By Kevin Parker and Boris Liedtke
Balancing food supply and demand in a manner that has a positive environmental impact and ensures a healthier life for humankind is one of the most important challenges facing the global food industry. The authors discuss in this article the lessons we can learn from the wine industry’s sustainable choices and practices, and how it is possible to enjoy healthy and high quality food whilst reducing the negative impact on the environment.
Some twenty years ago in an ordinary courtroom in Oklahoma, the US National Association of Attorneys General worked out and finalised an agreement with the humbled tobacco industry which was to lead over the next 25 years to payments of USD 206 billion by the industry to settle the outstanding lawsuits for health damages caused. The staggering payment was to recover health related care costs throughout the USA. To put this number into its historical perspective – in 1998, USD 206 billion was the equivalent of 70 times the entire value of Apple Computer Inc.; only two firms in the world had a market capitalisation exceeding this amount and the operating profits for the US tobacco industry in the previous year was a mere USD 8 billion. It was the largest settlement of a civil lawsuit in the United States history and implied that a quarter of a century of future operating profits would have to be paid for health related misconduct of the past. Health activists cheered, tobacco CEOs grit their teeth and European investors stared in disbelieve.
Since the ordeal of the tobacco giants, similar developments have followed in the car industry through diesel-gate, the pharmaceutical industry through the opioid crises and probably soon the gun industry. Closer than any of these to our health and our body are the emerging malpractices in the food industry. Direct smoking is a choice with secondary smoking being avoidable for most people. Driving combustion engines is a choice while the risk of breathing in fine particles can be minimised. The need to relief physical pain through the use of prescribed medicine is thankfully not a necessity for all. This in no way diminishes the individual tragic consequences of corporate malpractices in these industries on the impacted families. However, eating food and drinking is a human unavoidable necessity no matter where or who you are, which is why the coming tragedy in this sector will be felt much broader throughout society.
Last year the total value of the global food and agricultural industry was estimated by Plunkett Research at USD 8.7 trillion, over twelve times the size of the tobacco industry. In the US alone total food sales are estimated at USD 2.1 trillion in 2018. On the food processing and retail side, the market offers great brand diversity among a fragmented industry that includes household names such as Pepsi Co, Tyson Foods, Nestle, JBS USA, Kraft Heinz, Anheuser-Busch, Smithfield Foods, Coca-Cola, General Mills or Mars Inc. to name just the top ten by 2017 sales. This means consumers have choices and free market practises force companies to compete on price, quality and ethical behaviour. Competition brings choice and transparency.
However behind this, the production of the “raw materials” or ingredients of the food processing industry is exactly the opposite, i.e. highly concentrated among a few companies. Most notable among them is Monsanto and after the 2018 USD 63 billion acquisition – Bayer/Monsanto. For 2017, AgroPages estimates that Monsanto (34%) and DowDuPont (25%) between them were responsible for 60% of the global agricultural seed sales market. With Bayer, Monsanto’s new parent added in, this reaches a staggering two thirds of the global market in the hands of just two firms. The concentration in the US market, where the dominance of the biotechnology corporations is even more prominent, has already led to a de facto duopoly. Somewhere between 75-80% of the US corn and soya-bean market is controlled by Bayer/Monsanto and DowDuPont. Not everything about this is negative. Scientific progress, notably Borlaug’s Green Revolution, during the twentieth century, and manufacturing cost reductions, made possible in part due to such a highly concentrated industry, have allowed farming to become increasingly efficient.
Never in human history have we produced so much food at so little cost to humanity. While lives of Homo sapiens in a pre-agricultural world some 13.000 years ago was a daily struggle to search for food and water, nowadays in the developed world such as the European Union we spent less than 1/8 (12.2% by Eurostat) of our household expenditure on food and beverages. Prof Steven Pinker, author of Enlightenment Now and The Better Angels of our Nature, is absolutely right when he points out that “genetic engineering can now accomplish in days what traditional farmers accomplished in millennia”. However he is also right in pointing out while this progress has saved billions of lives, it has nevertheless been challenged and the “beauty of scientific progress is that it never locks us into a technology but can develop new ones with fewer problems than the old ones.”
