The goal of this course is to understand the challenges and

opportunities of agribusiness nowadays from farms to retailers,

from input providers to traders.
All the diverse players of this value chain interact in a complex business environment in
which nature,
policy, technology, and management strategies have to be
considered to overcome future challenges and seize upcoming opportunities.
To understand such complexity, we will take Italy as a large open-air Lab in which all major
phenomena and business dynamics influencing agribusiness worldwide coexist and clearly
show their effects.

History, heritage and tradition, technology and innovation, brilliant farmers and multinational
companies all in a constrained, diverse, physical and business landscape,

Italy is the perfect sampling area for agribusiness. In the first week, then we will set the
ground for our sampling.
We will understand the Italian agribusiness,
the geomorphology of the country, its fine agricultural products
and the interacting players, especially focusing on the agricultural production.

In the second week, we will understand the challenges that

will mark the next 30 years for all mankind,
such as climate change, food security, water scarcity, land competition.

We will focus on their direct impact on agribusiness. We will also examine other market and
business phenomena that are
making the challenges even tougher.

However, a challenge is an opportunity to grab, and we will start considering how in the third
week.

In this week, we will learn more about the innovation management process, and we will
showcase how players in the agribusiness are tackling the future through technology and
ingenuity,
with the contribution of top managers and entrepreneurs who have accepted the challenge of
thriving in the next 30 years.

The fourth and last week, will, instead, shift the focus from
technology to strategies for the future, business models, policies, and people.

We will see how the Italian agribusiness is changing with young farmers, new entrepreneurs
and new strategies to
address new markets and new consumers’ needs.

Ready? Let's get to it.

We are here in Trenzanesio, a Palladian style villa built in the 16th century by a famous noble
Milanese family.

This is also the site where our founders, Cavalier Romeo Invernizzi and his wife Enrica, lived
part of their life,
and certainly the place they mostly loved.
Romeo Invernizzi was a well-known Italian entrepreneur who forged in Italy a commercial
empire based on producing excellent fresh cheese, a widespread distribution, and innovative
advertisement on media.

After retiring, together with his wife, he decided to give life to this foundation in order to
support research in economics,
medicine and agriculture.

Strong was the bond to his territory and the Lombardy countryside.
For this reason, we are really proud to sustain this new initiative of Bocconi University and
its Business School, with the aim to study,
support, develop modern agricultural entrepreneurs and firms.
In the past, the people who worked in this industry
were more focused on cultivation techniques and improving machinery to gain productivity.

But now they feel the need to understand business logics, financial planning and control, the
impact of IT and AI opportunities,

how to attack ever-changing and more rapid markets

and conceive a sound marketing strategy. To nurture this new figure of a business manager
sensible to food and agricultural themes is the best way to balance the well-being of our
planet with the increasing population of the human race, too.

Only superior knowledge, together with a respectful and ethical

approach in the use of natural resources, can shape a sustainable and durable economic model
in agriculture.

We all know that in the next few years lots of young students and managers will be brave
enough to take on this challenge and create
a better world for all of us.
In this first module of the course we will start familiarizing with several fundamental
concepts of farming and agribusiness.
We will understand who the players and their history are, what their competitive strategies
are and how they influence one another,

what are the strengths and weaknesses of the Italian farming and agribusiness industry.

We will do so by going through the several phenomena and contradictions that shaped the
most peculiar and probably fragile agri system in Europe and the world.

While watching the videos of the week, keep one question in mind: Why Italian agribusiness
should be taken as an emblematic case to understand the future of agribusiness?

Try to focus on understanding if the wide array of coexisting phenomena in the Italian agro
system make it more or less resilient to future challenges.
The history and evolution of agriculture in Italy begins around 70 years ago.

Since after World War II, a fast-paced industrialization has dramatically

changed the Italian society in a matter of 20-30 years, whereas a comparable change in the
rest of European economies occurred over a period of a century.

The phenomena that shaped the modern Italian economy and agriculture have thus been
extremely concentrated, more than what the Italian population could culturally metabolize.

The effects for the country were relevant, and even more for agriculture.

Post-World War II farms were still pre-mercantile, self-consumption,

micro-productive units bonded with families.

Peasants’ families, as a matter of fact, were strictly connected to the land they were working,
often not even owning the land.

Being born on a farm meant working in the same farm for the rest of your life.

Self-consumption strongly limited the evolution of farms, keeping them small, closed units,
physically and culturally isolated.

This had a significant impact socially, productively, and technologically.

Physical isolation during centuries, due to the lack of infrastructure and transport, created
small local markets where farms, unable to generate surplus, could exchange some of the
products for
a very limited set of manufactured products.

Not generating a surplus was not just a matter of poor productivity per se, but it was also due
to the fact that farms had to be dedicated to feed the family.

The feeding requirement of the family forced farms not to specialize on one product,
but to be able to manage several micro production processes.

Things suddenly changed after World War II with the industrial boom.

Agriculture quickly became nothing but a workforce reservoir for factories in

the rising manufacturing districts in Northern Italy.

While in the US, this change had been ongoing for some 40 years already and
only speeded up after World War II, it was quite new to the Italian economy.

Young peasants began moving from the countryside to the city, and that was the igniting
phenomenon of the real switch to modern agriculture, rising incomes in cities decoupled
food production from food consumption, both spatially and temporally.

Farms quickly needed to turn from self consumption to market economy, as logistics and
infrastructure developed allowing production inputs and outputs to move up and down the
Peninsula.
The change to modern agriculture was also boosted by the rising chemical and mechanical
industry, providing more efficient production inputs, such as modern tractors, and combine
harvesters, fertilizers, improved seeds and agrochemicals with a growing population in
numbers and incomes not able nor willing anymore to produce its own food, so
increased productivity sustained a larger production of agricultural products in volumes.

