Industry T rend Analysis - Agriculture Megatrends T o 2050: Food Security Challenges And Opportunities

10 Apr 20 18 Glo bal Ag ribus ine s s

BMI VIew: Agriculture and global food security will face considerable challenges in the coming decades. The episodes of supply disruption and rising food prices will
become more frequent, as rising consumption and the impact of climate change will put a growing strain on available supply. Different continents will follow diverging
trajectories: while developed markets will maintain elevated levels of food self-sufficiency, Africa and the Middle East will see their food security worsen in the medium
term. Consumer awareness will be a key issue for agribusiness companies over the coming years, as will the theme of IoT and disruption, especially for upstream
companies and grain traders.

AGRICULT URE MEGAT RENDS T O 2 0 50 : WINNERS & LO SERS

Megatrend Winners (country or industry) Losers (country or industry)

Climate Change T o Promote Focus
On Environmental Sustainability
Pushed By Agtech And Labour
Shortages, Agriculture Will Become
Capital-Intensive
Heightened Food Security Concerns
Due T o Production Divergence
Between Countries
Consumer Awareness And Food
Regulations On T he Rise
According to research compiled by the IPPC, tropical
regions will see a more drastic decrease in yields
Precision agriculture companies due to climate change.
Yield-boosting technologies: Big data agri
companies, animal genetics, GM companies
Crop insurance companies in EMs
Traditional agribusiness companies providing Small scale farmers, especially in developing
agtech countries, unable to adopt the agtech.
Farmers adopting agtech will enjoy higher yields but
face higher production/maintenance costs and a
Tech companies specialised in agri strong dependence on providers
Tech companies (diversified) Fertiliser companies, grain traders
Africa and the Middle East will see little or no
Traditional global breadbaskets (Europe including production growth. Africa will see its food security
CIS) and the US. decrease in the coming years.
Trading companies
GM companies
Health conscious food producers (dairy producers
especially in the 'nutrition' segment) Red meat companies

Organic food producers (WhiteWave Foods, Hain

Celestial Group and General Mills in the US) Sugar companies
Fruits and vegetable producers and exporting
countries. Palm oil companies
Liberalisation Of Illicit (Organic) Early entry players. First mover advantage for any
Narcotics of major trading houses.
States (higher tax revenue)
S o u r c e : B MI

Weather Volatility From Climate Change To Promote Focus On Environmental Sustainability

Weather dis ruption events will become more recurrent due to climate chang e, and their impact on food s upply will be ag g ravated by g rowing water s carcity
around the world. Climate chang e is not only expected to s ig nificantly increas e g lobal temperatures and chang e precipitation patterns , but will als o increas e
the frequency of natural dis as ters , s uch as droug ht, flooding epis odes , and s torms . This will limit yield and arable land g rowth. Currently, Africa and South
As ia are the mos t at ris k of water s tres s , and climate chang e will wors en thes e ris ks in the coming years . A larg e s upply dis ruption, which is mos t likely to
s tem from natural dis as ters (El Niño or La Nina-related uns eas onal weather, dry or cold wave affecting a whole continent, etc), could clearly reduce g lobal
food s ecurity for s everal cons ecutive years .

To mitig ate this , we expect reg ulatory policy to become more s tring ent for the ag riculture s ector. Ag riculture is the larg es t contributor to non-carbon dioxide
(CO2) emis s ions in the world, with mos t of its emis s ions taking the form of methane (CH4) and nitrous oxide (N2O). Within ag riculture, the lives tock
s ubs ector is by far the larg es t contributor to g lobal GHG emis s ions : enteric fermentation (the dig es tive proces s that leads to methane emis s ions from
ruminants s uch as cows ) and manure (left on pas ture or us ed to fertilize s oils ) account for ca. two thirds of the s ector's total GHG emis s ions . Synthetic
fertilizers and rice cultivation are the next larg es t contributors , accounting res pectively for 12.6% and 10.0% of the s ector's total emis s ions in 2014.

