Canada’s Agri-Food Moment Canada 2020
Dominic Barton Global Managing Partner McKinsey & Company June 1, 2018 ESTIMATES The agri-food industry has a massive economic, social, and environmental footprint
Size of food and agribusiness sales $12tr across the value chain globally 10% Food share of global consumer spending Proportion of greenhouse gas emissions 30% related to agriculture
Share of worldwide employment in agriculture 40% (including 70% of the “bottom billion”)
Share of worldwide water consumption 70% used by agriculture
Share of undernourished population 80% that live in rural areas
Years of historical food production that must 10,000 be matched in the next 40 years
SOURCE: World Bank; FAO; McKinsey GHG Abatement Curve and Water Initiative; KPMG – The Agricultural and Food Value Chain 2013 8 Agri-food is a major industry globally, representing 8% of global GDP and is growing rapidly to meet demand
2017 total global output 10-year trailing CAGR by sector (percent)
Wholesale & Retail Trade 6.4 Tourism & leisure Other Food & Agribusiness 4.8 IT & communication 4% 3% Transportation & 4% Manufacturing Healthcare 4.3 logistics 5% 27% Manufacturing 4.2 Energy & mining 5% Construction 3.8 Healthcare 5% Real Estate 3.7
Financial 6% Financial Services 3.4 services Public Spending 3.4 7% 14% Wholesale & Public sending IT & Communication 3.2 7% retail trade 8% Tourism & Leisure 3.1 Real estate 7% Construction Food & agribusiness Transportation & Logistics 2.9
Energy & Mining 2.2
SOURCE: IHS Global Insight Industry Database. April 2017. 9 However, the agri-food sector is also facing several supply-side constraints 1 Water 40% deficit expected by 2030
Over 20% of arable land already degraded; require additional 175-220 million hectares of Land 2 crop land to meet the 2030 demand (11-14% increase)
Climate Could lead to 3-16% lower productivity by 2080 3 change
Has steadily declined since the 1960s (2.2% Productivity 4 average annual yield increase) to today (1.2%)
Over 50% of cash costs are fertilizers and Energy 5 fuels (63% for U.S. corn production)
SOURCE: FAO World Food and Agriculture to 2030/2050; FAO Expert Meeting on How to Feed the World in 2050; Sage; PEAT; USDA; UNEP; World Bank; Resource Revolution, McKinsey 10 Meeting future global demand will require investment in a combination of yield improvements, land expansion and loss reduction Production potential Billion mt of cereals
Solutions 1.6 1.6 ▪ Advanced breeding ▪ GMO 0.4 0.4 ▪ Digital agriculture 2.0 ▪ Biologicals ▪ Microbial solutions 5.2 1.8
1.4 Range of potential 2.3
2.3
9.5 Current production Yield upside on Land upside Upside from high Reduction of waste Technology improve Theoretical current crop land1 with current yield2 yield on new land and food loss ments3 potential production
1 Yield upside is estimated as the difference between current yield and IIASA estimated potential yield, where this is higher 2 Land upside is based on IIASA estimated available land, reduced by 30% to account for needs in infrastructure , wood land etc, 3 Technological improvements are based on a IIASA maximum yield increasing by 1.2% a year in developed countries and 0.6% elsewhere SOURCE: FAOSTAT, OECD FAO Agricultural Outlook 2015/2030 and 2030/2050 appendix, McKinsey analysis 11 The broader agriculture sector has outperformed the market historically Evolution in the agriculture industry vs broader market1 USD, Indexed, Jan 2000 450 S&P 500 400 Ag. Index
350
300
250
200
150
100
50
0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
1 Ag index based on MSCI Agriculture & Food Chain Index SOURCE: Bloomberg 12 Upstream players have outperformed downstream firms since 2005
Share price of agribusiness companies1 2005 Index 800 750 700 650 600 550 Upstream 500 • Inputs 450 • Ag. production 400 350 300 250 200 Downstream 150 • Trade/primary processing • Secondary processing/retail 100 50 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1 Sample of Agribusiness companies based on custom index created by McKinsey SOURCE: Capital IQ, McKinsey analysis 13 Global Ag value chain performance Low High
Nutrition Input Seed & Chem Farming Aggregation CPG branded Retail (Fertilizer) distribution
2 2 2
Sample companies 2 2
2 2
2
EBITDA1, ~15% ~27% ~4% N/A ~5% ~18% ~7% % (avg ’06-’16)
Capital intensity
~39% ROIC1, ~16% ~21% % (avg ’06-’16) ~12% Financial indicators Financial ~6% ~8% N/A
Number 10s 100s ~600 million 10s 1,000s 1,000s of players
Est Top 5 level share by 70-80% 50-60% <1% 40-50% 15-25%
Consolidation segment, %
1 Average financial performance for publically traded companies for 2006-2016 2 Includes financials for only the relevant businesses in each segment SOURCE: CAP IQ, Team analysis 14 >50 Ag 2025 hotspots 5-50 Market size <5 $ billions Opportunity matrix
Risk to outcome Index
Cotton & Bio- Feed Low soybean pesticides additives in L. America Aquaculture Microbial fertilizers Functional Cotton in E. Asia Foods E. Europe wheat & corn Ag. machinery Medium Info. Services Precision Ag. Protein in Asia & data Fruits & veg. In MENA Irrigation
Developing world Equipment for Sugar in India input distribution GMO seeds trace testing
High Corn in Africa Post harvest loss infrastructure in EM