These larger volumes weren't in any way destined to local markets anymore. Instead, they
were bought by food manufacturers in a modern trade context.

Farms at that point not only had new suppliers on the input side, they also had new customers
looking to provide the market with the lowest possible price per quantity ratio.

In a few words, they were looking for standardization of the agricultural supply and
efficiency.

With new suppliers and new customers, farms rapidly changed from unspecialized small
family-subsistence units to specialized businesses, focused on monocultures of what the land
they owned would be best suited to produce.

Despite the increased productivity of land and labour, agriculture was then facing land
competition with the other industrial sectors.

Land competition in Italy is harder than in most European countries. Land is scarce because
Italy is a small, densely populated country. Agricultural land is even more scarce because of
the geomorphology of the Peninsula, with only 25 percent of flat lands overall, and the
remaining part being hills or mountains with none or extremely poor productivity.

Since it is physiological to have a production factor moving towards more profitable use, land
was taken from agriculture and given to those industries that could more intensively use it
in economic terms, in extent, manufacturing.

Land scarcity has influenced the development of agriculture in Italy since then.
Under a macroeconomic perspective, land scarcity and a booming population pushed
Italian food manufacturing to importing goods from abroad. It also dramatically influenced
the distribution of land assets and their use.

In many cases, families kept land properties for generations, and even after moving away
from rural villages and agriculture.

With land scarcity, land is a capital reservoir itself, and in times of high inflation rates, this is
even more evident.
Families did not sell the land and a large part of arable land has been sitting there not or sub-
optimally used for agriculture. This also posed a limit to the development of agriculture,
besides constraining the sides of agricultural area and farms.

Today there are some 1.7 million farms in Italy on 12.9 million hectares of utilized
agricultural area. The divide between the north and the south is still visible, with some 30
percent of
the farms in the north producing over 50 percent of the agricultural value added.
While the average gross sellable production in the north is around €70,000 per farm,
in the south the average GSL does not exceed some €20,000. What is Italian agriculture
growing? Mainly forage and cereals for animal feed, fruits and vegetables, grapes, milk, and
meat.
In conclusion, despite the low levels of GSL produced by Italian farms, Italy is by far
the first country worldwide in terms of quality, with over 800 products certified by
the European Union under quality schemes.
809 this is the number of certified quality products in Italy. Not surprisingly, 523 are wines,
whereas 286 represent meats, cheeses, and olive oils. With some 3,000 quality products all
over the world, Italy is the first country in terms of quality production. This certainly means
that
no other agricultural system has the competencies, or capabilities, or simply the conditions to
grow excellence as Italian agriculture does. Well, what does it mean to cultivate excellence?
What the conditions, the capabilities and the competencies that allow Italy to become the first
country worldwide in terms of quality agri-food products. That's what we're going to find out
in this lecture.

56 percent of the utilized agricultural area (UAA) some seven million hectares, is
destined to the production of such goods in Italy, certified as PDO, PGI,
and TSG under the European Union scheme. They not only represent one of
the founding pillars of our cultural heritage, but an extremely valuable asset for the industry.

The value of certified quality products exceeds €13 billion on the consumption market,
or else the 10 percent of total agri-food turnover. As in many other industries, production is
fragmented and diverse according to the region of origin. Some regions and even some small
provinces show a very high concentration of certified excellent products,
some others just a few. Well, let's start with understanding quality according to the European
certification schemes.

There are three European quality schemes of geographical indications and traditional
specialties. The Protected Designation of Origin (PDO), the Protected Geographical
Indication (PGI), and the Traditional Specialties Guaranteed (TSG). Such schemes promote
and
enforce the protection of names of quality agricultural products and foodstuff under the EU
regulation. The purpose of the law is to protect the reputation of regional foods, promote rural
and agricultural activities, help producers obtain a premium price for their authentic
products,
and eliminate the unfair competition and misleading of consumers by non-genuine products,
which may be of inferior quality, or of different flavor.

While PGI labels only certify the origin of raw materials, the more prestigious PDO certifies
products whose characteristics essentially or exclusively depend on the territory they come
from,
meaning the combination of human and natural assets that allow the product to be
inimitable outside that specific ecosystem.
Going back to why Italy is able to cultivate excellence like no other country worldwide,
which was the underlying question to this lecture, we have identified three sine qua non
conditions. First, as for the natural assets, the landscape of the Peninsula is characterized by
thousands of micro-climatic and orographic unique areas. Second, a strong cultural heritage
able to influence know-how, production techniques and technologies almost always related to
a specific region, province, municipality, or even a village. Third, stronger entrepreneurship
pushed by the need to acquire economic sustainability of small, often physically and
culturally isolated areas.

There is no need to underline how tradition led the development of so many excellent
products in Italy, sometimes to the point of diffusing the misconception of tradition as a
synonym for excellence. But as I said, this is a pure misconception. The excellence of Italian
products is not just tradition, but the combination of several unique ecosystem
resources. Natural and human capital, including know-how, culture, and innovation. Now
while the three conditions
can be found in any Italian region, the extent to which these have been leveraged on to
develop
excellent productions varies from region to region, with a high concentration in the north.

The north-south two-speed pace in the development of economies certainly is the main
reason, but not the only one. The strength of tradition in southern regions sometimes has
hampered the diffusion of innovation and some sort of resistance to listening into market
needs. This leads us to what in my understanding is one of the core capabilities to
develop certified excellence in agricultural products, sensitivity to consumer needs, and this
is one of the key points for
the development of agriculture in Italy.

