Securing Food Supply Chains through Adequate Financing

Executive Summary October 2014

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Dear Participant,

We are proud to share with you our fourth report on food cooperatives.

The following pages summarize the key findings of a study conducted over the summer 2014, for the benefit of the participants of the International Summit of Cooperatives. This work is based on the analysis of a number of available information sources, in-depth review of the strategies of the 50 largest food cooperatives worldwide as well as interviews with C-Suite members of more than 30 of them, industry experts and representatives of publics bodies in Europe, North America, South America, Africa and Asia.

As detailed in this document, food supply chains are about to be re-shaped by five mega-trends and a number of additional sector-specific trends. These trends will pressure food supply chains that have already been seriously weakened for a couple of years, as illustrated by the high volatility of raw material prices over the past years, recent food scandals in Europe and Asia and financial difficulties faced by a number of food companies in the world.

For sure, food supply chains have to rebuild trust and regain strength to ensure food security in the long term, and all stakeholders will have a role to play. Most interviewees were fully aware of these threats. They agreed both on the nature of these trends, and their likely impact. Interestingly, however, their perception of the level of urgency and their strategic responses to these threats were of high diversity. Few have clear plans to take up the identified challenges.

In our view, this shows the complexity of the challenges at stake. Most likely traditional tools and solutions will not be sufficient. Cooperatives will need to innovate: long-term vision and strategy, new products, new sourcing strategies, new business models, new geographies, new financing models, new skills, (sometimes) new governance. That will not be easy. But the ongoing transformation of the global food supply chain is for them a unique opportunity to demonstrate the relevance and the strength of their business model. We believe that their values and capabilities can be strong differentiation factors in an increasingly unstable world.

We remain at your entire disposal should you want to have a more detailed discussion with us after reading these pages.

Yves Pelle Partner, Audit Erwan Colder Partner, Transactions

Sébastien Murbach Director, Strategy

Sonia Boisvert Partner, Audit

With the participation of : Maryline Thénot, PhD Teacher - Researcher

PwC October 2014

4 Securing Food Supply Chains through Adequate Financing

Five megatrends re-shaping the food supply chain

Five major trends will be re-shaping the world and the food sector over the next decades, on a global scale:

• Population growth. There will be more than 9bn human beings on Earth by 2050, a third more than today. Most of the additional 2.5bn will be located in Africa and Asia, whereas population in developed countries will stagnate or decrease. A new consumer base will emerge for food companies.

• Switch in economic power. Today, almost 70% of the global wealth is located in developed countries. This share is expected to decrease to less than 45% in 2050. Middle classes have already emerged in Asia and South America, and are emerging in sub-Saharan Africa and India. As they become richer, these populations will change their eating habits towards more proteins and more processed food.

• Accelerating urbanization: urbanization rate is expected to jump from 49% in 2014 to 70% in 2050. At this point in time, there will be more inhabitants in cities than there are on Earth today. In the same time, rural population will decrease by 0.5bn people. Fewer people will need to produce more food on smaller farmland, for more people.

• Climate change and resource scarcity: environmental concerns are growing with climate change and more frequent storms or droughts in many parts of the world. Moreover, farmland grabbing, reduction in soil’s fertility, uneven water availability in time or space and resources scarcity are jeopardizing worldwide production systems, threatening food security.

• Technological breakthrough: technology and biotechnology are now embedded in almost any piece of land, object and, soon, individual. Huge amounts of data are being collected that will be processed to develop new applications. In the same time, innovation in genetic and processes are constantly advancing. Big data and biotechnologies are on the top of the agenda of companies and also, increasingly, of farmers.

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On top of these megatrends, additional trends will add pressure on food supply chains: an increasing demand in agricultural products from the industrial and energy sectors (green chemistry, bio-based plastics, biofuels, etc.), ongoing deregulation of international food trade, and consumers’ growing concerns on food quality and traceability.

In this context, is easy to understand that the way food is produced, transformed, brought to consumers and consumed will dramatically change in the coming years.

Most likely, in the coming years:

• More shortages will occur, generating a higher and more frequent volatility of raw materials prices

• Supply chains will become more global, with processing going closer to consumption, and more complex with raw materials, finished products, intermediary goods, financial and information flows moving faster and faster on a global scale

• Ratios of power will change as many stakeholders including food processors, end consumers and states, will try to take control of supply chains to secure their own supply in quantity and quality.