0 3 7 9 12 13 14 15 16 Low Medium High Expected growth, % CAGR
1 Growth: <3% low; 3-7% medium; >7% high; Risk; number obstacles across geopolitical, regulatory, technology and execution risk 2 Additional hotspots not mapped: 8 - private label in emerging markets, 19 – solutions to land scarcity, 29 - futures and risk management SOURCE: McKinsey analysis 15 We are poised to capture this opportunity – Canada’s endowment
Abundant natural resources (e.g. freshwater, long coastlines suited to aquaculture, least densely 1 occupied arable land in the world) 2 Strong network of R&D facilities and universities Sophisticated, ethnically diverse consumer base that 3 stimulates product development 4 Early adopters of technology Reliable access to capital and inputs (e.g., fertilizers, 5 feed, seeds) 6 Lowest use of pesticides per-hectare Political stability and goodwill that encourage 7 foreign investment
SOURCE: Advisory Council on Economic Growth 16 Agriculture has been our growth star Bubble indicates size of Canadian sector over the past five years Sector GDP / total GDP
Canada’s sector growth momentum relative to global trends, 2010-15 Canadian success in capturing sector growth1, Canadian GDP growth / global GDP growth 2.0 Oil and Gas 1.0 Agriculture
0.8 Construction
Real Estate 0.6 Hotels and Transport Equipment Restaurants Social and Personal Services 0.4 Wholesale Financial Services and Retail Transport 0.2 Health and Social Services Trade
Knowledge and IT 0 Utilities Education Public Admin Food and Bev -0.2 Manufacturing
-0.4 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.0 Global sector growth1, GDP growth, % 1 Based on historical GDP CAGR data for 2010 - 2015 SOURCE: IHS Global Insight 17 Agri-food is Canada’s number one job creator … 0.20 million Natural resources
Canadian “core strength”1 sectors Employment contribution Million jobs, 2015 GDP contribution %, 2015
Agri-food 2.10 6.7
Manufacturing 1.70 10.51
Education 1.00 13.7
Energy and renewables 0.95 6.8
Tourism 0.63 2.0
Forestry 0.30 1.3
Financial services 0.78 5.2
Mining 0.06 3.5
1 Export-intensive sectors with strong GDP contribution and/or comparative advantages SOURCE: MentorWorks; National Energy Board; Natural Resources Canada; Innovation, Science and Economic Development Canada; Conference Board of Canada, TIAC 18 … and a force of economic inclusion Widely dispersed across rural and urban areas, these jobs are a force for economic inclusion… the sector has also proven to be a strong employer of New Canadians across the value chain
Advisory Council on Economic Growth
SOURCE: Advisory Council on Economic Growth 19 Underdeveloped value chain 1 • Only processes 50% of agriculture output • Lack of investment in processing infrastructure
Low productivity • Unable to achieve economies of scale on farms in some sub-sectors • Deployment of productivity-enhancing technologies limited by rural However, 2 internet bandwidth • Government spending primarily on risk management rather than there a few productivity enhancing investments major barriers to growth Trade barriers • Lack of preferential trade agreements with 3 of 5 biggest potential 3 export markets (China, India, and Japan) • Comprehensive Economic and Trade Agreement with EU yet to be fully implemented
Regulation 4 • Growing regulatory obstacles to trading with the U.S. have added substantial burdens to agri-food companies in the last decade SOURCE: Canada Advisory Council on Economic Growth 20 There are four building blocks to our agri-food growth strategy
Set an ambitious Increase annual agri-food exports by US $30 billion over the next 1 aspiration 5-10 years to become a Top 3 agri-food exporter
Launch a few Signature initiatives that large and small players can rally behind 2 bold pilots across key sub-sectors
Implement the Council’s Specific initiatives to broaden trade agreements, develop infrastructure, core recommendations enhance immigration and FutureSkills Lab, and accelerate innovation 3 in agriculture sector
Public-private Rally private sector and government to work together to drive growth 4 collaboration
SOURCE: Canada Advisory Council on Economic Growth 21 Potential aspiration for agricultural product exports
Exports of agricultural products1, 2015 Share of global agricultural exports, %
14.8 >$11B
8.0 7.0 1.4x 6.4 6.2 5.7 4.3
USA Target China Netherlands Brazil Canada Spain
Canada could target at least an 8 percent global market share in agricultural products by 2027
1 Agriculture trade defined as live animals, aquaculture), live plants, edible vegetables, edible fruit, cereals, oilseeds, veg plaiting SOURCE: Advisory Council for Economic Growth 22 Potential aspiration for exports of agri-food products
Exports of agri-food products1, 2015 Share of global exports, % 8.2 8.1 7.2 6.5 >$19B 5.6 5.1 4.5 4.4 4.0 2x 3.6 3.3 2.8
Germany USA Netherlands France Target Brazil Italy China Belgium Spain UK Canada
Canada could aim to at least double its share of processed food exports by 2027
1 Agri-food trade defined as dairy, coffee, milled products, lac, gums and resins, fats, preparations of meat, sugars, cocoa, preparations of cereals, preparations of vegetables, miscellaneous edible products, beverage SOURCE: World Trade Organization 23