The ability of understanding the market, the evolution of consumer tastes and needs is
a vital capability to enhance traditional products potential. But there's also one other
capability that gave competitive advantage to entrepreneurs in the north - managerial
skills. The south of Italy is populated with traditional products, probably far more than the
north, but since European excellence labels are obtained upon rigorous production
management standards, it's been the capability of managing processes in the farming and
manufacturing phases that allowed
the diffusion of so many certified quality products in the north. Recently, this gap seems to be
decreasing, as agriculture in the south of Italy is embracing a fast innovation pace,
but we will see this in the next lectures.
Mountains and hills are the prevailing landscape in Italy. However, in the last five or six
decades
all political and technological efforts have been addressed towards flatlands. In fact, some 50
percent of all farms in Italy concentrate in the flatlands, representing just some 23 percent of
the Italian territory where technological advancements and political decisions have driven
agriculture
towards a modern, industrial development.

Unfit for industrial mechanized agriculture, uplands soon became a negative asset in
agricultural
terms, with hills too low to justify investments in technology. European policies also until
recent times used to favor farms in the flatlands with higher funding for equal
productions. This two phenomena attracted landowners and farmers investments towards the
plains, with mountains
and hills being gradually abandoned.
Despite these conditions, some farmers have never left these unfavorable landscape and
developed specific skills and techniques to the point that some of these farming techniques
are defined as heroic agriculture. Nowadays, food security, land scarcity, soil erosion and
climate change push towards rethinking agriculture on hard slopes and impervious terrains.

From structural economic data, it is quite evident that agriculture in challenging

environments is anything but performing Indicators such as Gross Sellable Productions,
added value, net income are considerably lower than in the flatlands,
while the contraction in the number of farms is stronger, and part of the UAA is abandoned.

However, beyond these general aggregated figures lies the fact that as farms in the flat lands
are now challenged by commoditization, some of the best performing traditional products
on the market in terms of price and brand value yet come from the most difficult terrains in
Italy.
Apparently, some of the most difficult agricultural areas in the country, independently from
public intervention, founds a sort of economic balance by selling high value-added products,
integrating tourism and agriculture, creating new development models.

In such areas, the population abandonment and population aging were somehow mitigated,
generating employment and wellbeing. In some areas, territorial brands and aggregations
on the supply side have played an important role, clearly linking the product to its
geographical origin. Trentino and South Tyrol’s apples, Prosecco wine from Conegliano
Valdobbiadene are all best practices in this context.

In some other cases, the key to high value in low productive areas has been to keep
traditions and respect the ecosystem balance. It is the case, for example, of Sciacchetrà wine
from Cinque Terre, or Zibibbo wine from Pantelleria island, where the viticulture cultivation
technique recently became UNESCO Heritage.
Certainly, what we can learn from these and many other successful case histories is that
agriculture is no longer a matter of working the land alone, and its sustainability is, instead, a
combination of several activities and competencies. Moreover, it is also quite evident that
there
are unexploited resources in impervious areas.

All successful case histories of profitable and sustainable agriculture in

unfavorable landscapes in Italy carry some core elements. Multifunctionality and connected
activities, taking advantage of seasonality to value the farm as an asset for tourism, culture,
and sports. Territorial marketing and branding not just for harvesting the product, but
exploiting its intrinsic, intelligible values.

And finally, cooperation. In fact, to cooperate in operations and information sharing means a
more efficient use of resources for small farms. Despite the successful case history, the road
towards profitability of impervious agricultural areas is still very long. But if we consider
land competition and other sustainability challenges, a sustainable productive system in
unfavorable landscapes could soon become a necessity. But there are many issues to
overcome.
The Italian case is representative. First of all, physical infrastructure, without
roads and logistics impervious territories will still be isolated from outward markets. Second,
digital infrastructure. The digital divide is more evident in the mountains and inlands than
elsewhere, and it is as severe as lacking infrastructure.
Lastly, farming technology.

So far, investments in farming technology have focused on efficiency, large machinery, and
vehicles to operate on more land in less time. To foster development of a profitable
agriculture
on difficult terrains, more specific technologies will have to be developed to mitigate the
impact of labour.

Almost 90 percent of all farms worldwide are managed by a family or an individual. And
they heavily rely on his or her labor. Only 2 percent of farms in the world can be defined
as large, organized farming businesses.

These farms, on the other hand, occupy 70 percent of the global UAA, whereas 72 percent of
farms working less than a hectare occupy just some 8 percent of the global UAA.
Farms are also very different if you look at their geographical distribution. This data indicates
that there are some agricultural economies still waiting to develop, like in Asia and sub-
Saharan Africa.
Some others, although (they are) technologically advanced, are limited by the
geomorphology of the land they cultivate and by their historical evolution, like Italy. Large
farms concentrated where industrial agriculture began, and found more physical space to
develop, namely North America. South America is also a land a very large farms, but the
average is lowered by a high number of people still living in a subsistence agricultural
economy, cultivating a family farm on one hectare
more or less.

As it is quite easy to understand, the pulverization of farms competitive landscape and their
limited size and investment capabilities, put farms on the wrong side of bargaining power
imbalance if compared to their suppliers and customers. This is also very true for Italy, where
the average size of farms is lower than the European average. This, together with all the
changes in the Italian and European policies in the last two decades, have exposed farms to
global markets in a dangerously short time.

National governments before, and the European policy on agriculture later, were making an
umbrella for farms under which low productivity and sub efficient efficient use of inputs was
compensated by direct funding and protected markets. While the priority was to ensure food
for the European Union in the hard times of Cold War, the European policy basically created
a drug addict market and kept it high on funding. For 50 years Italian farms could rely on any
kind of help, and their production was sold and sometimes even paid in advance
at fixed prices.

