Its share in the

corporate market has been strengthened considerably.The Rabobank Group has

the highest credit rating (Triple A), awarded by the renowned international rating

agencies Moody’s and Standard & Poor’s.

11.2 Rabobank Group: the global leader in food & agri financingStrong F&A financial expertise Rabobank focuses on the food & agribusiness sectors offering specialist products

and services. Every location has access to the bank’s strength: a network of

prominent industry specialists, leading researchers and industry analysts who

generate a wealth of knowledge for clients.The combination of strong banking

skills with highly specialised market knowledge enables Rabobank to deliver

financial expertise with lasting positive impact on F&A companies’ business.

Dedicated F&A Research… Rabobank has a global team of analysts that continuously accumulates

knowledge in major F&A sectors, issues and trends. All the major F&A sectors are

covered worldwide, with the emphasis on covering all the relevant issues

throughout the food chain from production to the consumer, from brand

strategies to environmental issues, from world trade flows to chain control.The

numerous publications reflect the bank's extensive knowledge of F&A sector

trends and corporate strategies.

Rabobank


…and F&A advisory Rabobank uses its extensive knowledge of F&A sector trends and corporate

strategies to act as an advisor to existing and prospective clients in strategic

discussions with the management of companies and in paid advisory mandates,

such as growth strategies, country entry strategies, repositioning strategies,

feasibility studies and co-operative strategies.

Full range of financial services Based upon the combination of extensive F&A market knowledge and high-level

banking skills, Rabobank offers a full range of financial services. From loans to

insurance, from credit structuring to project finance, from commodity finance to

acquisition finance and from advice in mergers & acquisitions to price risk

management.

Box 2 Rabobank’s full range of financial services

Corporate banking Lending and payment services are elements of a total approach in which quality advice and productinnovation are inherent aspects in the provision of financial services. Each customer is appointed aninternational relationship manager who is dedicated to finding tailor-made solutions.This often entailsmobilising multiple forces within the network and bringing together a team of designated specialists.

Corporate finance Rabobank's long-standing experience of lending is enhanced by the addition of a wide range of corporatefinance services, including project and leveraged finance, export finance and mergers & acquisitions.Whether the target is structured equity, off-balance sheet solutions, cash-flow management or fiscaloptimisation, the primary objective is to enable a company to concentrate on its core activities.

Asset management When confronted with the need to manage capital, questions with respect to duration, risk appetite andexpected return need to be addressed and implemented in an investment strategy.This requires specialistswho understand the situation and recognise a company’s demands. Rabobank offers the services of theoldest and one of most reputable asset managers in Europe, Robeco. Robeco has an investmentprogramme that comprises both a series of investment funds tailored to specific objectives andinvestment mandates. Robeco has more than one million clients and investments in more than 160 mutualfunds.

Capital markets The innovative teams of Rabobank Capital Markets focus on delivering tailor-made solutions to institutionalclients for their investment, liability and risk management needs. Rabobank operates around the globefrom its main branches in Singapore, New York, London and Utrecht.

Sustainability services Rabobank is actively committed to sustainability.The Rabobank Green Fund invests in forestry and nature,sustainable innovations in corporate processes such as agrification, organic agriculture and horticulture,sustainable construction, sustainable wind, solar and biomass energy, and other kinds of environmentallyconscious investments.

Leasing Companies often have to invest in production and process facilities whereby it is not desirable to financethese from their own funds.Through De Lage Landen Rabobank offers a complete range of leasing andtrade finance products to cover a company’s financing needs, including real estate financing, leasing aswell as consultancy in finance, engineering and tax-related fields. De Lage Landen offers solutions forcompany owners as well as financial investors.

Trade and commodity finance Rabobank offers trade and inventory financing as well as price hedging solutions for commodities.Dedicated teams of high quality professionals are located in all major trade locations around the world.Theteams are highly interconnected which ensures an efficient, state-of-the-art approach to solving clientneeds. For soft commodities, Rabobank has dedicated research capabilities that ensure that our productsand solutions match the requirements of industry and take into account the latest developments inbanking. For trade and export finance, Rabobank deals with all commodities as well as consumer andcapital goods.

