Horizons February 2018

A monthly newsletter on Australian and international trends, innovation and other insights relevant to the Australian food market

Making news

UK food plan scrapped – An industry-led food and farming 25-year plan to make the UK one of the most innovative food nations in the world has been shelved. Launched in 2015, the plan aimed to establish the UK as “one of the most innovative food nations in the world”. Instead, the Department for Environment, Food and Rural Affairs (Defra) will focus on the “immediate and critical issues for these industries” caused by Brexit.

Meanwhile, a cross-party House of Commons committee has sounded alarm bells for the UK ag sector, calling the government’s timetable for a new EU trade deal “extremely ambitious” while pointing to the potential impact of some of the highest tariffs allowable under WTO rules coinciding with a loss of subsidies. As the UK is not self-sufficient in food consumers could be hit with increased prices for meat and dairy, while exports of dairy, sheep and cereal products would be hardest hit. The committee called on the government to publish the agriculture bill as quickly as possible, and expressed surprise that Defra had not already completed its sector-by-sector analysis. But as with most aspects of this Brexit debacle, “surprises” aren’t that astonishing.

Brexit was opposed by the UK’s peak farming lobby group the NFU, but supported by many farmers! The scrapping of a long-term plan for the ag sector, as well as the ominous findings of this latest Committee report highlight the lack of preparedness in the government and the sector itself for this massive change.

Vision thing – Australian farmer lobby group National Farmers’ Federation (NFF) wants to expand the agriculture sector to a A$100bn industry by 2030. NFF has submitted 60 recommendations to the federal government. The core points are to grow trade and ensure agriculture is central to trade agreements, improving infrastructure and connectivity. NFF’s CEO Tony Mahar said infrastructure such as rail, roads and ports to ensure agricultural product can be moved efficiently were priorities along with connectivity in the bush.

Mahar referred to a report which points out that coordinating a digital transformation could grow Australian agricultural production by A$20.3bn or 25% based on 2014/15 dollars. The government is currently formulating its 2018/19 budget, but new Ag Minister David Littleproud didn’t want to pre-empt anything that would be delivered. The minister said he was “happy to support” the NFF’s vision of a A$100bn export industry by 2030.

The NFF has developed a detailed and comprehensive plan – with a hefty price tag attached for the government. It has an uphill battle implementing it with a rookie ag minister and many of the recommendations falling into other portfolios such as environment, trade, communications and infrastructure.

Food trends in 2018 – CB Insights have compiled 12 food trends to watch in 2018, including increasing use of new technologies, private label expansion, alternative channels to consumers, packaging innovation and meat and dairy substitutes. While major retailers seek to leverage their brand and lock in loyalty with private label strategies, food producers are looking at opportunities to bypass them through both on and offline channels.

Packaging innovation will focus on two areas according to CB Insights – showcasing products online and reducing environmental impact. CB Insights also highlights the blurring of food and beauty –  with probiotics and other ingredients featured in products to be consumed as well as applied! The continued growth of synthetic and plant-based proteins is another key trend that CB Insights tip will accelerate in 2018 – driven by start up as well as animal protein incumbents hedging their bets.

Underlying most of the trends identified here are consumer demands for greater convenience, sustainability and traceability in food. The challenge for the food industry – particularly for FMCG giants – is to credibly and cost-effectively transform and deliver.

Meat tax? – Analysis from UK-based Farm Animal Investment Risk and Return (Fairr) initiative argues that meat is following the same path as tobacco, carbon emissions and sugar, making a “sin tax” aimed at curbing consumption inevitable. Fairr is an investor initiative aimed at putting “factory farming” on the Environmental, Social and Governance (ESG) agenda of investors. Governments begin to implement sin taxes as consensus forms over harmful impacts, the Fairr analysis notes. So far more than 180 jurisdictions tax tobacco, more than 60 tax carbon emissions, and at least 25 tax sugar.