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 Policy To Target Outsized Agricultural Contribution To Climate Change
Global - GHG Emis s ions By Economic Sector In 2010 (% of total anthropog enic emis s ions in Gt of CO2
equivalent per annum)

Note: Pie chart shows direct GHG emission shares (in % of total anthropogenic GHG emissions) of five economic
sectors in 2010. Pull-out shows how indirect CO2 emission shares (in % of total anthropogenic GHG emissions)
from electricity and heat production are attributed to sectors of final energy use. 'Other Energy' refers to all GHG
emission sources in the energy sector other than electricity and heat production. Emissions are converted into
CO2-equivalents based on GWP1006 from the IPCC Second Assessment Report. Source: IPCC, BMI

We believe that climate-related policy and reg ulation will targ et lives tock and s oil manag ement on a priority bas is , as thes e are 'hig h-impact' areas that could
g enerate s ig nificant emis s ions reductions at low cos t to g overnments . Rice cultivation, by contras t, will be s pared immediate action; mos t rice is produced in
low-income countries , where the g rain plays a s ig nificant role in employment and food s ecurity, and g overnments will avoid confrontation on this s ens itive
topic. We als o expect g overnment action on climate chang e to manifes t its elf in the form of more s tring ent land us e reg ulations . In addition to rig orous
monitoring and enforcement mechanis ms , g overnments will introduce land reg is tries and reg ulate land-us e s o that a portion of farmland is s et as ide for
environmental purpos es .

Asia & Nitrous Oxide Generate A Growing Share Of Agricultural GHG

Emissions
Ag riculture - GHG Emis s ions By Reg ion And By GHG (anthropog enic emis s ions in Gg of CO2 equivalent
per annum)

Source: FAO, BMI

We als o fores ee a number of s ig nificant opportunities for farmers and ag ribus ines s es that are able to remain ahead of the curve when it comes to
environmental reg ulation.

Demand for innovative, environmentally friendly inputs and equipment will increase. These include, among other things: less emissions-
intensive fertilizers and fertilizer application technologies; top-of-the-range animal genetics (e.g. bovine semen); equipment for the collection,

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 storage and treatment of manure; high-quality and easily digestible animal feed; yield-boosting technologies that decrease the land-intensity of
agricultural production systems.
Yield-boosting technologies will experience unprecedented growth. Food demand will increase significantly out to 2050, driven by an increase
in the global population, rising incomes and diet diversification in emerging markets. Given the expected increase in land use restrictions, we
expect yield-boosting technologies to become even more central to production growth than they are now, generating significant opportunities
for companies that offer high-tech inputs such as seeds, fertilisers, herbicides and pesticides.
Farmers will benefit from first-mover advantage if they are able to anticipate and prepare for change. The agricultural sector's contribution to
regulatory process will be crucial to the development of rational pathways towards a sustainable future. Those who are able to influence the
policy debate and implement best practices in a gradual manner will avoid sudden shocks to their production processes and enjoy an
advantage over their competitors when competing for markets with more stringent environmental regulations.
Feedstock and biofuel producers will benefit from ambitious government support policies. In countries that plan to increase the share of
biofuels in their energy mix as part of their commitments under the Paris Climate Agreement, we expect to see an increase in biofuel support
policies, including biofuel mandates, fossil fuel taxes, emissions trading schemes, and so on. Feedstock and biofuel producers will benefit from
the surge in demand for feedstock that will result from these policies.
Organic agriculture will become increasingly mainstream, driven by rising health awareness and concern around the presence of harmful
chemicals in day-to-day food products. Acreage devoted to organic products and international trade is on the rise in developed countries and
we expect this trend to gain momentum going forward, opening opportunities along the supply chain.