Rabobank


11.3 Rabobank Group: growing international retail banking in ruralareas

Logical expansion into rural banking The roots of Rabobank lie in the financing of the Dutch agricultural sector.Today,

Rabobank still has the best market position and the strongest brand name in the

local rural market in the Netherlands. Retail and agri finance is the core

competence of the Rabobank and therefore offers the opportunity to stand out

from competitors worldwide.This, coupled with the fact that in many

international rural markets banks are struggling to maintain their margins and are

subsequently withdrawing, made it a very logical step for Rabobank to carry over

its retail success in other countries.Therefore, Rabobank International has

gradually expanded its activities in foreign retail markets.

Country banking in mature markets… The focus in Rabobank’s country banking strategy is on the acquisition of smaller

organisations active in rural areas and which, in addition to retail activities, hold a

strong position in the agricultural sector. Although not ruling out emerging

markets completely, the country banking strategy is primarily implemented in

mature and possibly converging but high-potential markets with a strong

agricultural sector and where legal structures are well in place.

…shown in a number of acquisitions The country banking concept was launched in the mid 1990s with the

acquisitions of rural credit suppliers PIBA in Australia and Wrightson Farmers

Finance in New Zealand and was continued in March of 2002 with the acquisition

of ACCBank in Ireland, a strong rural brand servicing SMEs, food&agri and personal

customers. In the US, the acquisition of Valley Independent Bank (VIB) in 2002, with

a retail network in southern and central California was followed in 2003 by the

acquisition of Lend Lease Agri-Business, an agricultural mortgage lender with a

national network. Next, the Iowa based Ag Services of America was acquired: a

crop input lender also with a vast network.Very recently, Rabobank Group and

Farm Credit Services of America (FCSAmerica), headquartered in Nebraska,

Treasury Rabobank offers treasury management solutions, including treasury advice, risk advice, transaction and flowanalysis and optimisation, client-focused alternatives to volume-driven foreign exchange counterparties,risk advice on customer balance-sheet hedging needs and a full range of foreign exchange products.

Insurance Every company or organisation is constantly subject to risks that can have serious financial consequences,for example fire, tornado, burglary, lightning strikes or explosions.The Rabobank subsidiary Interpolis offersa large variety of insurance options for companies.

Venture and private capital When the necessity arises to strengthen the capital base of a company, the private equity and venturecapital professionals of Rabobank can offer solutions. Rabo Private Equity is not a fund with shareholdersbut an integral part of Rabobank Nederland.The total investments amount to EUR 150 million in a portfolioof non-listed Dutch companies. Innovation is a key issue at Rabobank Nederland and is expressed in theinvestment focus of Rabobank. Rabo Private Equity invests in all kinds of transactions from businesssuccession, expansion and development to buy-outs, buy-ins and replacement of capital.While there is nopreference regarding type of industry, the investments are restricted to the Netherlands.


Rabobank


reached an agreement concerning the acquisition of this US co-operative

agricultural credit institution. It is the largest provider of credit and insurance

products to farmers and ranchers, the agricultural processing industry and rural

residents in four US states.

11.4 Rabobank: rural banking and managing commodity risks indeveloping countries

Commitment to help improve access Rabobank’s success formula of agricultural finance is not only applied in mature to affordable credit… markets but also in developing countries. Rabobank is going to significantly

expand its rural banking activities in developing countries.This is in line with the

bank’s commitment to taking a much more targeted approach of giving small

agricultural companies and others access to affordable credit in order to stimulate

economic development. One of the key points of action for 2004/2005 is the

launch of the Rabobank Development Programme that is aimed at developing

financial institutions with a long-term commitment by creating institutional links

and providing financial support e.g. equity participations and guarantees, in some

15 developing countries.

…co-ordinated in the Rabobank The Rabobank Development Programme will capitilise on experience Development Programme activities that Rabobank has been carrying out in the field of rural banking for

over a century and will receive start-up capital totalling USD 25 million (for equity

participation and guarantees).

Making derivative markets accessible Smaller commodity producers in developing countries are now benefiting by to smaller producers using hedging tools based on derivatives markets as a way of managing

commodity risk. Rabobank has recently participated in several successful,

innovative pilot transactions with the World Bank International Task Force in

Commodity Price Risk Management (ITF). In Uganda, Rabobank assisted a local

East African business to be the first to use hedging as a tool to manage coffee

price risk.This initial small transaction benefited about 450 Ugandan small coffee

farmers. Further transactions occurred during the following two crop seasons with

an additional counterparty. In Tanzania, Rabobank is working with a large coffee

co-operative, amongst others.The hedging transactions by the Tanzanian co-

operative were larger than in Uganda and benefit several thousand small coffee

farmers.

Rabobank

www.rabobank.com

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