KPMG services for agricultural companies

24 Pages·2016·1.71 MB·English

KPMG services
for agricultural
companies
2018
KPMG IN RUSSIA AND THE CIS
kpmg.ru
2 KPMG services
for agricultural companies
Megatrends
of global
agricultural
production
Free competition with global economy
industry urges every sector to change
and evolve. Such changes provide both
challenges and opportunities enabling
the business to identify, prepare to
and capitalize industrial shifts in a
timely and more effective manner as
compared to competitors. Agricultural
industry is no exception. Major sectoral
changes alter rural lifestyle, economic
structure and state policy. These
changes are often called magatrends
as they are built on the overlapping
of multiple trends including adjacent
sectors. Trends can be economic,
geopolitical, social, technological, and
so on. KPMG analyzed main drivers
of global agriculture and identifed
nine megatrends that will defne the
world’s agricultural landscape for future
decades.
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for agricultural companies
1 Growing demand for basic agricultural products
Increase of population is a key factor of growth in world
agricultural supply and demand. Based on current growth
indicators, by 2050, the world’s total population will rise by
2.3–2.4 billion amounting to 10 billion people. A greater growth
will be seen in emerging countries with relatively low GDP and
food consumption level that is currently insuffcient to ensure a
productive and healthy life. Proceeding from indicators for 2015,
world food demand will grow by 60-70% by 2050. This estimate is
based on a population growth forecast (70% food demand growth)
and income growth forecast (30% food growth) based on dietary
allowance of 2770 kcals per person. It should be noted that about
1/3 of the world population consumes 1840 kcal meals.
2 Urbanization and growth of middle class
Based on OECD statistics, an average global income (GDP per
capita) is 14,000 USD per person per annum. It is expected to grow
to 22,000 by 2030 and to 28,000 by 2040. Currently the fastest
income growth is seen in China, India and Indonesia. Following
the growth of health and welfare, the population of these countries
will choose products in accordance with western consumption
patterns which include a greater share of grain and pulse crops,
sugar, vegetables, fruit, nuts, meat and fresh dairy products. Total
energy value of consumed food will presumably grow from
2619 kcal to 3000 kcal per person per day.
According to FAO, half of the world’s population lives in cities,
by 2030 urban population will become an absolute majority. Active
urbanization of the population and a global shift in consumer
preferences to healthy, fresh and safe food, green production
and social responsibility create demand for special agricultural
products and production, whether it is organic agricultural
produce or high fber food, allowing tracing all production
stages – from the «feld» to an end user.
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3 Technological digitalization of agricultural
production
Today agricultural industry actively uses computer-based production
modeling and big data analysis systems. In the future, agricultural
producers will use data from satellites, drones, sensors, weather
stations and agricultural equipment sensors (Internet of Things).
New technologies will allow agricultural producers to exchange
data with other producers, equipment suppliers and buyers, and
provide necessary analytical support to improve performance and
reduce costs. The agricultural robot will take a part of agricultural
production, product processing and packaging processes. End-to-
end tracking systems will increase transparency and improve end
users’ trust in agricultural products. Experts believe that developed
countries adopt new technologies at such a speed that we will hardly
even recognize the agricultural production process after 2025. In the
USA, for example, independent digital data of agricultural production
is recognized as additional assets and considered for purposes of
business valuation.
Agricultural product processing will use nanotechnologies, enzymatic
processes and 3D food printing. Marketing and distribution of
agricultural products will also undergo drastic changes – about 50%
of customers in China buy food online at least once every three
months. In the USA, this value amounts to 10%.
4 Biotechnology as a growth factor
Until recently, global agricultural production growth was mainly
due to the intensifcation of agricultural technologies, including
effcient use of production facilities, protection of agricultural
products, improved breeding and genetic material, and advanced
management practices. Use of fertilizers became the main factor
that allowed developing countries to double crop productivity
after the so-called Green Revolution.
Nowadays, many agricultural countries face restrictions in
further increase in productivity and diffculties in supplying water
to land development systems. As a result, a further growth in
productivity will be expected mainly due to the development of
breeding technologies that will allow using fewer resources to
increase production. The world needs Gene Revolution, and in
general we can say that we have progressed in that feld, as post-
transcriptional modifcation and apomixis processes improve and
accelerate cloning and allow editing of breeding material, thus
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creating preconditions to speed up the scientifc processes in
breeding and genetics, boosting the production of new variety of
plants and hybrids, and new breeds.
Moreover, genetic improvements will not automatically imply
the creation of genetically modifed organisms (GMO). New
technologies such as genetic editing will allow favorable
mutations in an organism – a traditional selection method, while
DNA sequencing will help determine and improve genotype of
plants and animals.
5 Limitation of land resources
The global land area is 13.2 bln hectares, with 12% (1.6 bln
hectares) used for agricultural production, 28% and 35% occupied
by forests and pastures respectively. The growth of cultivated
lands in the last 50 years by 159 mil hectares is due to the use
of land development systems. The area of lands fed by rainfall
decreased insignifcantly, some lands are idle due to soil
degradation, others – because of construction activities. In the
last 30 years, the disposed lands are valuated at 135 mil hectares.
Since 1960, food production has almost tripled requiring only
another 12% of lands for development. However, the price is
quite high, as intensive use of land resulted in degradation of soil,
water and biological resource. 25% of global land tilled today are
degraded or will become such quite soon. In addition to moderate
degradation of soil, the total hectares of deteriorated land will
reach one third of world’s cultivated soil, affecting the life of 1.5
bln people.