The challenges, which Professor Pinker refers to, are starting to play out in the court rooms of the US as they did for the tobacco industry before. In May 2019, a Californian jury found Monsanto’s glyphosate-based weed killer “RoundUp” to be a “substantial factor” in causing cancer in a couple and ordered the firm to pay USD 2 billion in compensatory damages. This was the third and largest verdict against Monsanto over its product. It will not be its last. There are an estimated 13,400 similar Roundup cancer cases pending in state and federal courts across the US. European investors and management of Bayer are in shock at the size of these settlements. Shares in the company, one of the traditional blue chips of the German DAX Index of large shares, has almost halved during the last 12 months wiping off EUR 50 billion in market capitalisation.
In the long run, it will matter little if these claims and the size of their settlements are justifiable or not. The end result will be the same as we have seen in other cases – prolonged uncertainty, appeals, more legal cases including class-action lawsuits, more appeals, hundreds of millions in legal fees, endless amount of managerial time and effort focused on solving the “issue”, tens of millions in lobbyist fees as well as “internal and external” expert advice, and on-going financial uncertainty driving away investors around the industry and Bayer/Monsanto in particular. Once the firm has been brought to its knees, the lawsuits will broaden out along the entire value chain of the food industry right down to the farmers who were putting Monsanto products on their fields by people wearing full-body Tyvek Hazmat protection suits. It makes for poor publicity trying to argue in court, on TV, radio or YouTube that the product sprayed on our daily food was safe while being shown pictures of people looking like aliens wearing gas masks to protect them from the hazard and risk of breathing in the chemicals, which the public would later consume for breakfast.
Instead of resisting the coming change to the food industry, the smart money will be looking forward to what the future will hold and which technological or operating change will replace the present practises. That is the quintessence of progress. It “operates on the principle of escalation. Technology solves problems but it also gives rise to new ones. The more technology we have at our disposal, the more technology we need to deal with the consequences. We invent ever more sophisticated techniques of food production, only to follow up with ways to contain overpopulation. Modern history condemns us to a permanent rat race against the consequences of our own creativity. We progress towards an ever-larger need for progress. To stop that progress is ultimately to doom humanity.” This thought so adequately and eloquently expressed by the architect Reinier de Graaf will also apply to the future of our food supply.
We should have no illusion that the alternative to the endless amount of cheap food presently produced with the help of Bayer/Monsanto and DowDuPont will not be a romantic return to nineteenth century farming. There simply are too many humans to feed and too much political pressure for keeping food prices reasonably low at a time of stagnating real wages in the industrialised world. The future model for agriculture will not be found in the mass production sector of the food industry, which has been driven towards lower and lower prices by squeezing more and more yield from crops and livestock on constantly shrinking space. Instead the answers to the challenges might just be found on exactly the other side of the food quality spectrum.
There is no other sector in the food or beverage industry that has attracted a more or broader research scrutiny than the wine industry. Endless amounts of annual literature, academic work and marketing events compare the various end products and speculate about the future development of the annual harvest and its quality. The price range runs from wines that are barely more expensive than industrial produced grape juice to values that make it unaffordable to the average consumer. What is more, wine has become not only a consumer product but has attained a respected status as a financial alternative investment instrument. There are financial experts that launch and manage dedicated Wine Funds, companies that act as wine advisers and specialised storage facilities with attractive tax arrangements for the storage and save keeping of these wines in places like Luxembourg, Geneva and Singapore; so called Freeports.
The wine industry is no picnic though. Due to its attraction as a hobby in addition to its function as an industry, it has pulled in many participants who are willing to run their operations for social status and for the enjoyment of simply making their own wine. Frequently their aim is less financial optimisation but rather high quality for its own sake. As a result, margins are thin and many vineyards even operate at a loss over many years until the quality and brand has gained recognition. The wine industry deserves a closer look in search for indications about the future of the agricultural industry precisely because of these differences compared to the low quality / high volume food industry that is under pressure in the court rooms.
As a first step, we need to find out if high quality wine producers have already started to apply other operating methodologies long before the high profile court cases started hitting the headlines. After all because of its dual function as a high-end food consumer product as well as a financial investment instrument, wine producers have had a long and continuous interest in sustainable value, based on quality. While there may be as many as tens of thousands of wine producers across the globe, there is an estimated 250 producers only that are worth considering as a financial investment. Of these over 90% are from the French regions of Bordeaux, Burgundy or even the Languedoc. These include well-recognised names such as Chateau Margaux, Chateau Lafite, Chateau Petrus, Domaine de la Romanee-Conti, Domaine Leflaive Montrachet, to name but a few. As one would expect, these vineyards are extremely cautious about giving away too much detail on their wine producing and storage expertise to the public. The reason for this is not only that such information could potentially be used by their competitors to catch up in quality or by fraudsters to copy them. More interesting is a second conceivable reason for their discretion. The top end wine producers might fear that by doing so they could actually hurt their image. A look at the wine industry in the aspiring regions of California sheds more light on this argument.