Chatham House analysis from 2015 shows that a meat tax is far less unpalatable to consumers than governments might think, and it’s only a matter of time before agriculture becomes a focus for serious climate policy, as fossil fuel industries have. The Chatham House research indicates the community expect governments to lead action for the global good, and that in the next 10 to 20 years meat taxes are likely to accumulate. Fairr point out meat taxes have already been discussed in German, Danish and Swedish parliaments, while the Chinese government cut its recommended maximum meat consumption by 45% in 2016.

“Sin taxes” have been effective in curbing consumption of “harmful” products in the past. The threat of their deployment for meat adds to the impetus from consumers to support the development of meat alternatives.

Discerning consumers

Why drink this stuff? – You can never have too much protein, right? Protein has emerged as the undisputed “good choice” over decades of conflicting studies demonising fat or carbs. While many consumers may not be sure why protein is good, it seems to be a common denominator in many diets there must be something to it. It has fostered the rise of protein powders – which could isolate protein from the fat and carbohydrate that comes with natural sources like meat and milk. Originally marketed to muscle-builders in large buckets, US-brands like Muscle Milk have developed popular ready-to-drink products with large ranges featuring various flavours and protein contents in Walmart, Costco and Walgreen across the country. Most protein supplements are made from whey, which has a naturally acrid taste, which makes flavouring challenging. According to Eater writer and muscle builder Casey Johnston, the industry standard is “just barely not disgusting”. Riding the protein wave with it’s slightly tastier macro rations propelled Muscle Milk to a business acquired for US$500 million in 2014.

While protein is known to help with body-fat loss and satiety – the impact of protein supplement consumption is less well understood. Some studies indicate humans can’t absorb more than 20 to 30 grams, while over-consumption can cause kidney stones – even kidney failure.

It’s another instance of a short cut to a healthy lifestyle for many consumers, even though many of these products are unpalatable and the benefits of protein supplements are unclear.

Health warnings fall short – Researchers at the University of Amsterdam has found people choose unhealthy foods despite warnings if they encounter the right stimuli. The researchers looked at all kinds of stimuli associated with food, including advertising and the smell or sight of food.  This pull factor associated with rewarding food experiences trumps the good intentions prompted by health warnings. Psychologist Aukje Verhoeven said the study found unhealthy choices are activated by learned associations such as branding, making health warnings focused on conscious choices ineffective.

The study found that health warnings for healthy food choice are only effective in an environment where no food cues are present. The researchers suggested decreasing food-associated stimuli to consumers – in particular children. While restrictions on marketing of unhealthy foods to children is one option, Verhoeven points out that food-related stimuli can also be used to promote healthier diets. Making healthier options more accessible would also support better food choices.

When it comes to healthy food choices it seems consumers really can “resist anything but temptation’ with almost any stimulus overriding health warnings.

Volatile world

Russia reshaping the grain world – The rise of Russia and other Black Sea grain exporters such as Ukraine and Kazakhstan mean the global grains market has undergone a fundamental shift. Traders that have relied almost entirely on North American benchmarks for hedging and trading are being caught out, this was highlighted late last year by Archer Daniels Midland US$20m on hedge positions.

Russia became the largest wheat exporter in the world in 2015/16, while the US has seen its share of grain trade fall from 45% three decades ago to just 15%. However, the derivative market has remained stable, with the 140-year old soft red winter wheat future traded in Chicago still the dominant contract with 70% of the market. The growing Black Sea influence has seen the Euronext contract is accounting for a greater share of price discovery, with contract volumes increasing ninefold in the decade to 2016.

The emergence of a dominant supplier is testing the way risk is managed in grain markets. As the centre of gravity in grain trade shifts to the Black Sea, hedging strategies need to be adjusted.

Freight pushes food import bill higher – The UN Food and Agriculture Organization (FAO) estimates the cost of food imports to rose 6% to US$1.4tr in 2017 due to rising shipping costs, as well as higher meat and dairy prices.  It’s the second-largest food import bill ever, and the FAO says growth in world trade – led by China –  has pushed up international freight rates, with the benchmark Baltic Dry Index rising 55% in 2017. Bulk freight rates have been trending higher since early 2016, after declining post the 2008 financial crisis, which coincided with the increased delivery of dry bulk vessels.

