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Good day everyone!
Out of many requests from investors, on how to invest in global food sector, I have decided to launch a new series of blogs called ‘Food and Finance’.
In these blogs, we will have the opportunity to discuss the intersection and interaction between the finance industry and the global food industry.
This symbiosis is not new, but is as old as agriculture itself, because the beginning and end of food production, manufacturing and supply has always been finance.
This symbiotic relationship has been parasitic in the sense that up to now, the financial system has sucked life from the food industry and in many cases, reinforced global structural market inequalities because it seemed to be more profitable.
However, we find ourselves at a critical point in history where the two respective industry have to have a mutually beneficial relationship whereby finance becomes a more benevolent investor into the food sector for all of our collective benefit.
While we have seen the challenges to the global food supply caused by the COVID 19 virus, in the grand scheme of things, it pales into insignificance when compared to the challenges we will face in feeding our world if the current relationship structure is maintained.
In understanding the food industry today, the key driver is the phrase ‘food security’. There is an account in the Bible that perfectly encapsulates some of these challenges we face going forward.
This is the story of Joseph. The Bible asserts that he was sold by his brothers to the Ishmaelites. They sold him because they hated him, as he received preferential treatment from their father Jacob despite being the second youngest son and having 10 older brothers.
He was sold as a slave to a kind Egyptian master called Potiphar, who was said to be the head of the Pharaoh’s guard. He distinguished himself and became the head of Potiphar’s household.
He was falsely accused of rape by the wife of Potiphar after he rejected her sexual advances and was thrown in jail where he was of such excellent character and capability, that the prison warden entrusted to him the administration of the prison.
It was during this time, that he encountered the Pharaoh’s butler and baker, who were in prison accused of an attempted assassination of the Pharaoh.
They both had bad dreams and Joseph correctly interpreted their dreams, which resulted in the butler reinstated to his position of trust and the baker executed for treason.
Despite the urging of Joseph for the butler to help him plead his innocence to the Pharaoh, he was forgotten in prison for two more years, until the Pharaoh himself had a bad dream for which he could not get a correct interpretation from all of the wise men from Egypt.
The butler remembered Joseph and mentioned his encounter with Joseph in prison, after which Joseph was swiftly summoned to the Court of the Pharaoh to help interpret the Pharaoh’s dream, which he did successfully.
The dream itself was in two parts. In the first part, the Pharaoh was standing by the river and out of the river came seven beautiful and well-kept cows feeding on the meadow.
Next, he saw another seven cows came out of the river, but unlike the first seven, these seven were very thin and neglected. These thin cows ate up the seven fat cows.
The Pharaoh woke and went back to sleep and this time, he saw seven healthy ears of corn upon one stalk and after this, he saw another seven ears of corn but these were very diseased and like the first dream, these diseased ears of corn ate the first seven healthy ears of corn.
Joseph interpreted the dream by first saying it was one dream not two, it was just repeated. The seven healthy cows and the corn represent the next seven years within which the land will be very prosperous and the seven poor cows and ears of corn represented the following seven years, where there will be a very grave famine in the land.
Understandably, for Pharaoh, this was very troubling news, he realized how food insecure Egypt was and this is the reality, that leaders across the world are facing today, when they look at the projections going forward, but this time it is not because of natural phenomena, but a crisis of man’s own making.
Currently, it looks like a time of plenty, but the world is facing a food insecure future. According to UN figures; currently more than 690 million people face chronic hunger, which is defined as:
The distress associated with lack of food. The threshold for food deprivation, or undernourishment, is fewer than 1,800 calories per day.
Undernutrition goes beyond calories to signify deficiencies in energy, protein, and/or essential vitamins and minerals.
Malnutrition refers more broadly to both undernutrition and over nutrition (problems with unbalanced diets).
While these are typically understood to be problems, in what is known as the global South, which is broadly most of Africa, some of the Middle East, South and Central America and most of Asia, we are also seeing this increasingly in what is known as the global North, where there is relatively more affluence.
Increasingly, we are also seeing food insecurity across the world, this is not just talking about agricultural challenges, but also looks at other challenges to get nutritious food three times per day, in adequate portions in every plate.
Food Security is defined as “Food Availability, Access and Utilization”
When a person always has adequate availability and access to enough safe and nutritious food to maintain an active and healthy life, they are considered food secure.
Before, we return to the story of Joseph, I will hasten to add that food insecurity, or famines have never had anything to do with the amount of people but with faulty food systems.