In order to feed the world and to keep control of the food supply chain, food cooperatives will have to face ten key challenges, of four types:

Ten key challenges for cooperatives, all along the food supply chain

Finished Goods

Financial flows

Information

Raw materials

Figure 1: Key challenges ahead in the food supply chains according to cooperatives

Source: PwC interviews

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Our research and interviews show that agricultural output will need to increase by 70% by 2050 to meet demand. Though not unachievable, this will be a challenge. Yields are reaching ceilings in developed countries, in which growing environmental and regulatory constraints, as well as growing concerns around farmers generation renewal, may limit agricultural production growth. Although Eastern Europe will most likely contribute to production increase, especially in cereals, this will not be enough.

Finding new arable land will be difficult. Cities are growing everywhere, nibbling farmland. Only a tiny proportion of available land can be converted into arable land in a sustainable way. The FAO (Food and Agriculture Organization) estimates that the net balance will not be higher than 70mHa, a mere 5% increase in global farmland. Exploiting this farmland will in many cases be even more difficult, as 90% of it is located in South America and Sub-Saharan Africa, two regions facing serious climate, water scarcity, political and logistical constraints.

According to the FAO, 80% of new food production in emerging countries will come from productivity increases. In these countries, yields are still very low for numerous reasons such as land fragmentation, low usage of seeds and fertilizers, poor water management and lack of infrastructure and agricultural equipment. But increasing productivity in these countries, and more particularly in Africa, is not that much an option: in these countries, growing imports will not be sustainable over the long term and, more importantly, economic development will never happen if farmers, who account for two thirds of the population, do not get richer. Actually, the World Bank estimates that the agribusiness in Africa will reach USD1 trillion in 2030, vs. USD313m in 2010. Our research shows that a number of food companies, although few cooperatives, have started to bet on emerging markets’ agriculture development by deploying inclusive strategies and models to connect some of the 500m small-scale farmers of these countries to their supply chains.

Collect, stock and transport will be another challenge. In emerging markets, an estimated 40% of agricultural output is lost every year due to poor infrastructure. High investments will be needed to improve the situation.

Upstream, cooperatives will need to produce more, differently, and to secure logistics

Figure 2: World production and use, major products (million tons)

Source: FAO

Figure 3: Global map of environmental and political burdens

80%

According to the FAO, more than 80% of the expected growth of agricultural

output in developing countries will come from productivity increase

New lands or more productive land?

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2005/07 2050 2005/07 2050 2005/07 2050 2005/07 2050

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3,500

258

455

195

341

149 282

2,068

3,009

+76% +75% +89%

+46%

Meat Sugar Oil crop Cereals

Food Non-food

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Downstream, new solutions will be needed to reach consumers and meet their new expectations

Figure 4: Share of population living in cities, 2014-2015

3,3 bn 6,7 bn

x2

Demographics changes will radically change the way people eat and drink, towards more proteins, more processed food, more out-of-home meals and, also, more customized food. With as many people living in cities in 2050 as there are on Earth today, new schemes will be needed to ensure food security and meet consumers expectations in terms of volume, price and quality. In the meantime, consumers are becoming more demanding, for instance paradoxically asking for higher quality, more authentic products year-round in convenient formats at the lowest price possible.

Additionally, most new consumers will live in Africa and Asia, i.e. far from many of the current food production basins. Cooperatives from developed countries will have to go there as growth relays. Food logistics flows will increase fast, which could prove costly if the business models are wrong. Many cooperatives told us that export-based models will still prevail, in line with their raison d’être (valuing the output of their members), but that they will also need to grow their presence in consumption markets in terms of processing capability but also, possibly, agricultural production and distribution. Defining precisely where to produce what will be a challenge.

Another challenge will be to adapt products to markets. Smaller formats in countries with low purchasing power, for instance, or alternative sources of proteins (such as fish, shrimps, insects or whey) where classic solutions do not work. Product innovation and market segmentation will increasingly matter in this context.

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Cooperatives will also have to manage a number of “transversal” challenges

Figure 5: Evolution of food prices, 1990-2014

0

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1/19

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2011

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Meat Price Index

Dairy Price Index

Cereals Price Index

Oils Price Index

Sugar Price Index

Source: FAO

Cooperatives have identified four key challenges impacting all steps of food supply chains: volatility, (de)regulation, waste and safety. Actually, they all connect to each other. In more global food markets, strong demand growth and ongoing deregulation of international food trade increase the level of risk on supply chains, what the increase of raw materials price volatility materializes.

Indeed, regulation is changing fast, whether at regional level (e.g. end of dairy or sugar quotas in Europe) or at country level (food policy and import/export bans). With serious impacts on supply chains. As an illustration, the end of European quotas in dairy is expected to boost European milk production by at least 10% (up 15bn liters), which may increase the risk of overcapacity in Europe in case of change in import regulation in China.