While bumper harvests and lower shipping costs pushed down the cost in the prior 2 years, the FAO warned that more volatile freight rates would restrict demand for agricultural commodities in the future. Developing economies with heavy reliance on imported agricultural commodities will be hardest hit by rising costs – with sub-Saharan Africa expected to suffer significantly larger cost increases than the global average.

This time it’s volatile freight costs that are pushing up import bills. Vulnerable economies may have trouble paying for much needed supplies in future as freight cost and currency volatility takes a toll.

Running dry – The four million people living in South Africa’s Cape Town may soon run out of water. Day zero – when the city reservoirs hit 13.5% of capacity and the taps are turned off has been pushed back from sometime in April to 1 June. Population growth and a record drought exacerbated by climate change are behind the dramatic water crisis. The city is preparing 200 emergency water stations, which would each have to service 20,000 residents who will have to get by with a daily allowance of just 25 litres. Cape Town was given a slight reprieve this month when farmers in the region made 10 billion litres of irrigation water available.

It’s an alarming scenario for Cape Town that could be faced by more cities. Mexico City, Sao Paulo, Jakarta and Perth are some of the cities where water is an issue or has the potential to become one. There are also lessons to be learned – in the mid-1990s Israel was in a similar position with available water stocks collapsing. South-African-born and Israeli based water expert Dr Clive Lipchin says what’s required is managing water as a flux – a commodity that entails cost – and thinking beyond a reliance on natural water. In Israel 70 to 80% of drinking water comes from the sea, and issues of unequal access for non-urban users are being addressed. Read more.

The crisis in Cape Town has sharpened the focus on water security around the world. While there are solutions, they come at a cost, with an increased risk of unequal access for urban and rural communities without careful management.

Evolving models

The McDonald’s comeback – The launch of all-day breakfast, return of the $1 menu and a push into China saw McDonald’s same-store sale rise 4.5% in the US in 2017. CEO Steve Easterbrook has launched a number of new initiatives to put the fast food chain back on top. Along with menu changes, Easterbrook implemented the use of technology such as app for mobile ordering, the build-your-own burger kiosks and a delivery partnership with UberEats.

Meanwhile, the burger chain has stripped artificial preservatives from McNuggets and launched fresh beef patties in selected stores. McDonald’s expects to serve cooked-to-order Quarter Pounders with fresh beef patties in all its US stores by mid-2018. Easterbrook announced funding in sustainable beef pilot programs in the US and Brazil, testing new cattle grazing methods to cut the chain’s carbon foot print. During Easterbrook’s time at the helm, McDonald’s has implemented a plan to unload 4,000 company-owned restaurants by the end of 2018. By moving to a mostly-franchise model, the fast-food chain can keep 82% of revenue as opposed to only 16% from its company-run stores.

The McDonald’s comeback story has seen it double-down on its core offering of convenience, reliability and low-cost. At the same time it has given the nod to sustainability measures, which due to its size are having a wider industry influence.

The long road to a meat-free future – Dutch banker Rabobank and US-based CoBank have both released reports on the future of alternative proteins. In the last couple of years meatless burgers have prompted plenty of hype, attracting investment from the likes of Bill Gates. According to Rabobank, growth in demand for alt-protein products is expected to represent a third of all growth in protein demand over the next five years. In the US, the weight of alt-protein demand is projected to see a CAGR of about 6% per year. Rabobank’s report takes all alternative proteins under considerations, while CoBank’s report only considers lab-grown meat.

CoBank argues that alternative proteins may never be cheaper than a pound of feedlot-finished ground beef. At the minute, San Francisco-based food technology company Memphis Meats is spending US$2,400 to make a pound of cultured ground beef, down from US$18,000 last year. And while consumers have no problem paying 3.5% more for beef that was ‘naturally raised, organic and grass-fed’, there are no guarantee they will pay extra for meat-less meat. CoBank argues cultured meats may face significant regulatory hurdles and stiff competition from meat and poultry. Both reports agree that alternative proteins aren’t “going to replace Big Macs anytime soon”, but Rabobank cautions the trend should be taken seriously. Read more.