Pushed By Agtech And Labour Shortages, Agriculture Will Become Capital-Intensive

Ag ricultural production and s upply chain proces s es will als o chang e dramatically in the coming decades with the acceleration in adoption of machinery and
technolog y in the s ector and the concomitant decreas e of labour at a time when labour s hortag es are becoming a pres s ing is s ue. The ag ribus ines s s ector
offers fertile g round for a confluence of technolog y trends , including advanced automation (Internet Of Thing s objects including tractors and harves ting
robots ), artificial intellig ence aided by ‘big data’ and drones , among others . As a res ult, ag riculture - traditionally one of the mos t labour-intens ive indus try -
will become increas ing ly capital-intens ive. Overall, ag tech will be a major factor behind future improvement in g lobal yields . It will als o help reduce was te and
could connect more directly farmers and cons umers , fulfilling ris ing s ocietal as pirations .

The ris e of ag tech us e and ‘precis ion ag riculture’ will benefit or dis rupt a number of operations and bus ines s es in the proces s and we believe the winners of
this key multi-decade s hift will be farmers that have adopted the technolog y, who will record hig her yield and profits as well as the tech s ervice providers in
the s ector. The corollary of the ris e of ag tech will be hig her production cos ts at the farm level and a s trong dependence on providers . A larg er s hare of
farming profits will be captured by thes e s uppliers at the expens e of farmers . Meanwhile, the fertilis er indus try is s et to s uffer, as precis ion ag riculture
means lower input us e.

IO T IN AGRIBUSINESS

T ype of technology and device

Sub Sector Goal used Impact
Collecting and sending information on
moisture, sunlight, rainfall, crop & soil, air M2M: Sensors, drones, satellites,
Crop f arms monitoring, etc. Allowing precision farming connected and eventually autonomous Farm: Increased yield, better use of
(grains, sugar, (precision planting, fertiliser application, tractors. Data: data analytics, database fertilisers and inputs, lower production
etc) spraying, irrigation). servers, cloud systems. costs (less input, less water).
Input companies: decrease in fertiliser
use per ha.
Increased productivity (detecting
Fence monitoring/fenceless farming; tracking disease outbreaks early and
and monitoring cattle (health tracking, calving M2M: Sensors, drones, GPS-enabled decreasing the impact of diseases),
Livestock cycles, localisation, etc); grazing/feed collars. Data: data analytics, database more efficient feed use (potential for
f arms management. servers, cloud systems. lower feed need).

Farms: This technology will be more

suitable for developing countries,
characterised by the pre-eminence of
small farms with very low investment
capacity and which rely on
Relations intermediaries to a greater extent than
between input Connecting field agents to a cloud-based Handheld technology: Smartphones, farms in developed markets. Better
companies, analytics engine, in order to give farmers tablets used by intermediaries. Data: market, crop and input information
intermediaries customised products and increase efficiency Data analytics, database servers, cloud could boost yields and returns for
and f armers for their intermediaries. systems. farmers.

Input companies: The aim would be to

gain market share by boosting
intermediary and farmer loyalty.

M2M: Sensors (on silos), GPS vehicle

tracking (telematics). Data: analytics, Reduction in waste along the supply
Supply chain Inventory tracking and product traceability. cloud system. chain.
S o u r c e : B MI

In terms of g eog raphical adoption, developed markets with a mature ag ricultural s ector are larg ely mechanis ed and have already s tarted adopting ag tech.

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 They will remain at the forefront of adoption, helping them to remain larg e ag ricultural players on a g lobal s cale. Looking at developing countries , the vas t
majority of them s till rely on labour at the farm level, but we will witnes s an increas ing diverg ence in machinery and ag tech us e. As ia will outperform others in
terms of adoption in the coming 10 years due to s trong ICT fundamentals and a pos itive outlook for ag ricultural production and trade. China in particular will
embrace ag tech on a five-year horizon, helped by active public s upport.