When the European policy changed from ensuring food to developing the industry, funding
was diluted and controls on spending increased. Farm had little knowledge on how to access
the market and of basic managing capabilities, mostly related to the agronomic side of
production.
As the market became global and suppliers and customers changed, it was not just about
growing crops and raising cattle to be sold in bulk. Instead, it was about competing with the
quality and prices of the products, marketing the product bargaining, delivering,
understanding the consumer, and adopting the most suitable, rapidly evolving technology.

Forget about one-size-fits-all solutions. Agriculture today is about managing the

complexity of the agribusiness, a value chain in which players have sometimes conflicting
objectives at each stage of the value creation, marked by imbalances of bargaining
power, information bias, and an unevenly distributed value. Understanding the competitive
dynamics of agribusiness is but one of the many challenges for Italian farms nowadays.

When we walk into a supermarket, we are overwhelmed with branded products.

The supermarket is where we can easily get food. In fact, there is a lot of different foods all in
the same place. The supermarket is our contact point in the agrofood supply chain. But what
do we actually see of it? We see ourselves the food retailer, that is the supermarket, and by
looking at brands the food manufacturers.

Let's take, for example, a meat-based product. Well, what we know about the supply chain
that brought the product right there for us is actually a very little portion. In fact, agrifood
supply chains are complex, sometimes very long and articulated, with a very high number of
actors involved. Farms in this example are very far from the consumer. So, who are the
players
involved in the agribusiness supply chain?

Let alone the fact that players involved are extremely different in size and typology.
We can identify seven different categories of players. At the very top of the chain are
input providers, agrochemical companies, fertilizers and seed companies, factories producing
heavy machinery. They provide farms with all necessary inputs to produce agricultural
commodities, such as cereals, meat, fruits and vegetables. Once ready or harvested,
commodities are sold to traders that are intermediary ensuring that these products will reach
demand.

Typically, processors, who with an industrial transformation process will turn commodities
into food, clothing, fuel later distributed by retailers. In the case of agrifood supply chain,
retailers
are food services, such as restaurants canteens, catering services, and hotels.
At the very end of the chain, we can find us, consumers, activating the whole chain by
generating a demand for products and services to fulfill our needs. A supply chain,
we could say any supply chain to be defined as such, generates three flows moving up
and down the chain, the physical flow of products from raw materials upstream to the final
consumer.

The information flow related to order fulfillment from downstream to upstream and the
monetary
flow of payments between customers and suppliers. Now, in the agribusiness supply chain
some of the players can influence flows more than others. In fact, some of the steps in the
supply chain show higher concentration with a limited number of very large players in the
key points of the chain. By understanding competitive dynamics of each step in the supply
chain, the number of actors involved and the market they address are at the core of
understanding and managing the imbalance of power generated in between steps.
The global players and dynamics we're going to analyze, will help us understand
how Italian agriculture is evolving. The innovations and the business opportunities it will
bring
about and its role in the global agribusiness industry. How agribusiness players compete
worldwide, what other business drivers, how will they adapt to a changing environment in the
near future? Let's start by understanding who the players at the top tier of the supply chain
are.
Let's talk about input companies.
Up to the '70s, seed companies were small operators, collecting, cleaning, packing, and
stocking seeds grown by farmers themselves. During the '70s, the parallel market of
chemical inputs for agriculture was seeming to saturate, and chemical companies seize the
opportunity of entering the seed market through acquisition of the seeds companies.
With the chemical industry capitals entering the R&D, the seed industry developed fast.
Furthermore, in the '80s, the advent of biotechnologies changed the competitive landscape,
and agrochemical companies expanded their production in R&D capacity through mergers
and acquisitions.

In some 20 years, the industry achieved full complementarity

of both seeds and crop protection. Larger M&As concentrated the market around some 10
large multinational companies, with a global turnover of around $90 billion in 2013.
What are the main drivers in this business?

There are three, know-how acquisition and retention through M&As, germplasm
development, and complementarity of products between seeds and crop protection products.
Such drivers led the market further concentration in recent years. From 2014 on, three large
M&As, that are, ChemChina Syngenta, Dow DuPont, and Bayer Monsanto reduced
the number of dominant players to four large companies.

This new competitive landscape will lead to market growth towards 2025, when the crop
protection market is projected to reach some $300 billion. A growth sustained by
three main drivers: rising food demand, worsening of climate change effects on agriculture,
and reduced agricultural land productivity.
The agricultural equipment industry gives us yet another perspective on competitive
dynamics in the agribusiness. In fact, the mechanization played a key role changing labor
productivity in
the evolution of agriculture. While back in the '50s, there was some 7 million tractors and
1.5 million primordial combined harvesters, we have today more than 28 million tractors and
a 4.5 million combined harvesters worldwide.

Today, while higher growth rates are expected in Asian markets, namely China and India,
the topology of sold products also gives us an idea on the stage of development of
agricultural worldwide. While Europe and the US are witnessing this shift towards the so-
called farming 4.0,
with high-tech, hyper connected, super-efficient autonomous driving heavy machinery, the
Asian market is still switching from small and medium basic tractors to heavy and more
technologically advanced machinery, along with the swift change that is bringing agriculture
from a substance model to the post-modern industrial agricultural age.
All in all, the market will grow globally for the same drivers, leaving the development of crop
protection and agrochemicals a strong need to reduce the input-output ratio for a growing
commodities demand worldwide in tougher climatic conditions.

Moving downstream the supply chain of agribusiness, who is buying agricultural

commodities from farms? As we should know, the main customers of farms worldwide are
traders in the first place, and then processors and manufacturers and retailers. Just like farm
suppliers, traders are usually large companies operating at the local level. They collect
products from farms through local subsidiaries and distribute them worldwide to
manufacturers and retailers, acting as intermediary between the production of commodities
and the distribution to final customer.