Whatever the population of the earth, it has the capacity to feed all of its inhabitants, but the misalignment of priorities due to economic incentives are the main reasons why we have not yet witnessed full food security and the global obliteration of world hunger. This is why I started this blog, with a necessity for the symbiosis between finance and food to be a mutually beneficial one and less of a parasitic one, because the issue of food security is of paramount importance.
Joseph correctly identified, that while it is a challenge, it can be overcome with a strong system where everyone cooperates. This is why I said, hunger is not a capacity issue whether of natural resources like land, water, knowledge, people etc.
Rather it is a systemic and structural problem reinforced by the financial system.
His recommendations to the Pharaoh were as follows:
Pharaoh realized at this point, that Joseph was the best man to carry out this task and he was appointed as Prime Minister of Egypt, to make Egypt food secure.
The system Joseph built is very instructive for us to use today, as a playbook to achieve food security.
He built an integrated system, that started with the agricultural land and what it produced. As a fifth is about 20%, it conceivably was part of a taxation system, where farmers gave 20% of all they produced to the Pharaoh as a tax, which was then saved in storehouses, while the people kept 80% of all they produced.
This issue of saving and investing for the future, is very instructive for the role of governments, in creating food security. Governments must tax to save and to invest not just to fund current programs.
Part of the tax from the participants in the food sector, should go towards investing in the food sector, whether it is research, infrastructure, education of farmers, strategic reserves etc.
This brings me to the next part of Joseph’s plan. He built huge local storehouses in every city and a logistics system for transporting the food to the storehouses from the surrounding villages and farms.
He went about filling the storehouses, and the account in the Bible said, that he gathered corn without numbers, it was as the sand of the sea.
During this time, the famine began and the Bible says, that it was all over the whole earth and everyone came to Joseph to buy corn, and it is said that with this, Egypt became very prosperous.
The people of Egypt came to buy corn with their money and when that was finished, they sold their livestock and land, to buy corn and when this was finished, they said they had nothing left, so Joseph made a contract with the people saying, that they can cultivate the land after the famine, but have to give twenty percent to the Pharaoh and keep 80% for themselves and with this agreement, he was able to feed everyone for the duration of the famine and afterwards.
What we see with this system Joseph created, is that it was mutually beneficial, because the initial 20% of the produce that was the taxation, was stored to feed the people afterwards and when they could not buy anymore, they were given a fair deal by Joseph in exchange for more corn.
In the second part of this blog, we will examine the respective role, that the various parties played in securing the food supply of Egypt and the world, but in this part, we see that the answer for the impending food crisis was a systematic approach to increasing the capacity of the system to withstand shock and stress.
Our current food system is very fragile and not resilient and capable enough to withstand shocks.
This is for three reasons that I will briefly address:
Misalignment of objectives.
The global food supply chain is not working towards the same purposes.
An example of this in action.
The cocoa or cashew nut market. While these unfair relationships exist in every food supply chain, the cocoa and cashew markets are probably the worst. International companies and traders will descend on local farmers in the global South and bid down the price of the raw material to its minimum price (whether it is cocoa or cashew), and then they will go on to sell it with huge margins.
Raw unshelled cashews can cost $900 to $1000 per MT to buy from Nigeria and Tanzania, but when it is processed and packed into retail packs, it can cost a minimum of $25,000 per MT.
The profit margins are enormous, and while profits are important, we can still share more of the profit margins across the supply chain if not for altruistic reasons, but for pure business sense.
One of the reasons, is the fact, that most of the farmers are growing older. They do not have the capital or strength to renew their plantations and their children refuse to carry on the work, as it is so low paid and without more investments and a better structured system, this system is not sustainable and in the long term, the whole supply chain will suffer from lower productivity and yield levels.
Over efficient supply chain.
Those of us in the global North, have mastered just in time production and delivery terms, which makes the whole supply chain very fragile indeed, as in many cases, delivery times are so tight that there is no margin for error.
However, when there are supply or delivery shocks, the system breaks down very quickly. To resolve this issue, the whole supply chain has to be recalibrated in such a way that it can be scaled up when necessary and wound down as appropriate. Additionally, more emphasis has to be placed on forecasting, storage solutions and scenario planning to add resilience to the system.
Underinvestment in the supply and value chains.
This happens primarily because of short term thinking, with companies unwilling to tie down capital for an extended period of time, which is in turn driven by the investment community’s overemphasis on short term profitability and fast growth at the expense of long term investments, which in many cases can help a company consolidate or grow its market share.
In conclusion, the untold story of most of the challenges we have discussed above is driven by financing decisions, which includes cost of capital, risk, duration, profitability.
Further on, in part two, we will discuss this in more detail and conclude, on how finance can become an enabling partner for investing and financing the long term resilience and robustness of the global food supply chain.