Boosting farmer resilience to protect food security is the most crucial issue facing the international agri-sector, says Ian Proudfoot, KPMG’s global head of agribusiness. Sustainable solutions enabled by governments and initiated by the financial services sector offer a real path forward.
This article originally featured in the Irish Farmers Journal in May 2024.
Will farmers keep farming? That’s the most common issue I’ve heard in conversations with our teams and their clients around the KPMG network in the past year. This critical question is on everyone’s mind, partly due to farms generating insufficient returns and partly to regulatory uncertainty.
It’s beyond serious. One European organisation we work with believes as many as 30% of farmers will walk off their land in the next 10 years. We see a similar level of risk in Australia, New Zealand and the US.
Fundamentally, farmers are saying it’s too hard. They’re telling us they see regulations coming at them too quickly and from a technical regulatory perspective that often proves unworkable in a practical way on a farm.
Ultimately, every food company is going to become an energy company. That was really clear when I sat down with some of the dairy companies in Ireland – the conversation started with anaerobic digestion rather than dairy herd productivity. They recognise farmers need other revenue streams.
Striking a delicate balance
Across the EU, farmers are concerned about the Green Deal, but the nature of their concerns differs depending on the market, the products being grown and the systems being used. In Ireland, there are a lot of concerns about water, while in the Netherlands, the key concern is nitrates, and in Spain they’re most worried about plastic packaging.
What that range of concerns means is that making global farming systems resilient into the future is a complex undertaking. We need to ensure the agri-food sector can cope with climate change and respond to the fact that we're currently pushing natural planetary boundaries close to their limits.
The regulatory response needs to strike a delicate balance, so we can keep growing food and feeding the global population, while at the same time ensuring we don’t make life impossible for farmers.
Understanding the risks
The biggest risk is that the global food system can’t meet the food needs of society moving forward. If we lose food security, everything else society relies on starts to be undermined. When people can't feed their families, we see extreme reactions.
In recent years, for example, the Sri Lankan government introduced dramatic changes to farming systems with limited consultation. This caused a collapse in agricultural production, often referred to as the organic farming disaster. Food became really expensive, inflation went through the roof and the whole economy ground to a halt.
Food price pressure is undeniable
Globally, I have reached the conclusion that we have implicit food price regulation in most countries. Not every government is explicitly saying the price of milk or bread can’t exceed a published level, but the cost of food is one of the clear ways the population sees the cost of living crisis reflected in their wallets. Governments have a political desire to see the price of food kept flat or even reduced.
In Canada recently, for example, it was reported the Prime Minister called in the CEOs of the largest retailers and gave them a deadline to reduce the price of food, warning they would be subject to heavier regulation if they didn’t meet it. Similar conversations are happening time and time again around the world, putting real pressure on the system.
For the average farmer, their cost of labour is higher and their cost of inputs is higher, while the cost of energy and the cost of money have also gone up. All their key costs are higher, but they don’t have the ability to pass those increases through to the consumers.
The need to diversify farmer income
With it being difficult to increase prices and costs increasing the margin farmers are gaining on the food they produce is coming under real pressure.
Farmers are typically at the end of the value chain and there is often not enough money left for them once other supply chain ‘partners’ have taken their share. If we're going to have resilient farmers, we must think about how we change the on-farm income model.
While in Ireland, many people have sought off-farm jobs because they can’t make enough money farming, that’s not always viable for farmers around the world. And it’s not an option in many countries because people don’t have or can’t access the appropriate skill sets or training.
Rewarding farmers for protecting nature
The first key way we can seek to diversify farmers’ income is to consider business models that will reward them for the ecosystem services they deliver to society.
While there has been a lot of talk about carbon credits, we also need to consider biodiversity, soil, water and the other elements of nature farmers interact with. What about the work farmers do to improve and protect soil quality and water quality? Shouldn’t we reward them because in doing this work they're creating public good?
