Challenges of the Global Agro-System

Week 2
Lecture: Income growth 2

What happens when income grow?

• Taking China as an emblematic example, it is quite easy to understand how the change in disposable
income indirectly activated commodities import.

• In the last decades China imported soybeans, corn and wheat mostly from North and South America to feed
a growing cattle raising.
• Animal proteins are in facts a proxy indicator for the economic development of a country: the higher the
disposable income, the higher the consumption of animal proteins.
• OECD countries diet, although being quite varied, is rich in meat and it has been for a long time. The diet in
non OECD countries is instead evolving.
Lecture: Prosumerism and food scares 3

One hamburger from Burger King can contain ingredients from approximately 200 suppliers located
throughout the States and around the world:

à when a problem arises at one point in the supply chain, it is not easy to identify the original
epicenter and even the precise cause;
à the probability that a threat to food safety (whether real or not) will evolve into food scare has
increased, causing an increase in consumer anxiety concerning food.

Food scare has been defined as “the response to a food incident (real or
perceived) that causes a sudden disruption to the food supply chain and
to food consumption patterns”.

It is the response of the final consumer that elevates an event happening at any
point in the supply chain to a food scare, and this response resolves in a
significant change in consumers’ consumption habits and patterns.
Lecture: Prosumerism and food scares 4

Types of food scares:

• Information
• Technology or Industrial processing
• Microbiological
• Contaminant
• Deception

Implications for the actors involved in the food system:

• The food system increased complexity and globalization augment the probability of butterfly effects,
whereas an improper management of even a trivial event (a butterfly) may have an effect on a very
large scale.

• All the economic and political bodies involved in the food system should conceive strategies to
reduce both the number of incidents related to food scare and their associated economic, social and
environmental impacts.
Lecture: Prosumerism and embeddedness 5

• People tend to generalize the favorable evaluation of positive nutrients such as natural ingredients,
maybe ignoring or underestimating the presence of negative ingredients (OPTIMISM BIAS).

• People tend to overestimate negative factors such as sugar or fats, even when they are present in
very low amounts (NEGATIVE BIAS).

People tend to declare they prefer detailed nutrition information, but studies on actual choices show
that they utilize more easy-to-use and simplified labels and employ mental shortcuts that substitute a
complex problem with a simple one.

The food industry is full of cases where consumers’ perceptions and behavior are driven by causes that
are more rooted in cultural and fashion trends than in objective factors.
Lecture: Sources and causes of climate changing emissions 6

• Anthropogenic climate change started about 250 years ago fuelled by the utilization of coal and oil
during the industrial revolution.

• Anyway about half of cumulative anthropogenic CO2 emissions have occurred in the last 40-50 years,
during a period of great acceleration of population and economic growth, and development of new
energy GHG emissions per year by sectorsintensive technological solutions.
GHG emissions per year by use
1. Energy, both through direct utilization and through electricity and heat production, is the most
important contributor;
2. Industrial activities (contributes to more than 30%);
3. Transport (contributes to more than 14%).

“Considering agriculture, forestry and other land use (AFOLU) – for example, land-based CO2 emissions
released from forest fires, peat fires – this sector contributes to about a quarter of (just under 25%) of
global GHG emissions per year.”

à beef and cattle milk production account for 41 and 20 percent of the sector’semissions;

à In terms of activities, the production and processing of food and enteric fermentation (digestion)
from ruminants represent the two main sources of emissions.
Lecture: Desertification: the fragile Italian agro-system 7

Global water consumption in agriculture Water consumption in Italian agriculture

1. Irrigation (70%) 1. Irrigation (47%)
2. Manufacturing (22%) 2. Domestic use and services
3. Domestic use and services (28%)
(8%) 3. Manufacturing (18%)

• In the last 20 years we have witnessed several water scarcity events, which have highlighted that
there is competition on water use.

• A research carried out by CERTeT-Bocconi, has highlighted that this competition is not between
different uses (e.g. agriculture vs. energy production) but between agricultural producers located in
different areas.
Lecture: Agriculture value added 8

How much value added is attributable to

agriculture?
“Agriculture value added is the net output of the agriculture sector, including forestry, hunting, fishing
crop and livestock production, after adding up all outputs and subtracting intermediate inputs.”

When industrial economy advances:

• raw materials from agriculture are transferred to industrial food manufacturers who benefit from
economies of scale of large processing plants;
• input cost increases due to growing demand for standardized volumes: as a consequence farmers
pay more for production inputs.

• The limited possibilities for farmers to add value to the basic product or to get remunerated for it
and the increasing input costs due to competition for scarce resources, is reducing the value added
of agriculture in the supply chain.
• Agriculture’s contribution to the Italian national GDP is a decreasing percentage, today around some
2%,
Lecture: Commoditization and price transmission in the chain 9

Distinctive aspects of commoditization

1. Product homogeneity: products are perceived in the market as being interchangeable;

2. Price sensitivity: buyers are looking for the best price for a standard product;

3. Switching cost: the direct and indirect costs of changing from a supplier to another are basically
inexistent;

4. Industry stability: predictable market demand, a consistent competitive structure, and few changes
in the set of customers.

• The process of commoditization in agricultural products it is one of the concurring factors that lead
agriculture to progressively reduce its weight on domestic economy in Italy.

• With constrained physical spaces, winding poor infrastructures, the Italian agro-system was never
suitable for commodity production.

• Luckily Italy was able to develop niche markets for high value specialties in many cases,
Lecture: Commoditization and price transmission in the chain 10

“Price transmission in a supply chain refers to a situation where prices at one level of a supply chain react
to changes at another level.”
Why do asimmetry in price transmission exist ?
1. Market power

2. Adjustment costs
3. Public interventions
4. Publicity and food scares

5. Perishability of the products