They buy, sell, store, ship and trade crops. Traders are very often specialized players
in one agricultural commodity. One example: the most traded commodities worldwide, such
as sugar cane and palm oil - grains, such as soy corn and wheat, still represent the largest
volumes traded on stock markets and the main traders in the world are global companies with
extremely diversified lines of business acting in a very concentrated market. Five companies
control over 90 percent of the global supply of grains and agricultural commodities in
general.

The business of traders largely relied on data accessibility for many years. The inside
knowledge of markets, weather, trading flows and yields. Now this competitive advantage is
vanishing in the face of sellers and buyers accessing real time data on all these aspects.

Long believed to be thriving in times on volatility, exploiting their ability to move on the
market, now global traders seem to be suffering from data availability because of farmers’
increasing stocking capacity waiting for the right time to sell on one hand, and on the other
hand, because of new competitors and new consumers increasing demand for niche, GMO-
free, sustained products Most probably, traders will undergo further consolidation through
mergers
and acquisitions.
Processing of agricultural products and their distribution to the final consumer generate the
most value added in the chain, large part of agricultural products is produced and later
distributed as manufactured food, while agriculture in general relies on two to three percent
margin overall, the transformation process guarantees companies 10 to 20 percent margin
on the same volume.

While small food processing companies tend to supply locally, the major firms in the
business buy at a global level, searching for price advantage, flexibility and large volumes,
responding to an increasing demand. Main suppliers for these companies are global
traders. More and more, although in only for specific products, companies deal directly with
farmers either
to control quality, ensure fair trading practices and reduce price volatility.

Even more than manufacturers, retailers play a key role in the agribusiness supply chain,
being the last tier in direct contact with consumers, they can respond faster to demand
changes
and sometimes they can induce a change in demand themselves. In fact, 50 percent of their
turnover depends on manufactured and fresh food. Worldwide, the top 10 retailers operate
globally with a larger geographical footprint than the remaining 250 competitors.
According to the product they look for, retailers access different tiers of the supply chain:
manufacturers, traders, or sometimes farmers directly. For example, when it comes to fresh
horticultural products, the same consumers demands an increased attention towards products
traceability, as well as having influenced manufacturers sourcing behavior, pushed retailers to
move closer and closer to farmers, cutting the middlemen represented by wholesalers and
promoting the creation of organizations of producers. The so-called OPs are aggregating
supply and reducing the number of steps in the sourcing phase for retailers.

There is an ongoing change in the attitude of the global business community, based on the
idea that no business will be a successful business unless it tackles at least one of the many
challenges humanity will face in the next 30 years.
Population growth,
climate change,
food safety
and food security,
the change in consumers’ behavior. I came to understand that while, say a digital startup, can
tackle just one of the challenges to be successful, the players of the agribusiness, farms first,
are engaged in each one of these challenges. In this week, we will understand what the
challenges are, what are the consequences on a global and local scale, and most of all we will
understand
how farming and agribusiness will play a pivotal role in overcoming these challenges in the
near future.
After the first week of this course, it should be pretty clear now what is agribusiness and what
are the several competitive strategies and dynamics put in place by the players of
agribusiness?
Despite the dominant position for some of them, all players of the agribusiness are now
facing major challenges, forcing them to review their strategies and to adapt to a fast-paced
future. Such challenges are not directly related to business. They are, instead, the challenges
humanity will have to tackle to achieve sustainability on the road to 2050. Each player at
each stage of the supply chain will have to find its own way through these challenges and the
adaptation strategies they will pursue will also depend on their location, history and
background, and managerial capabilities. Italian agribusiness will have, thus, to find its role
in this changing environment.

The first and hardest challenge is population growth. It may sound provocative, but we are
simply too many. We’re not too many per se, but we are too many if we want everybody
in the world to follow the Western development pattern.

As far as agribusiness is concerned, because of our production and consumption models, we

are too many to feed. You see, it took the human species some 300,000 years to reach the
first billion individuals. Since then, it took 130 years to add a second billion. 30 years to add
a third billion, 15 years to get to the fourth, 12 years each for the fifth, the sixth, and the
seventh billion.
As you can see, population growth has been geometrical rather than mathematical. Almost
flat for 300,000 years, the curve started rearing with the first and second Industrial
Revolutions.
All in all, there is a strong correlation between population growth and disposable income.
But the industrial development didn't only create surplus for the first time in history. It
ignited the development of modern medicine and mechanized agriculture. In other words,
people live
longer and have got more food. Population growth is still speeding up the pace, and demand
for
arable land is increasing not only from the needs of food production, but also from the
development of biofuel, paper and timber industries, among others.

This will pose a twin challenge of land competition, ensuring access to raw materials at
competitive prices, and a sustainable supply of nutritious food against the backdrop of global
food security.
An unsolvable trade-off among land to be used for fibers, food or energy. Since we have
some one billion people starving and counting, food security should definitely
be our priority right now.
But what about energy security? Without energy, countries cannot develop and connect with
each other. Well, although energy-wise the world is still a very unsafe place,
1.2 billion people, around 17 percent of the world's population, have no access to electricity.
38 percent of the population uses solid biomass for cooking - timber. Geopolitical risks are
growing, casting doubts on the reliability of energy supply. The global energy system in
general is in danger of falling short of the hopes and expectations placed upon it.

This trade-off is also evident if we look at investments in land use across the globe in the land
metrics register. Large land acquisitions, originally in part destined to agrofuels production,
are
now concentrating on food production.