Not only that, but they're creating something valuable for large food processors and retailers that have made commitments to enhance nature-based outcomes their organisations deliver to society.
While this is in part an agritech question, involving how we measure what's actually being delivered. It is fundamentally a fintech question around how we create these markets in a credible, robust way so people are confident investing in them. The sector needs to find partners in the financial services sector prepared to assist in establishing these markets quickly as it is critical farmers that invest in doing the right things by nature are rewarded.
Moving to a circular bioeconomy
Secondly, we must seek to ensure farmers can monetise 100% of what they grow. Ireland is quite ahead in its thinking on this. Traditionally, farmers have only used a relatively small percentage of the biomass they create in growing a product for food or fibre purposes. Circular bioeconomy solutions can ensure everything that gets grown is valuable.
Our clients who grow grapes in Marlborough for our New Zealand wines, for example, take the juice out of the grape, meaning they use two or three percent of what they invest to grow.
They’re left with grape marc [the solid remains of crushed grapes after the juice has been extracted], the leafy biomass that was on the vines and the prunings of the vines. All that is a huge amount of other biomaterial that has cost them money to grow and costs them money to get rid of.
To build resilience, we need to think about connecting this into energy systems and think about how they can extract other active ingredients that are inherent in the biomass so they can create new products, new value and as a result new revenue streams for the farmer.
Food companies or energy companies?
Ultimately, every food company is going to become an energy company. That was really clear when I sat down with some of the dairy companies in Ireland – the conversation started with anaerobic digestion rather than dairy herd productivity. They recognise farmers need other revenue streams.
This is a global trend. In France, we’re seeing green energy cooperatives in local villages where farmers are coming together to work with the village councils to create great solutions where they can use the excess biomass on their farms to generate energy.
Meanwhile in Brazil, they talk so much about the ‘three Fs’ now. It’s not just ‘food and fibre’ any more. It’s ‘food, fibre and fuel’ now. If a business doesn't tick each of those three boxes, it doesn't work. This is key to the future of farmer resilience.
Building credible markets for ecosystem services
This much-needed reimagining of farming needs governments to enable markets for ecosystem services, while financial services organisations to come on board with the liquidity that's needed.
We’re seeing, for example, big sovereign wealth fund investors from around the world and particularly the Middle East targeting the food and bio-economies because they're looking for the solutions to replace the fossil fuels that they're historically being dependent on.
Inherently, most farmers farm their land with the intention their land will remain productive and able to be passed on to the next generation. We need to recognise that and reward people for that stewardship.
There’s a one- to five-year time horizon where we can make an immediate difference. It’s not good enough to say the price of food should go up when so many people live in food insecurity. That means we need to look at the long-term economic drivers of how we achieve this.
Food as a social connector
The pandemic was great for our food system. That may sound counterintuitive, but what it did was connect people to food and help people understand the positive impact that eating the right food in the right way can have. That impact is not just about health, but also about our connection to family and to society.
The world understands the importance of food better than it has done at any time in the past 70 years, probably since the Second World War, which was the last time we had large-scale food shortages.
As we foster that consumer connection to food and encourage people to celebrate where their food comes from, we can be really positive about the future of the global food system. That is, of course, as long as we can ensure our farmers are resilient enough to be able to supply us with the food we need and appreciate.
This article originally featured in the Irish Farmers Journal in May 2024.
How KPMG can help
KPMG's Agribusiness team can help you improve the efficiency and profitability of your business through our wide range of audit, tax and advisory services. Our national and international cross functional agribusiness professionals focus on understanding the issues faced by agribusiness companies and developing tailored solutions to meet these challenges.
We combine our multi-disciplinary approach with deep, practical industry knowledge to help clients meet challenges and respond to opportunities.
Get in touch
If you are looking for guidance in Agribusiness, we can help. As a first step, please contact Tom McEvoy of our Agribusiness team. We'd be delighted to hear from you.
Tom McEvoy
Partner, Head of Food & Agribusiness
KPMG in Ireland