Increasingly Californian wine producers are combining modern wine growing practises with environmentally friendly methodologies, which qualifies them for so called “eco-certification”. In a study published in the Journal of Wine Economics by Delmas, Gergaud, and Lim, the academics indicate that the number of eco-certified Californian wine in their database had increased from 10 in 1998 to 57 in 2009. However, vineyards rarely use this label as a marketing tool out of concern that consumers might consider eco-labelled products as entailing a trade-off between product quality and environmental impact. “In other words, in order to achieve low environmental impact, green products would have to be of lower quality.” Even in progressive and environmentally conscious California barely 1/3 of those with an eco-label dare to indicate this on their bottles. In an industry obsessed with high quality products, this is a risk which few wine producers are willing to take. Unlike the rest of the food industry where organic products increased from USD 13 billion in 2005 to an estimated USD 35 billion in 2014 with producers using the environmental label as a marketing tool, the wine industry is going through the same shift towards eco-friendly products while trying to keep this information away from the end consumer. One needs to ask the obvious question – if an eco-label is still considered to be more of a concern rather than a marketing tool for the wine industry, why shift the production towards environmentally friendly practises?
The above-mentioned publication provides the answer. By using data from three leading wine-rating publications (Wine Advocate, Wine Spectator and Wine Enthusiast) the academics crunched the numbers on over 74,000 wines produced in California between 1998 and 2009. They correlated the wine-ratings of these to two types of eco-certifications – organic and biodynamic, which were provided by the Californian Certified Organic Farmers and Demeter Association respectively. Their result is clear and gives an answer to our question above. “Being eco-certified increases the scaled score of the wine by 4.1 points on average [typically out of 100].” Adaptation of wine eco-certification production methodologies have a statistically significant and positive effect on wine ratings. To state the obvious, another study, this time by Oczkowski and Doucouliagos in the American Journal of Agricultural Economics, we find a positive and significant correlation between wine scores and price. It is safe to conclude that wine producers in California are increasingly shifting towards environmentally friendly production, not because of any marketing impact this might have. To the contrary, they shift production methodologies despite marketing concerns because it simply enhances the quality and hence the value of their end-product.
We have a better understanding why traditional top quality wine producers in the old world, i.e. France, are substantially more reluctant to share with the public the trend of the industry to move towards environmentally friendlier wine production. Many of them simply implement these practises without much publicity and some might have never abandoned them entirely. There are in Europe only a few top quality vineyards, which have publically committed to bio-dynamic wines such as the award winning Chateau Maris in Languedoc, the Burgundy based Romanee-Conti, Chateau Palmer in Bordeaux, as well as the multi-national winemaker M Chapoutier. A daring strategy that is more likely to pay off as the public becomes increasingly aware of the health risks they have been exposed to by the low quality / high volume food industry. The on-going court cases will make the public increasingly aware of these risks and will inevitable result in a shift of consumer behaviour.
In the industrialised world, which is struggling with obesity this will have additional health benefits. If regulators and the media continue to nudge the population in the right direction, consumer behaviour will shift from over-consumption of low quality food towards a more appropriate consumption level of high quality products. By doing so and applying environment-friendly methodologies towards quality food production, like the wine industry has been doing for years, we are unlikely to see a substantial increase in the percentage of total household expenditure spent on food. It would appear that in this case, humanity can have its cake and eat it – as long as it is of high quality, environmentally friendly and served with a good bottle of wine.
About the Authors
Kevin Parker is the Managing Partner of Sustainable Insight Capital Management. He has over 35 years of investment experience and was previously a member of the Management Board of Deutsche Bank for 10 years and the former Global Head of Deutsche Asset Management from 2004 – 2012. Kevin is an outspoken advocate for a global shift towards sustainability, identifying climate change as a megatrend in 2004. He is also the owner of Chateau Maris, named one of the five most environmentally friendly wineries in the world by Wine Spectator Magazine.
Dr Boris N. Liedtke is the Distinguished Executive Fellow at INSEAD Emerging Markets Institute and has over twenty years experience in the financial sector. He was the CEO of the largest bank by assets in Luxembourg and board member for Operations at the largest German fund manager. He is author of numerous articles on finance and trade as well as having received his PhD from the London School of Economics for the publication of Embracing a Dictatorship by MacMillan.
