The agri-food supply chain today faces perhaps unprecedented demands and challenges and is evolving rapidly in response to them. The task of feeding a population of 7.4 billion people that is expected to grow to 11.2 billion by 2100. Further, modern agriculture is being asked to provide an increasingly complex suite of differentiated products—differentiated in traditional senses of size, variety, colour, etc., but also in dimensions that were rarely considered not long ago. They include nature of inputs into the production process (e.g. use or not of genetic engineering (GE)), location of production, environmental implications of production, treatment of birds and animals used in production, and ‘fairness’ of marketing arrangements to farmers an farm workers. The dimensions that comprise a food product’s relevant characteristics and its ‘quality’ are significantly broader today compared to only a few years ago.
Proceeding apace with increased concentration is greater vertical coordination across the stages of the supply chain. Such coordination is tied inexorably to the market’s demands for products that are increasingly complex and multidimensional in their characteristics. Contract production dominates modern agriculture in key sectors, such as fruit, vegetable, nut and livestock production, and is expanding in the developing world, limited mainly by lack of institutions to facilitate and enforce contracts.
An important trend in the USA, Europe and elsewhere in the developed world is to make food consumption conform to one’s sense of identity or morality. In settings where food consumption occupies a rather small share of the budget, consumers increasingly seek products that conform to an identity or morality such as support for those less fortunate, care for animals or the environment, or in furtherance of a perceived healthy lifestyle. These human motivations are surely not new, but they are achieving prominence today through income growth. In 2014, only 6.6 per cent (17.2 percent) of US (EU-27) consumer expenditures were allocated to food.
As the dimensions of food and agricultural production practices have expanded to fulfil consumers’ diverse demands for quality attributes and products that contribute to their sense of identity and morality, researchers have sought to determine their willingness to pay for these emerging characteristics.
Key examples from the USA and Europe include products that:
- limit the use of chemicals, such as organic;
- improve confinement conditions of animals;
- employ humane animal treatment practices;
- limit the use of antibiotics in livestock production;
- use fair-trade marketing arrangements for product procurement;
- limit a product’s carbon footprint;
- identify a country or specific region of production, such as European protected designations of origin and protected geographical indications.
Consumers have also shown an increased awareness and interest in the health impacts of food and diet, spurring demands for safe foods and differentiated foods, such as natural, organic or non-GMO, that they perceive (rightly or wrongly) to be healthier than the conventional alternative.
Demands for an expanded suite of product characteristics are emerging in the developing world as well. Increased income levels in developing countries have precipitated dietary composition change with broad implications for global food demand moving forward. Most notably in China and India consumers have moved away from traditional staples and toward livestock products. For example, China experienced a nearly 300 percent increase in meat consumption from 1980 to 2010, but only a 2 percent increase in rice consumption.
To date the literature focused on quantifying consumer willingness to pay for expanded food attributes suggests that Chinese consumers have primarily focused on food safety and country-of-origin attributes, and, along with counterparts in India, exhibit greater willingness to pay for food safety relative to animal welfare or environmental attributes.
A little-appreciated characteristic common to most of the credence attributes introduced in the production stage is that they reduce yields, generating less output per unit of land committed to producing the product. Thus these demand-, policy-, and third-party-driven choices to pursue less efficient agricultural systems impact food prices and our collective ability to produce food and meet world food demand in the future. Reduced yields and productivity also provide a significant basis to question the claims of environmental benefits for the alternative production systems, compared to conventional agriculture. In large part, this debate centres on the impacts to the environment of intensive versus extensive expansion of agricultural production in order to meet global food needs. Given that the leading cause of anthropogenic greenhouse gas emissions is land conversion to agriculture, strategic intensification of existing agricultural lands to increase yields reduces greenhouse gas emissions and use of nitrogen fertilisation compared to the alternative of greater land clearing to expand food production.
Reduced yields have been documented most extensively for organic production, a credence attribute with a long history and widespread adoption. Recent meta studies peg the yield gap between organic and conventional systems to be in the range of 20–25 percent, on average, across crops and countries.
Implications for food system efficiency and sustainability
While there is some variation in the yield effect of adopting GE across crops and countries, they are generally significant both statistically and economically. Genetically engineered crops increased yields 22 per cent, on average, and also reduced chemical use by 37 percent and increased farmer profits by 68 percent.