Food security is somehow righteously guiding acquisition of arable land, but this is shrinking
day after day. If we could count on some 0.4 hectares per person in the '60s, today we are left
with less than 0.2 hectares each.

Basically, spare agricultural land is reducing faster than population increase or, in
agribusiness terms, we are still using our production inputs inefficiently. Now, since we are
expected to grow to 10 billion by 2050, under current conditions we will need more food,
water, and energy than what we're able to provide today, and we will need to do it without
further worsening livability conditions in terms of climate and pollution.

Back in the 50s, when the world population was around three billion people, the average
calories intake in the industrialized world was slightly above 2,000 calories a day. Most of
the population, in fact, was working in factories and fields, and the calories were burned to do
physical jobs.

Today, we are 7.3 billions, and the economy moved from manufacturing and agriculture to
services. We could say that 75 percent of the GDP is created on a desk. So, we should expect
a lower calories consumption for less physically demanding jobs in the service economy
nowadays, but this is not the case.
Globally, the average daily consumption raised to 2,750 calories, creating a demand
of around 20 trillion calories a day to feed the world. In 2030, the average is expected to
increase to 3,050 calories a day per person, and the population is expected to reach and
exceed the eighth billion. According to FAO, the average minimum daily energy
requirement is about 1,800 calories per person, and to feed the world population under
current conditions, we will need 110 percent more cereals, 135 percent more meat,
and 140 percent more soybeans. That is more than doubling the arable land. Not surprisingly,
there's a wide gap in terms of calories intake between the OECD countries and the non-OECD
countries. The average intake in the US is around 3,800 calories a day per capita. It is the
country with the highest calories consumption, Austria being the second, and Italy being the third.

When we think about food security, providing the world population with the right amount of
calories is but one of the multiple sides of this challenge. When it comes to food security,
we don't just mean that there shouldn't be any starving people, but also that some high-
income countries should consume less or differently.
Food security is, in fact, a fair distribution of calories for the 10 billion people to be. As some
2.5 billion people in emerging countries are moving to a modern economy with a larger
middle class who is getting more disposable income for nutrition, calories intake worldwide
is, in fact, increasing. What could happen soon without a change in our consumption course is
well represented by this graph released by FAO.

The blue continuous line represents historical food production. As we can see, it increased as
agriculture was modernizing and becoming more efficient. The red dotted line represents,
instead, the future calories demand if the whole world population turned to a Western
consumption pattern.
Meaning, the world average calories intake will increase to the actual OECD average. If we
assume actual inputs and outputs ratio in food production to be constant,
the forecasted production will not match future demand by some 500 calories per capita a day
in 2050. This hypothesis also optimistically assumes that global climate conditions will be
constant,
implying that we would be able to stop climate change starting today.

But according to the majority of scientists and climatologist, this will not be the case and in a
worst-case scenario the global temperature could rise some four to six degrees more with
multiplicative effects on climate. In this case, the gap between food production and food
demand could be around 1,300 calories a day per capita. In other words, we wouldn't be able
to feed the world.As of today, we cannot certainly expect or require the world diet not to
change, since we have one billion people starving and one billion people suffering from
overeating.

So, an unchanged diet pattern for the future, the blue dotted line, is not to be expected or
promising. While emerging countries are still making their way to ensure all population a
daily meal, something hopeful is happening in industrialized economies. After some 40-year-
long feasts, probably the awareness of nutrition-related diseases and sustainability is bringing
people to rethink the way they eat, reducing animal proteins and carbs intake and choosing
healthier diets. The road to food security will anyway require more than a fashionably healthy
diet, but a real change, instead, which is very hard to predict today.

There is one more challenge that is changing the way we understand the world and it's
influencing the future of agriculture worldwide. Calories consumption is directly related
to income availability and the quality of the food consumed. What we see is that when
income increases,
food consumption changes, not only in volumes, but also and especially in quality.To
understand this challenge, we need to flashback to some 10,000 years ago. At that time, just
before the introduction of agriculture and animal husbandry, hunters, gatherers, nomadic
groups were relying on a few proteins.
Animal proteins, particularly, were consumed on rare occasions, two or three times a year. At
that time, animal proteins were not displayed on a refrigerated shelf in a grocery store. They
were moving, instead, and you needed to be a good hunter to catch them and possibly not to
get killed by proteins themselves. In human history, begun some 300,000 years ago, the last
10,000 years have passed in the blink of an eye, so fast we're still feeling this ancestral
hunger for proteins. Animal proteins are, in fact, a proxy indicator for the economic
development of a country.

The higher the disposable income, the higher the consumption of animal proteins. This
consumption follows a precise pattern. This is moving from fish and cereals to meat. Poultry
first, then pork, and red meat. OECD countries’ diet, although it’s quite varied, is rich in meat
and it has been for a long time.The diet in non-OECD countries is, instead, evolving. After
centuries, the diet in many countries is moving towards the western model, increasing the
amount of meat and calories with urbanization and incomes raise.

Raising cattle to fulfill an increased demand of proteins requires a large amount of resources,
that is modern and efficient agriculture and energy resources. As we have seen in the
Italian agriculture history in the first week, in time of industrial development, workforce is
drawn to manufacturing and services, and agriculture suffers abandonment. Food is not to be
found in the field, and it is manufactured instead.

Resources are then to be found from external sources, relying on the global trade of
commodities. Taking China as an emblematic example, it is quite easy to understand how the
change in disposable income has indirectly activated commodities import.
What has China imported in the last few decades?
Soybeans, corn, and wheat, mostly from North and South America, to feed the growing cattle
raising. Why soybeans?