While these two reports have slightly differing views on the threat competition from “meat alternatives, as Rabobank point out, animal protein supply chains need to consider the consumer issues these products seek to address.

Virtual restaurants – Tucked inside industrial parks, commissary kitchens and refitted basements, virtual restaurants are cooking up a storm. With no dining rooms, no wait staff or signage, these restaurants only exist online and are making inroads into traditional takeaway. Virtual restaurants have low overheads and allow restaurateurs to shift away from a capital-intensive model. It also provides the possibility of having different offerings prepared in the same kitchen.

Grubhub is the leader in the app-driven food space in the US, and has bet on the virtual restaurant model through a $US1 million investment in customer Green Summit Group, which has kitchens throughout New York City. While there could be 10 different “establishments” that appear on Grubhub, each with a different cuisine, they might be prepared in the same kitchen by the same staff. In the US, a nationwide shakeout in the oversupplied restaurant sector has kitchen space in some locations going for below market rates —start-ups Foodworks and Green Summit Group specialise in snapping up kitchens on the cheap.

Virtual restaurants can offer the illusion of choice through an app, but drive efficiencies through a central production-line style facility. The question for incumbents – how will the rise of these apps reshape the restaurant business?

More from less

Maori sue NZ Gov’t – The Mataatua District Maori Council has filed an action with the Waitangi Tribunal to grant an urgent hearing against the New Zealand government. The Council argues that the New Zealand Government has failed to adopt adequate policies to combat climate change and as such these will affect Maori communities and cultural sites. The council argues that there’s a gap between the government’s public commitments to reduce emissions and its initiatives, such as the Emissions Trading Scheme (ETS).

The ETS it claims has disincentivized emission reductions as it allows carbon emitters to purchase removal units from cheap international markets which lowers costs of domestic emissions units. Furthermore, it’s also argued that the government is far from achieving an 80% to 90% reduction in emissions as set out in the Paris Agreement. The Maori Council asserts that the government has a legal obligation to the Maori to protect the common property of all citizens and is awaiting a decision on whether or not its claims will be considered before its emissions targets under the Paris Agreement are finalised in 2020.

The Maori take a long-term view of custodianship of the environment and are pushing for action from regulators. It’s interesting to contrast this with agriculture stakeholders.

Taking the animals out of ag – The National Academy of Sciences has modelled US agriculture to find the   impact of removing farmed animals on food supply and greenhouse emissions. While the system without animals increased total food production by 23% and decreased agricultural emissions by 28%, it only reduced total US emissions by 2.6 percentage units. Currently, animal derived foods provide 48% protein, 23% -100% fatty acids and 34% – 67% essential amino acids for human consumption in the US. However, if all animals were removed from US agriculture production, food production would meet fewer requirements for essential nutrients.

Another aspect of a carbon-friendly food system is soil. The National Academy of Sciences and the Intergovernmental Panel on Climate Change (IPCC) agree that sequestering carbon in the soil offers almost 90% of the mitigation potential for agriculture’s greenhouse gases. This is fostered by well-managed grazing. The UK Soil Association reports that grass is uniquely capable of forming soil carbon thanks to high root densities and fungi populations, and grazing cattle play a vital role in stimulating vegetative growth, aiding seed germination and adding organic matter. Read more.

While a move toward plant-based diets is widely advocated, a more holistic analysis that accounts for both nutritional needs and carbon sequestration options indicates complete elimination of animals may not be the answer.

Urban farm turns up the heat – Swedish Plantagon CityFarm is like many other urban farms; underneath a 26-floor office tower in Stockholm, the farm will grow greens in vertical towers under LED lights when it stats production in early 2018. But Plantagon also captures the ehat from the lights to heat the office building, saving 700,000 kilowatt-hours of energy annually.

The company plans to sell food directly to people working in the offices as well as two restaurants in the building and surrounding stores – in Sweden there is higher demand for local food than organic food, according to co-founder Hans Hassle. The rest will be sold to nearby grocery stores in an on-site store. The company plans to open 10 more underground farms in Stockholm over the next three years.

