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Procurement Powers, Pains and Predictions

An insider perspective on agricultural crops and their evolution over the years, focusing on emulsifier production – and revealing the impact of global trends and other factors, even where seemingly unrelated.

At the very beginning of my working life, I had little or no idea about agricultural crops and how pivotal their global trade is to feeding our growing population. Still today, I am amazed at how this truly international industry continues to transform and tackle challenges, particularly in an increasingly complex environment.

First and foremost, what are agricultural crops? Quite simply, they are cultivated plants that naturally thrive in particular climatic conditions and are grown on a large scale, generally outdoors in certain geographical areas.  .

 

Weather cycles

By its very nature, agriculture is cyclical, as crops are exposed to seasonal patterns and weather changes, including weather phenomena that may result in positive or adverse effects. El Niño and La Niña are possibly the best-known weather phenomena and both are taken into consideration when ocean surface temperature changes alter winds and generate droughts or very wet conditions.

As the debate continues about whether the global climate is, in fact, changing, it seems apparent that weather patterns and incidents have become more extreme. Years ago, generally accepted wisdom was that there would be six to seven annual major weather incidents with the potential to negatively impact crop development. In 2017, however, there were around 90 weather incidents categorized as disasters and, thus far in 2018, there are some 28 ongoing weather incidents throughout the world. 

 

The changing face of farms

The supply chains for agricultural commodities are highly complex and crops are handled over many different steps - from producer to end-product manufacturer, all the way to supermarket consumers. The perception of farmers has substantially changed as the size of farms and plantations has grown and farmers now rarely sell their own produce at markets. Small farms are less common and farmers hawking their wares at market stalls are probably more the exception in today’s world. That said, palm cultivation still employs about 300,000 small farm holders in Malaysia; farmers in rural communities who would otherwise have little to no alternative source of income.

While many countries dedicate less than 20% of their land to crop cultivation, there are exceptions. In Denmark, for example, crops make up more than half of all land-use. The Food and Agriculture Organisation of the UN predicts that arable land will continue to expand through to 2050, although it also indicates that the rate of increase is expected to be lower. It is likely that the increase will be greater in developing countries and that the volume of arable land could, in fact, decline in some developed countries. There is even some debate that the availability of arable land may have ‘peaked’.

 

Proportionally plant-based

Although more than 80% of the world’s caloric supply comes from plant-based crops, these are grown on less than 20% of agriculture land. The plant-based crops that cover approximately 11 million square kilometres of the earth’s surface include grains, fruits, vegetables, trees and other plants, some of which ultimately yield seeds or nuts that contain oil. Such oils can be refined and processed to produce food-quality oils, as well as multi-functional derivatives. These high-quality oils and derivatives are the backbone of emulsifier production and include a wide diversity of sources from all over the world, such as soy from soy beans, canola/rapeseed or sunflower from seeds and palm from oil palm trees.

While most seeds are annual crops, planted in temperate climates and harvested simultaneously in season with the rest of the plant, oil palms are an exception. Palms grow in tropical climates and fruit bunches can be harvested only after many years and, when palm trees are mature, the fruit can be harvested monthly for 15-20 years.

 

Rising yields – and demand

There are distinct differences in terms of yield per hectare for plant-based oils; palm oil yields about 3.6 tons of oil per hectare, while the output of other oil crops ranges from around 0.10 tons per hectare (for sesame oil, for example) to approximately 0.80 tons per hectare (as with canola/rapeseed).

With land use for oil-producing crops increasing threefold since the beginning of the 1960s, the total production of vegetable oils worldwide has increased to approximately 215 million tons. In addition to increased land use, the continuous refinement of plant breeding and genetic modifications has made productivity improvements and higher yields possible.

Demand, however, has also increased significantly. In fact, the global inventory of plant-based oils has not kept pace, and stocks are now proportionally lower. As the industry has improved its infrastructure and efficiency, this is not necessarily a cause for concern, but rather an indication of a leaner and more professionally managed supply chain. 

The global population has more than doubled over the last 50 years and, at the current rate, there are expected to be almost 10 billion mouths to feed in 2050. At an average per capita consumption of 28.5 kg of food per year, this translates to 285 million tons necessary to feed the projected population of the world.

Stock and trade

During constrained or adverse conditions, price volatility for agricultural commodities can be quite significant and fluctuations can be greater than in comparable financial markets, such as shares or bonds. This is one of the key reasons why players in the supply chain look to reduce risk by using so-called ‘commodity exchanges’ for hedging purposes. Examples of these commodity exchanges include the Chicago Board of Trade (which trades soybeans and soy oil in addition to other commodities), the Malaysian Derivatives Exchange (which offers a platform to trade palm oil) and MATIF in France (which gives the ability to trade canola/rapeseed). 

While such exchanges provide a critical platform for market actors to mitigate their risks, they also offer possibilities for outside players seeking opportunities to invest and capitalise. Since the beginning of the century, the prices of main plant-based oils have more than doubled, for reasons that include inflationary pressure.

 

Looking back

So, what can we learn from the past - and do we dare say anything about the future? It’s clear from the last several decades that the significant increase of arable land for the production of oil crops alone has not been sufficient in all situations to meet the calorific demands of a growing population. Thanks to scientific contributions and productivity initiatives, however, it has been possible to increase oil crop production to a level that allowed supply to meet overall demand.

Impressively, this increase in oil crop production has occurred in a period with ever more challenging environmental conditions.

 

Looking forward 

While I would never attempt to make bold predictions about the future, the following dilemmas are significant: Will urbanisation continue? Will suitable land for crop cultivation become an increasingly scarce resource - especially as climate changes become even more apparent? How can we feed a growing population? And what mechanisms will ensure that those in need have access to affordable food to sustain and improve living standards?

These are all big questions and there is no single perfect solution to further increase output and meet the needs of a growing population. The answer will most certainly require combined efforts in multiple areas - science, infrastructure and, undoubtedly, the optimization of available land. 

 

Industry response and responsibility

In this rapidly changing and increasingly complex environment, prioritising food safety and sustainability is challenging, but it is not a choice. It is important that the food manufacturing industry maintains a high level of credibility and takes responsibility for decisions and actions.

Transparency is now more important than ever and at the end of the day, we are all consumers – and all part of the global population. We all want to be sure that our food is responsibly and safely produced. And we all know that we have just one world.

‘Sustainability’ is more than merely a phrase used in a report or a corporate department, it needs to be something truly embedded in how we live and work.

About the author

Pia Brinkmann Madsen

Pia Brinkmann Madsen is CPO at Palsgaard A/S and has assumed several leadership roles and trusted positions with leading players in the food industry - working in-depth with risk management as well as actively promoting sustainability through pioneering solutions. Madsen holds a degree from Aarhus University in International Business Management and Supply Chain.

‘Sustainability’ is more than merely a phrase used in a report or a corporate department, it needs to be something truly embedded in how we live and work.

Pia Brinkmann Madsen, Global Procurement Officer, Palsgaard A/S