Meanwhile, African countries will s tay behind in terms of mechanis ation and ag tech adoption trends , at leas t over a 10-15 year horizon. A number of African
g overnments and multinational ag ricultural machinery companies have tried to improve mechanis ation rates throug h s ig nificant inves tment of capital in
recent years , but thes e efforts will have limited s ucces s for now. In order to increas e profitability in African ag riculture and boos t mechanis ation us e –
whether ‘bas ic’ or ‘advanced’ – a number of primary g oals need to be achieved: partners hips with food companies , the development of cooperatives , g reater
acces s to credit and in inves tment into s ectors s trong ly linked to ag ricultural equipment, namely the development of infras tructure s uch as roads , ports ,
power and finance.

Heightened Food Security Concerns Due To Production Divergence Between Countries

Global food s ecurity is currently relatively s table, as the world is able to produce more than it cons umes . Some reg ions and populations s uffer from
temporary famines or remain undernouris hed or malnouris hed (mainly in South As ia and Sub-Saharan Africa), but thes e s ituations can be attributed to
inefficient public policy and the lack of inves tment, which are creating food s hortag es , rather than to a g lobal food s upply is s ue. Global food cons umption
will continue to accelerate in the coming decades in line with a g rowing population and emerg ing market middle clas s . Indeed, we forecas t world population
to reach 9.7bn in 2050, and the Food and Ag riculture Org anization (FAO) believes that by 2050, g lobal ag riculture production will need to have increas ed by
an additional 70% from today's levels to meet g rowth in food demand res ulting from population increas es , ris ing incomes , and a s hift in preferences to
protein-rich diets , which in turn requires a larg er production of feed. The cons umption of non-food products will als o be behind the s train put on ag ricultural
production, as urbanis ation and more wealthy lifes tyles entail arable land encroachment, increas e pollution and contribute to climate chang e.

Cons equently, the epis odes of s ig nificant g lobal s upply dis ruption and s kyrocketing food prices will become more frequent and s evere, as ris ing
cons umption and the impact of climate chang e will put a g rowing s train on available food s upply. To mitig ate thes e effects , ag ricultural productivity (and
ultimately production) will require continuous expans ion, and there is evidence that this is already happening . Several countries - including China and India -
have the potential to boos t their ag ricultural output. In China, the commercialis ation of g enetically modified s eeds for food products (es pecially corn) - which
we s ee happening on a three- to five-year horizon - will g ive a s ig nificant boos t to its yields . In India, inves tment in infras tructure and the s upply chain would
als o help the country make s ome breakthroug h improvements in yields and exportable s upply.

Americas Dominating GM Crops

Global - GM Area Planted By Country In 2016 (% of g lobal GM area planted)

Source: BMI, ISAAA

Another potential s olution is the creation of alternative meat products . For example, meat proces s ing companies are increas ing ly looking at opportunities in
the s ynthetic meat s pace as an alternative to low marg in, labour intens ive products that carry potential health ris ks . While we believe this will be a long -term
proces s developing over decades , we expect to s ee more inves tment in this s pace in the s hort term as cons umer tas te preferences continue to s hift
towards hig h protein diets , es chewing beef for chicken and other alternatives . Tys on Foods , one of the world's larg es t proces s ors and marketers of chicken,
beef and pork, has confirmed that it s ees plant-bas ed protein as a big part of the food indus try's future, as evidenced by its 5% s take in plant protein s tart-
up Beyond Meat, which it acquired in October 2016. Similar to Beyond Meat, plant-bas ed meat and dairy alternative company Impos s ible Foods has als o
attracted financing from larg e inves tors , including Goog le, which tried to acquire the company in 2015. Tys on Foods als o launched a USD150mn venture
capital fund in order to inves t in meat s ubs titutes and opportunities outs ide of meat and is emerg ing as an early adopter in this s pace. One of its recent
acquis itions in early 2018 included Memphis Meats , a Bill Gates -backed s tartup that has had received inves tments from Carg ill.