Well, soy has a high protein content that animals like pigs and
cows quickly transform in meat reaching the slaughtering weight much faster.
The other two larger import items for China are wool and cotton, probably partly because of
garments are a source of production from the US and Europe, but also because with income
rising, clothing needs of the population increase. So, according to the level ofeconomic and
industrial development, trading flows swing from a country to another. North America is a
net commodities exporter, and so is South America.

China and India, instead, are net importers.

So far, China has been the largest buyer of US soybeans, but recently a trading war between
the two countries is imbalancing China imports from the US to South America. Considering
the impact of average wages on the food and fibers consumption pattern, let alone energy
consumption patterns,the challenge of food security will become more and more one of the
major challenges to tackle in agribusiness. Will we be able to respond to a world changing its
diets to
a more protein-intensive diet? Or will we be able to provide such proteins and calories using
less resources?
The topic of this session is foods scares. A very important phenomenon in our daily life. The
discussion will be organized in five segments. Why have food scares become such an
important phenomenon in our daily life? The second is the definition of food scares. The third
is the typologies of food scares. The fourth is the change in consumer behavior determined
by food scares, and the final chapter is the implication for the political and economic bodies.

In recent years, the system that goes from agriculture to food retailing and services, has
become more and more global and complex. The need to satisfy a growing and diverse
population,
climate change, air and water pollution, global waste, technological advancements are
just a few forces that have had a significant impact on agricultural practices, production,
storage, retailing and delivery.

The food sector has now become a global market with products coming from all over the
world to meet the growing demand for variety and consistency, independently of seasonality.
In Italy, for example, we have many varieties of local cherries, typical of different regions,
but we can eat all over the year cherries coming from Turkey, the US, Iran, Chile and
Argentina.

As you can imagine, these cherries have been traveling thousands of days and days on
trucks,
ships, delegate trucks or railway. This evolution results in a more and more complex supply
chain, that involves many actors who cannot have detailed knowledge of each other's
processes and procedures.
One hamburger from Burger King, can contain ingredients from approximately 200 suppliers
located throughout the United States and around the world. The consequence is that,
when a problem arises at one point in the supply chain, it is not easy to identify
the original epicenter and even the precise cause.

Hence, the probability that the threat to food safety, whether real or not, will evolve into a
food scare has increased, causing an increasing consumer anxiety concerning
food. Significant is the title of a book written in 2004 by Susanne Freidberg, whose second
part is
‘Culture and commerce in an anxious age’.
The term ‘food scare’ is used in many different ways, it is often paired with expressions such
as ‘food hazard’, ‘food incidents’, ‘food fear’. Food scare has been defined as
the response to a food incident, real or perceived, that causes a sudden disruption of
the food supply chain and food consumption patterns.

Another, perhaps narrower, definition is a confirmed outbreak of foodborne illness, that leads
to a marked and a relatively sudden fall in consumer demand. Of both definitions, what is
key in our perspective of consumer behavior, is that food scare is a phenomenon
that manifests itself in a changing consumer behavior. The cause of this phenomenon may
be a foodborne illness, but there have been scares caused by an unauthorized presence of
products or ingredients in the supply chain.

The issue is not probably a health issue, but rather an ethical or moral issue. What matters is
that the final consumer, once aware of the issue, feels anxiety toward the food, loses trust in
the food supply chain providing that food, and may stop buying and eating it with a dramatic
impact on
market demand that hurts all the actors, independently of their guilt.

It is the response of the final consumer that elevates an event happening at any point on the
supply chain to a food scare, and this response results in a significant change in consumers’
consumption habits and patterns.

In 2017, the British Food Journal published an article on a comprehensive classification of

food scares. Crossing previous literature, the three authors developed a categorization of food
scares, organized in five main types. Information, referring to the provision of information to
consumers concerning the ingredients and processes which are used in the production of a
food item.

Technology or industrial processing, which refers to the use of technology that can result in
either unsafe food items or food items perceived by the public to be harmful. Examples are
technological interventions, such as genetic modification and irradiation. Microbiological,
which covers contamination of food items by microorganisms found in the air,food, water,
soil, animals and human body. Contaminants, which include all scares relating to the
contamination
of food items with anything that is not naturally found in the food item.

This can be biological, chemical or physical. Deception, which covers fraudulent

substitution,
addition or subtraction of ingredients to food items. The five categories are not mutually
exclusive because there are some kinds of scares that fall in a gray area between two
categories. This is, for example, the case of the 2013 horse meat scandal, in which foods
advertised to contain beef meat were found to contain undeclared or improperly declared
horse meat, as much as 100 percent of the contents in some cases.

It is, above all, social media that may transform an incident into a food scare and fuel the
debate for years. Social media have changed the way we communicate, assess and share
information,
multiplying exposure and repetition. The global interconnectedness amplifies the reach of the
news, which may easily become a scare.

This scare produces a series of changes in consumer behavior, which may go from no change
for people who do not consume the product or are not involved, to stop buying the product.
From demanding all the relevant information to support the choice, to banning the specific
brand responsible of the scare.

Consequences may be severe, with a sudden decrease in market demand for the product, or
even the single brand, and the trend may not be easily reversed. The most significant change
from a marketing perspective is the change in the criteria of evaluation of specific products.

Now consumers demand transparency of the supply chain, they want reliable information
on the product's country of origin and production processes, and reward companies who are
able to guarantee full traceability of the whole journey, from the beginning to the end.
To conclude this session,we cannot avoid mentioning the responsibility of all the
stakeholders
involved in the food system. Its increased complexity and globalization, augment the
probability of butterfly effects, whereas an improper management of even a trivial event, a
butterfly, may have an effect on a very large scale.

All the economic and political bodies involved in the food system should conceive strategies
that reduce both the number of incidents and their associated economic, social and
environmental impacts. Reviewing food standards, enforcing the rules, augmenting the
control of all the operations of the system, managing the communication
effectively, rewarding responsible behavior and banning improper behavior, are just a few
keynotes to keep into constant consideration.