According the FAO, total reserves of fertile land amount to 4.2
bln hectares mainly including lands of Latin America and Africa
(under the Sahara). But these lands either demand additional
costs to start crop rotation or located a long way from target
sales markets inter alia due to lack of necessary infrastructure.
Countries with high and growing demand for agricultural products
have reached maximum utilization of the soil potential, and the
situation is further aggravated by reduction of available water
resources. According to FAO estimates, the developing countries
have potential of providing about 120 mil hectares of land for crop
rotation. FAO experts also believe that land loss in developed
countries will amount to 50 mil hectares, with net forecast growth
of 70 mil hectares. This area is not enough to satisfy a growing
demand for agricultural products that will increase by 60–70% by
2050 as estimated by experts.
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6 Growth of biofuel consumption
Consumption level of biodiesel and bioethanol depends entirely on
regulating measures taken by the governments of developed nations
and particular developing countries as regards the domestic energy
market. The use of biofuel is driven by the state’s objectives to ensure
energy independence, reduce carbon dioxide emissions and create
additional income for agricultural producers. Most governmental
resolutions set a mandatory mixing rate for conventional fuel
(gasoline, diesel) and bioethanol or biodiesel. In the USA, 16% of
harvested maize go for biofuel production, while Brazil uses 54%
of sugar cane and 9 mil tons of vegetable oil to produce biofuel.
According to estimates, in the next decade, the demand for grain,
sugar cane and vegetable oil for biofuel production will grow by 12%,
28% and 14% respectively.
7 Globalization
Evolution of agricultural production systems is characterized by
greater integration between agricultural subsectors. Emerging
complex and diversifed agroindustrial chains imply qualitative
and quantitative changes in the distribution of proftability
between subsectors. More effective distribution led to the
creation of production facilities based on a large scale agricultural
production in parallel with minor agricultural producers and
farmers operating with government support. Major agricultural
producers accumulate a growing proportion of production and
distributing facilities or even retail capacities. In general, such
vertical integration is established at a national level, however,
large international agricultural chains have started to emerge.
Globalization in agriculture implies that the companies have to be
big enough to compete on the global stage. With this in mind, the
trend to consolidation of agricultural business will continue.
Globalization also affects suppliers of agricultural means of
production, for example, seed and fertilizer suppliers, who also
strive for consolidation at the global level, creating additional risks
as regards the dependence on a limited number of suppliers for
agricultural producers.
Sovereign wealth funds of some countries purchase agricultural
assets of other states to ensure their food supply security by
controlling necessary natural resources. This is also a part of an
agricultural globalization trend.
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8 Climate change
As of 2016 average global air temperature increased by 0.85°C as
compared to 1880. Global warming has changed conventional
weather patterns causing a growing number of extreme climatic
events, such as drought or food. Global warming forecast is far
from being positive: in 2016–2035, the air temperature is expected to
rise by 0.3–0.7°C. All the above in its turn will increase the risks for
agricultural business including return on investment risks.
9 Restricted global trade
In most countries, the agricultural industry receives active support
from the government. Free trade is possible if the exporting
countries liberalize the agricultural sector. With that, WTO
agreements are likely to cease being a liberalization driver as
previous negotiations on changing the WTO global trade system
have reached deadlock. Free trade agreements between countries
or regions may replace WTO agreements. But this depends on a
targeted diplomatic activities of a state.
In general, forecast on the development of global agriculture is
quite optimistic. Strong growth drivers are in place for higher
demand for agricultural products and its derivatives. Increase
in income in Asia will change consumers’ preferences resulting
in greater consumption of protein food and niche markets of
premium food becoming mainstream. New technologies will
create preconditions to reduce agricultural production costs,
improve quality of products, mitigate risks and enhance effciency
of logistic chains. Consumers will become pickier and will select
product manufacturers depending on the information about
product origin and its benefts to health. Being a challenge to
many agricultural producers, such changes in consumers’ demand
will also provide a lot of opportunities.
Russia has potential to become a leader in global agricultural
markets. Being number one in exporting wheat and corn, Russia
continues to boost exports. If the Russian government and
agricultural producers treat domestic agricultural industry as
part of a global competitive market building and supporting
agricultural business in their global competition for customers,
Russia will have a strong opportunity to become a world’s
agricultural leader.
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for agricultural companies
© 2018 KPMG. All rights reserved.
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for agricultural companies
Introduction
Russia has the potential to become of one of the strongest agricultural
leaders globally. As of today, this potential has not been fully realised,
however, steps taken to support and enhance competitiveness of
agricultural companies signal that the state has a strong interest in this
sector.
Vitaly Sheremet
Head of Agribusiness, Over the recent years, KPMG in Russia and worldwide has been paying
KPMG in Russia special attention to strengthening relations with agricultural producers.
and the CIS For these purposes, a dedicated team was set up to cooperate with
agricultural companies that is capable of contributing its Russian and
global sectoral experience to relations with our clients. Feedback provided
by our clients indicates that industry-related experience is a signifcant
competitive advantage of our team.
In this brochure, you will fnd information about our agricultural team and
learn how KPMG can help you. We will use our best endeavours to deal
with your challenges and contribute to the success of the agricultural
sector in Russia and the CIS.
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