While g lobal ag ricultural production will continue to g row in the coming decades , we believe different continents will follow diverg ing trajectories in terms of
s upply g rowth and food s ecurity. We hig hlig ht three g roups of countries . Firs t, the traditional g lobal breadbas kets , namely Europe (including Commonwealth

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 of Independent States countries ) and the US, will s ee their output and already-larg e food s urplus es ris e in the coming years . They will remain the mos t
important ag ricultural s uppliers on the international s tag e. Second, As ia and Latin America (including Mexico) will s ee the mos t s ig nificant increas es in
production on a 10-year horizon, but their food s ecurity will remain precarious due to s trong g rowth in local food cons umption (s ee chart below). Finally,
Africa and the Middle Eas t will s ee little or no g rowth. As s uch, Africa will s ee its food s ecurity decreas e in the coming years .

Africa's Food Security On The Decline

Select Food Grains - Production Balance By Reg ions (mn tonnes )

Source: BMI, USDA

Consumer Awareness And Food Regulations On The Rise

The ong oing ris e in cons umer awarenes s and increas ed g overnment s crutiny reg arding food quality, health is s ues and the overall s us tainability trend will
increas ing ly affect g lobal ag ribus ines s s upply chains and food reg ulations in the coming decades . Governments are s lowly adopting increas ing ly s tring ent
food labelling laws . So far, health and nutrition labelling has been targ eted the mos t, as a res ult of the obes ity epidemic and other food dis order-linked
dis eas es . We expect the s pectrum of labelling laws to broaden at a fas t pace in the coming years , including country-of-orig in labelling ; environmentally,
s ocially and ethically s us tainable production; animal welfare cons iderations ; and health warning s pertaining to s ome products . Thes e tig htening reg ulations
and the pus h towards trans parent dis clos ure will res ult in a ris e in production and packag ing cos ts , as companies will have to adapt to different reg ulations
acros s countries and reduce the us e of controvers ial production methods and ing redients .

Limited Impact So Far But More Scrutiny Ahead

RHC: Ag ribus ines s Larg e Cap Environmental ESG Scores & Five-Year Total Return (USD terms ); LHC: BMI
Ag ribus ines s Index Averag e Environmental ESG Score

Note: ESG scores calculated by Bloomberg out of 100. Total return period = 01/01/2012 - 01/01/2017. Source:
BMI, Bloomberg

Ag ribus ines s companies , particularly thos e more downs tream, will increas ing ly be affected by what our Food and Drink team terms ‘Social Ris k.’ The advent
of the s ocial media ag e has broug ht with it a new layer of trans parency and awarenes s reg arding the behaviour of companies . Cons umers have an element
of power when choos ing to buy products from a rang e of brands and increas ing ly us e that power as an extens ion of their pers onal values . We have termed
this as 'Social Ris k', and repres ents a s tep beyond traditional marketing and public relations , to determine the core belief of a brand. While price, loyalty and
availability s till play a key role in buying decis ions , cons umers are looking at a myriad of different 's ocial' factors , all of which can be defined under 'Social
Ris k' and may res ult in the cons umer buying the brand or boycotting it. 'Social Ris k' includes :

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 Political support: Which candidates or political parties the company or high profile executives donate to. Public statements for or against Brexit,
NAFTA, Paris Agreement, etc. Origin location of manufactured goods 'Made in China' vs. 'Made in America'.
Social/ethical causes: Support or opposition for; social justice, pro/anti-immigration hiring, working conditions and wages, instances of sexual
harassment, LBGTQ marriage rights, religious freedom.
Environmental/Green: Use of renewable energy, 'green' technology and/or other company policies that encourage the conservation of the
environment. Sustainably sourced goods, farm-to-table and use of local products.
Customer Relations/Marketing: Exceptional/poor treatment of customers, positive/negative social media presence, marketing campaigns that
focus on social issues, customer data privacy compromise.