In parallel, customers are increasingly concerned about food safety and quality after a number of food scandals all around the world over the past years. They push their governments to take action and ask for more transparency and more traceability. The China’s dairy market is a good illustration. From farm to fork, accurate knowledge, control and transparency of the product’s origin and composition are required, as well as more stringent quality and safety controls.

Last but not least, approximately 1.3bn tons of food is lost every year, actually mobilizing 30% of the world’s agricultural area. All regions and all stages of the supply chain are affected: 54% of this wastage happens upstream (production, post-harvest, storage), mainly in emerging countries and 46% occurs downstream, mainly in developed countries.

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Significant investments will be needed all along the supply chain

In order to make food supply chains more secure in terms of volume assurance, price and safety, significant investments will be required all along the supply chain:

• R&D and genetics to find new solutions, including drought-resistant seeds, GMO, new proteins • Seeds and fertilizers in affordable formats in emerging countries • Irrigation systems (only 5% of farmland is irrigated in Africa, 42% in Asia) • Technology, to improve productivity, reduce fertilizer costs and ensure traceability • Transport infrastructure. In Africa alone, the World Bank estimates that it would cost USD110bn to provide 75%

of the rural population access to an all-season road within 2km and, according to the IMF, USD 93bn would be needed annually to close the “infrastructure gap” of the continent

• Manufacturing / processing capacity to get closer to future consumptions basins • Sales and marketing, to ensure adequacy of products to local consumption patterns, and access to them • Financing support to small farmers through financial cooperatives, microfinance, etc.

The FAO recently estimated that the total average annual net investment required to deliver the projected production increases in developing countries would amount to USD 83bn, or average gross investment, including the cost of renewing depreciating investments, of USD 209bn, at constant 2009 prices. This means an increase of more than 50% compared to current investment levels. Most likely, traditional solutions will not cover all needs, and unconventional solutions will have to be found.

R&D Genetics

Plants Farmers financial support

Infra-structure

Technology Irrigation

Risk /volatility management

(incl. storage)

Partnerships Distribution

schemes

Product marketing

Figure 6: Overview of key investments needed in food supply chains

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The cooperatives’ answer: upstream still the priority, downstream a growing concern

Our research and interviews show that cooperatives have been implementing a variety of strategies over the last two years to reduce risks all along their supply chain.

Upstream remains the priority. It includes securing farmland in a context of farmers generation renewal and high real estate prices, maintaining strong relationships with members to make sure they continue to supply raw materials and ensure supply to processing plants. Preferred options to secure supply chain upstream seem to be partnerships, joint-ventures and mergers & acquisitions. All sectors were represented. Home territories remain key, as few cooperatives have developed local production schemes in new markets. Noticeable exceptions can be found in dairy in Asia for instance, with Friesland Campina and Fonterra setting up local milk production schemes.

Interestingly, preserving natural resources ranks first. This was actually confirmed by our interviews. Many initiatives were identified, such as the reduction of energy consumption, biodiversity and reforestation programs, lower usage of fertilizers, water usage reduction and recycling and eco-friendly packaging. It shows that food cooperatives are worried about sustainability, both to build the future and to reduce costs (reducing waste being another lever).

Logistics-related initiatives mainly concern the grain and the sugar sectors, in which key players continue to invest in import/export facilities to strengthen their supply chain. China, Eastern Europe, Americas and North Africa all have large ongoing projects sometimes co-financed by partners.

Downstream is still lower priority for cooperatives, which is not a surprise. We heard many times that the focus of a cooperative should be to sell farmers’ production. However, we saw in our research that cooperatives launched many projects to redesign their industrial organization and increase capacity to serve new markets. They often remain too far from customers, despite communicating on their products and business practices. They also remain very little involved in distribution, even in new markets.

Although not at the top of cooperatives agendas, ensuring food safety is gaining interest. Cooperatives are focusing on accreditations and labels to demonstrate that they can trace their supply chain, and are developing supplier certification programs. In the short term to ensure the procurement of ‘sustainable’ raw materials and, in the longer term, encourage farmers and suppliers to produce according to sustainable standards (and, possibly, adapt prices accordingly).