This urban farm not only offers a localised food supply and can re-use energy to reduce building costs. Are these smart systems the way of the future for more cities?

Disruptive technologies

Ketones for fuel – San Francisco-based human performance start-up HVMN have developed and launched a 2.2oz bottle of ketone ester called Ketone, expected to improve athletic ability, energy, and a heighten of focus. The company has leveraged more than a decade and US$60m worth of scientific research through a partnership with Oxford University. Ingesting ketones directly can enhance energy levels and create a stacking effect, meaning ketone levels can rise to those only achieved through fasting or the low-carb “keto diet”.

That performance boost is “unlike anything we’ve ever seen before”, said Kieran Clarke, a professor of physiological biochemistry at Oxford and the scientist leading the effort to commercialise her work HVMN Ketone.

This technology bypasses food and diet, consumers ingest a molecule to trick the body. Likened to a fourth macronutrient – this is truly a body fuel.

Look out for talking toast – Rice University researchers have used a commercial laser to transform surface carbon in foods – like toast, potatoes and cookies – into graphene. Graphene, a line of carbon that’s a mere atom thick, is several times stronger than steel and 100 times more conductive than copper. Without using any special vacuums or clean rooms, graphene can be patterned into an incredibly thin, edible circuit–including fuel cells to store power, radio hardware to transmit data, glowing elements to light up, and even all sorts of sensors, too.

It could enable a future where food is not only traceable, it could actually contain its own warning about food-borne illnesses. You could even have an actual apple with 1,000 songs on it, or a birthday cake that can light its own candles. Food could even heat itself.

While there are some obvious uses for this type of technology, there are likely to be more developed as it becomes more accessible.

Freshagenda’s Horizons February 2018 newsletter is a free publication on Australian and international trends, innovation and other insights relevant to the Australian food markets.

Our Horizons newsletter describes Freshagenda’s megatrends, describing how tech and innovation is shaping the food industry around the world. Our megatrends are; Discerning consumers, volatile world, disruptive technologies, evolving value chain models and more from less.

Horizons February 2018 digs in to Freshagenda’s megatrends

Freshagenda identified a set of major megatrends affecting the future of food that combine to provide the key inputs to industry or enterprise strategic planning built on future scenarios.

In a paper outlining these megatrends, Freshagenda explains what they mean, how they are playing out, and how they fit together.  These forces might be nice to know, and great to stimulate thinking, but how do you harness them?

As shown in the process summarised below, understanding these forces, articulating how they are affecting your industry and business outcomes in future, and drawing insights from them to stretch future thinking, are a key component that can provide impetus and context to strategy development

 

Discerning consumers – A diverse set of influences

  • Increasing developing world affluence creating new consumers
  • New channels of influence on behavior and wants
  • More complex segments and preferences affecting value, ethics, health and indulgence
  • Competing demands driving greater needs for convenience
  • Aging demographics in developed world

 

Volatile world – Food markets are more complex and unpredictable

  • Climate change affecting stability of food supply
  • Food commodity markets more prone to price volatility and closely linked as intensification continues
  • Ad-hoc protectionism of farmers and consumers
  • Trade policy becoming more technical rather than fiscal
  • Geopolitical conflicts
  • Lingering economic and financial uncertainty post GFC
  • Resilience of traditional farming threatened by volatile returns

Disruptive technologies – Technologies rapidly reshaping life

  • Digital tools and platforms are changing engagement, behaviour and lifestyles
  • Advances in GE and GM know-how and applications
  • Advances in automation for production and processing
  • New substitutes (3D printing, synthetics)

Evolving value chain models – Redefining how to add and capture value

  • Shift in capital power
  • Risks being reassessed
  • Emerging preferences for capital investors
  • Emerging retail models
  • New forms of value chain integration

 

More from less – Limited resources and capacities

  • Growing populations – more mouths to feed over time from finite natural resources
  • Greater community concern for sustainable production systems
  • Sustainability agendas balancing “3Ps” changing value chain relationships
  • Policy unevenness and short-termism