Liberalisation Of Illicit (Organic) Narcotics

We believe over the next s everal decades there will be a chang e in the leg al treatment of illicit narcotics , s pecifically marijuana but potentially cocaine as well.
We expect that s ynthetic narcotics will remain illeg al. The term 'narcotics ' its elf is s omewhat amorphous , but for our purpos es we us e the leg al definition,
which cons iders any illicit drug to be a narcotic. In our previous 'meg atrends ' article from 2015, we arg ued that the leg al chang es were s low but accelerating ,
mainly due to s everal US s tates pas s ing referenda leg alis ing the crop for either medical or recreational purpos es . Since then, momentum towards policy
reform has accelerated cons iderably, mos t notably due to the pas s ag e of marijuana leg alis ation by the Canadian Hous e of Commons in mid-2017 (the law
remains s talled in the Senate but is expected to be s ig ned into law in 2018) and the US s tate of California, which we feel is a potential g ame-chang er for
s ector in the US. As of early 2018, 29 US s tates allow at leas t medical us e of marijuana products that don’t have res trictions on THC content (the drug ’s
ps ycho-active component), and at leas t four other s tates could join them in 2018. This is likely to lead to a clas h with the federal g overnment (which s till
nominally criminalis es the drug ), and over the coming years , this will culminate in a dis cus s ion at the federal level over whether to leg alis e marijuana outrig ht
over the coming decades . Indeed, we as s ig n a cons iderable likelihood that marijuana will be re-s cheduled at the US federal level over that time.

A Growing Trend
United States - Marijuana Leg ality By State

Note: Includes laws which have not yet gone into effect. Some Indian reservations have legalisation policies
separate from the states they are located in. Source: Wikipedia

At a bas ic level, and g iven that marijuana in particular is ultimately a crop, we believe there are two key is s ues related to eventual leg alis ation both in the
United States and abroad. Firs t, reg ulation will need to s trike the rig ht balance between deterring exces s ive cons umption (which could lead to health ris ks )
and ens uring that any black market for marijuana is crowded out. This has a number of implications in terms of taxes , minimum ag e limits , quantity limits and
us e when operating vehicles or heavy machinery.

Second, the eventual reg ulatory framework will have implications for the commercial development of the indus try. Within ag riculture, s ome parts of the crops
s ub-s ector are relatively commercialis ed while others are more frag mented. For example, the s ug ar indus try is relatively commercialis ed, with larg e (in s ome
cas es public) companies owning s ug ar plantations . By contras t, the g rains s ub-s ector is more decentralis ed, with mos t corn in the US produced by family-
run farms . We believe that the marijuana indus try will likely follow the latter s ub-s ector due to its counter-culture his tory and relative s calability.

On an international level, leg alis ing marijuana has s erious implications for multiple international treaties , including 1961 Sing le Convention on Narcotic

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 Drug s , the 1971 Convention on Ps ychotropic Subs tances and the 1988 Convention Ag ains t Illicit Traffic in Narcotic Drug s and Ps ychotropic Subs tances . In
Canada, leg al experts believe that the new marijuana laws coming into effect will likely to violate thes e treaties , and have s ug g es ted that Canada either
convince other countries to chang e the treaties , g ive Canada a waiver, or formally withdraw from the treaties altog ether. The cons ens us in Canada appears
to be to withdraw from the treaty, which, g iven the country's clos e political and economic relations hip with the US, is unlikely to lead to any s ig nificant
international cons equences . However, the g ame chang es cons iderably if the US federal g overnment re-s chedules marijuana. This could res ult in potential
amendments to various international treaties loos ening marijuana res trictions and thus free individual member countries to liberalis e their own marijuana
laws .

Finally, s hould marijuana be leg alis ed, we als o s ee potential for the crop to become financialis ed, with the pos s ibility of financial market participants trading
'dope futures '. We believe this is s till years away, as the crop remains illeg al at the US federal level, but there are already dis cus s ions in the US about
opening a futures market for hemp, an indus trial cous in to marijuana (hemp and marijuana are both derived from cannabis herbs ). A s ucces s fully run hemp
exchang e, combined with an appropriate reg ulatory framework for marijuana, could lead to marijuana ultimately being traded on a futures exchang e s imilar
to other crops .

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