28%

30%

32%

36%

40%

42%

44%

50%

58%

64%

Manage volatility

Adapt to regulation change

Reach consumers

Meet consumers' newexpectations

Ensure food safety

Reduce waste

Collect, store and transport

Secure production capacity

Adapt industrial set-up

Preserve natural resources

Figure 7: Percentage of Top 50 cooperatives having launched a strategic initiative over the last 2 years, by type of challenge

Upstream Central

Downstream

Transversal Note: disclosed initiatives only Source: companies, PwC analysis

Price volatility management has not been identified as a strategic priority. It is true that 2013 was a little bit more quiet and that the tools are well-known. More worryingly, adapting to regulation change is not a priority either, except in dairy and sugar because of the upcoming end of the quotas. This may illustrate a disconnection from end markets and a possible lack of anticipation, which can be risky (see the recent Russian embargo of European products).

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The cooperatives’ answer: 6 key levers

1. Bigger. For many interviewees, size matters and will increasingly matter to reach critical mass (a key to support costly equipment such as trading platforms), to gain negotiation power against upstream or downstream giants, to reduce the use of intermediaries and to be in a better position to attract investors. Our research shows that the turnover of Top 50 cooperatives grew by 40% between 2008 and 2013, well above sector average.

2. More global. International footprint is seen as key to stay close to consumption markets, be more competitive on production costs and reduce logistics costs. Going international is also considered as a means to diversify market risks and increase profitability. From export-based to full local presence, strategies vary between players.

3. More integrated. Upstream and downstream vertical integration through acquisitions, joint-ventures, partnerships or contracts is considered by cooperatives as a key to better control volume and price fluctuations all along the supply chain. Only a few players from very organized, consolidated markets such as Northern Europe were not willing to integrate vertically. Strategic sourcing is also becoming more popular among cooperatives willing to diversify their supplier base, secure long-term supply agreement and improve their relationships with key suppliers. Not only to secure volume and price, but also to better manage risks, innovate better and faster and implement sustainable sourcing practices that end customers increasingly ask for.

4. Stronger brands. Whether global or local, strong brands will be key to avoid price competition and unlock value. Cooperatives also told us that they can act as a guarantees for customers in search for trust and increase food supply chain safety overall. There is a challenge here, as brand development has for long not been a priority.

5. More innovative. Cooperatives told us how innovation is everywhere in food supply chains, from biotech and genetics to product development. Food supply chains have also become digital. Precision farming is gaining awareness and drones and satellites screen land to optimize input, reduce costs and ensure traceability. Innovation will also increasingly ties into new business models and financing solutions, we were told.

6. More inclusive. In order to tackle transversal challenges such as waste, deregulation, traceability, or to foster food production in emerging countries, cooperatives will have to play in teams. They may have to improve lobbying pratcices to have an impact on regulation changes. They will also need to find new partners, possibly industrial companies, non-profit organizations, States and financial investors.

1 2 3 4 5 6

M&A

Bigger More global

More integrated

Stronger brands

More innovative

More inclusive

Vertical integration

Emerging markets

Strategic sourcing

Tracability Technology

New products

Genetics

Customer focus

Safety

Local development

Partnerships

Big dataValue

Growth

Co-creation

International

Sustainability

Disintermediation

PowerVisibility

Critical mass

Promise

QualityOpportunities

Alternatives

GovernancePrecision farming

Project financing

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Financing the future will mean looking for unconventional solutions

The lack of finance is often considered as a perennial constraint for food cooperatives. Their shareholding structure, complex organization and apparent lower than average profitability, as well as the low level of knowledge that many investors have of the agribusiness sector, historically prevented them for easily securing the financing solutions they may need for their projects.

“Traditional” financing solutions such as self-financing, bank debt and bonds still account for the lion’s share of finance, although a growing number of cooperatives have successfully raised money on financial markets, using private placements and new financing tools such as Schuldscheins.

These traditional solutions will probably not suffice to successfully take up long term challenges (see p9) and move as fast as private food companies, who already invest high amounts of money in logistics facilities, Research & Development (esp. upstream), acquisition of land, production capacity and local food production capacity, to name a few.

Good news is, Agribusiness has never been so popular among investors, who seem now convinced by the solidity of long-term fundamentals of the sector. More particularly, investors from emerging countries, esp. Asia and the Middle East, have been more active. In parallel, public bodies are mobilizing to continue to fight against undernourishment and make sure their growing population can eat. In our view, food cooperatives are well positioned to catch this financial opportunity, provided they are flexible enough to consider new types of partnerships and structured enough to attract investors.

According to interviewees, financial innovation should develop over the coming years, and a number of new types of partnerships could arise, including project financing (possibly under public-private partnerships models), creation of investment funds fueled by farmers or co-investments with investment funds, including infrastructure and private equity.