The USA has been the most aggressive adopter of genetically engineered technologies, with 58 percent of total hectares of all crops in 2010. Given that the USA and similarly developed countries have historically had access to means to control and combat weed and insect pressures, the benefits associated with GE adoption in those regions are largely not driven by yield increases, but, rather, by opportunity to avoid use of pesticides or to use herbicides like glyphosate instead of less effective alternatives. Impacts on yields are more substantial in developing countries with limited access to inputs and modern technologies.
Restrictions on technologies and allowable inputs for animal production also reduce the efficiency of feed conversion and, thus, require more feed inputs per unit of animal production. The production efficiency loss has been documented most extensively for antibiotic use for growth promotion and disease prevention.
Amid this backdrop of an evolving ethos surrounding food consumption patterns in the developed world, it might be easy to lose sight that the problem of adequately feeding a growing population is not solved. In some of the least developed countries, households on average allocate close to 50 percent of their total expenditures on food. Further, the FAO projects global food demand to grow by 70 per cent from 2005 to 2050.
Implications for meeting expanding world food demands
Beyond population growth, the income-induced change in dietary composition in developing and middle-income countries to emphasise higher levels of protein consumption, as reflected in the recent Chinese and Indian experience, adds pressure on agriculture worldwide to produce adequate supplies of food. This increase in demand for protein has lead to significant growth in the inventories of cattle, pigs, chickens, and sheep globally in the past 50 years. Yet, as is well known, animals convert plant material to food inefficiently—at an average rate of about 10 percent.
Regardless of the specific demand-growth estimate, most researchers agree that increased agricultural productivity is the key to global food security and the future. However, growth in crop yields has slowed over the past two decades, with global yield growth for key grains and oilseeds, maize, rice, wheat and soybeans, slowing substantially from 1990 to 2007 compared to the prior 30 years.
Implications for organisation of the supply chain now and moving forward
Modern markets for agricultural products are inherently differentiated-product markets due to their evolution from commodity-based markets selling largely homogeneous products on spot exchanges to an environment featuring multiple and nuanced product characteristics.
Organic agriculture provides a key example. Consumer demand for organic products continues to increase over time at a rate faster than overall food demand growth, and organic sales now account for roughly 4 percent of total US food sales. Major food retailers have expanded their product offerings to include organic products, and many have their own organic product lines and labels. Three fourths of US grocery stores now carry organic products, and the Organic Trade Association estimates that 93 percent of organic sales now take place through conventional and natural food supermarkets, compared to only 7 percent in 1991.
Further, mainstream food manufacturers such as General Mills, Kellogg’s and Coca-Cola have moved aggressively into organic production through the acquisition of independent organic labels such as Honest Tea, LaraBar and Kashi. In this sense it seems inevitable that a key motivation for those who support credence-type agricultural products, namely that their adoption will stimulate opportunities for small-scale producers and marketers, is destined to result in disappointment.
Indeed consolidation of the food chain continues. In the USA, there is an average increase of 13 percent an the four-firm concentration rate and an average increase of 30 percent in the Herfindahl–Hirshman index from 1997 to 2007 for food manufacturing.
Concentration in food manufacturing in member states in Europe is in general even higher than in the USA but is lower when all of the EU is considered more broadly. Undoubtedly the single greatest structural change in the agri-food supply chain worldwide in recent decades has been the rapid expansion of supermarkets and concentration of food retailing. The supermarket revolution has taken place in waves, first in the USA, then in Western Europe, and spreading across the world including Central and Eastern Europe.
However, substantial concerns about food manufacturer and retailer marketpower as sellers remain elsewhere, including in Europe, owed at least in part to food having a higher expenditure share relative to the USA and a less expansive set of public feeding programmes for the poor. In addition, the run up in commodity and food prices from 2005 to 2011 spawned concerns that at least some of it could be due to the market power of food manufacturers and retailers.
Greater buyer concentration, increased vertical coordination and vertical restraints, and the emergence of dedicated supply arrangements, whether codified through formal contracts or not, are behind the concerns regarding the buying power of large food manufacturers and retailers in both the USA and the EU. A common complaint among US farmers is the absence of selling opportunities, with producers often having only one, or at most a few willing buyers for their production.