In order to attract investors, many cooperatives will need to educate their members on the necessity to demonstrate solid, regular financial performance (in terms of profitability but also cash flows) and will need to improve transparency and financial communication.

Figure 8: Top 50 cooperatives’ growth, 2008-2013

Name Date Amount Solution

Agrial 2013 €95m Private placement

Arla 2014 €163m Bond emission

Arla 2013 €175m Bond emission

CHS 2014 €1.5bn Preferred stocks

Danish Crown

2012 €67m Bond emission

Friesland 2012 €394m Private placement

La Coop Fédérée

2014 €38m Preferred stocks

Limagrain 2014 €300m Bond emission

Limagrain 2013 €70m Preferred stocks

Sodiaal 2013 €130m Private placement

Vivescia 2013 €62m Bond emission

Figure 9: Selection of financing initiatives

Note: disclosed initiatives only Source: companies, PwC analysis

Note: disclosed initiatives only Source: companies, PwC analysis

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Strategic issues ahead, but a unique opportunity for food cooperatives

The ongoing transformation of food supply chains is a unique opportunity for food cooperatives to demonstrate the strength and relevance of their business model. Their values, their capacity to invest in the long term, their experience to deal and partner with public bodies, their direct access to land and agricultural production and their capacity to guarantee quality all along the supply chain can be strong differentiating factors compared to other food companies.

However, we (alongside a number of CEOs interviewed) found that such success will require a number of changes:

• Develop long term strategic vision with their members. Food cooperatives know how global food consumption will look like in 20-30 years, but few of them actually have defined more than their usual 3-5 year strategy plan. Most strategies will not enable to take up long term challenges. One strategic layer is missing.

• Expand from homelands. Cooperatives’ priority is and should remain to sell at the best possible price the output of their farmers. We believe that, tomorrow, cooperatives will also have to produce abroad, help smaller local farmers structure efficient supply chains, possibly sell their expertise to countries and better meet specificities of local market. Indeed, producing abroad will increasingly matter to secure the future of their member farmers.

• Go closer to end consumers. Cooperatives are still naturally geared towards upstream, although progressively integrating downstream. They will need to accelerate, as ratios of power are changing fast to the benefits of consumers. “from fork to farm” and not the opposite. This will mean building stronger bridges with customers, possibly entering distribution, and finding a way to convince their farmers to produce what customers want.

• Developing inclusive food strategies. For many reasons mentioned in our report, the level of integration in food supply chains is too low. Cooperatives will have to consider more contracting, more local supply, more partnerships and new ways of working with other industry stakeholders.

• Developing new expertise. M&A, innovation, digitalization, international growth, vertical integration, risk and volatility management, strategic sourcing will mean going beyond cooperatives’ core skills. They will have to develop and strengthen new fields of expertise.

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In Summary…

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Contacts

Yves Pelle Partner, Agricultural Cooperative Leader yves.pelle@fr.pwc.com

Sébastien Murbach Director, Strategy sebastien.murbach@fr.pwc.com

Erwan Colder Partner, Transactions erwan.colder@fr.pwc.com

The Agribusiness network

Isabelle Spiegel Director, Sustainable development isabelle.spiegel@fr.pwc.com

About the report

With the collaboration of : Sonia Boisvert Partner, Audit sonia.boisvert@ca.pwc.com

Argentina Mariano Tomatis mariano.c.tomatis@ar.pwc.com

Australia Craig Heraghty craig.heraghty@au.pwc.com

Brazil Jose Rezende jose.rezende@br.pwc.com

Canada Lori Robidoux lori.j.robidoux@ca.pwc.com

Germany Norbert Niedenhof n.niedenhof@de.pwc.com

India Ajay Kakra ajay.kakra@in.pwc.com

Ireland Jimmy Maher james.maher@ie.pwc.com

MENA Mark Webster mark.a.webster@sa.pwc.com

Netherland Marco Jansze marco.jansze@nl.pwc.com

New Zealand Craig Armitage craig.armitage@nz.pwc.com

Romania Anca Scurtescu anca.scurtescu@ro.pwc.com

Singapore Richard Skinner richard.skinner@sg.pwc.com

South Africa Frans Weilbach frans.weilbach@za.pwc.com

Ukraine Olena Volkova olena.volkova@ua.pwc.com

UK Liam Hennigan liam.hennigan@uk.pwc.com

USA Thomas Johnson thomas.r.johnson@us.pwc.com

© 2014 PwC. All rights reserved.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

Vincent Barbat Director, Operations vincent.barbat@fr.pwc.com