In economics, the term embeddedness refers to the degree to which the activity of a firm is
conditioned by non-economic considerations. That is, by factors that are related to society
and culture.

The food industry is full of cases where consumers’ perceptions and behaviors are driven by
causes that are more rooted in culture and fashion than in objective factors. One example is
the difference between the perception of component fats of beef and cheese in selected
countries, as you can see from the attached pictures.

Beef is perceived to contain more good fat in China compared to India, whereas cheese is
perceived to contain more bad fat in the UK compared to Japan. These differences are driven
by factors such as urbanization,urban lifestyle, climate, local availability, cultural values,
nutritional guidelines, and official restrictions.

Other examples are the use of appealing food images to feed people's hunger, systematic
underestimation of the calories consumed in a meal, especially for larger meals and among
overweight persons, interpretation of labels of low-sugar products. To understand the two
sides of consumer perception and firm activity, we discuss the results of studies on how
people use and interpret on-pack information on sugar content of food products.

In a world where obesity is considered among the main causes of illness, on-pack nutritional
information has become a priority. From the consumer’s side, enhancements in nutritional
labeling could help select healthier options. From the company’s side, food labeling can serve
as
a powerful tool for more effective communication and product positioning, which ultimately
turns into a competitive advantage.

Therefore, more effort should be made by both policymakers and marketers to collect insights
into how consumers use and understand food labels. The current state of research about the
effect of food labeling on product evaluation and purchase is far from being conclusive, as
this statement testifies.
Labels can help some people sometimes in some cases if they have the knowledge or
motivation to use the information, which may or may not be in a form they can understand. In
general, research shows that food labels have a positive impact on the nutritional selection or
healthy food,
but the same research has also discovered that nutrition labeling may have opposite effects
with respect to those intended. One reason are the optimism bias and that negative bias. In
case of optimism bias, people tend to generalize the favorable evaluation of positive
nutrients, such as natural ingredients, maybe ignoring or underestimating the presence of
negative ingredients.
On the other side, the negative bias is the overestimation of negative factors such as, for
example, sugar or fat, even when they are present in very low amount.

In general, people tend to declare they prefer detailed nutritional information, that studies on
actual choices show that the same people utilize more easy-to-use and simplified labels, and,
consequently, employ mental shortcuts that substitute the complex problem with a simple
one. In this perspective, simplified label formats can help consumers to choose the best
option and
improve their performance on diet-related tasks.

Front of pack (FOP) labels are specifically designed excerpts of the original labels that are
put on the front part of the pack to ease the consumer’s choice. FOP labels can be classified
according to the basis they use for summarizing the information: fact-based information,
satisfaction of a nutritional standard, and evaluative or interpretative criteria of healthiness.

The main objective of food labels is not to provide additional information, but rather to
improve consumer awareness of nutritional content by placing information in a more
prominent and visible position on the package.

Using both sides of the package, back and front, gives access to two segments of consumers.
The more involved consumers can consult the complete back panel nutritional details,
whereas casual shoppers can get the basic notions by easily processing the front panels
summary.

Mainly health claims can be placed on the front of the food packages, such as low-fat, low-
cholesterol, low-calories, sugar-free, healthy choice, etc. These healthy claims have
a strong impact on consumers’ perceptions of product healthiness, but only if they are
accurate.

For example, low-fat labels were found to increase food intake because consumers thought
they could eat more. Another form of FOP label is the traffic light system. A voluntary
labeling scheme that displays green, amber, or red labels to indicate whether the product
contains low,medium, or high amount of nutrients such as fat,salt, sugar, based on specific
reference intakes.
When confronted with low, medium, and high-sugar varieties of the same product, most
consumers tend to choose the low-sugar alternative, but not for all product categories.
If a product is stereotyped as healthy food as, for example, is the case of yoghurt and
smoothies, most individuals may prefer the medium and high-sugar variety, which are
perceived as healthy anyway.

The addition of a traffic light as FOP label does influence consumer choice. On one side, its
presence lowers the preference for the high-sugar variety, and on the other side, it increases
the preference for the low-sugar alternative. Despite the fact that the traffic light label has
been utilized for years, consumers still seem not to have a clear idea about how to correctly
interpret its color codes.
According to a survey we did in 2018 in Italy and the UK, around 60 percent of people
correctly believed they should not avoid red color-coded food, but more than 60 percent
wrongly believed they could eat only green color-coded food.

A further proof of how perceptions may impact consumer choice comes from the consumers
evaluation of the correct sugar level of the product they choose. In the same survey
mentioned above, participants were asked to compare the chosen options with the alternative
in terms of five nutrients as they appeared in the traffic light label.

For example, evaluating high or low level of sugar content, 37-47 percent of respondents
gave the wrong answers with different percentages for different product
categories. Regardless of whether subjects consciously use or are unconsciously influenced
by FOP labels, their presence has an impact on purchase decisions.

When applied to support consumers in choosing the best healthy options for them, traffic
lights increase the sales potential of the healthiest options, particularly for product
categories that are not perceived as healthy per se.
Since, however, consumers do not have a clear understanding of these FOP labels, a
preliminary task for companies and political bodies is to educate consumers not only to eat
properly, but also to be aware of the meaning of food labels, back and - above all - front of
the pack.

Climate change is probably one of the greatest challenges humanity needs to address in the
coming decade. It's an issue that has to be faced if we want to maintain stable conditions in
our planet, in order to guarantee our wellbeing and sustain our development and prosperity.
Anthropogenic climate change started about 250 years ago, fueled by the massive utilization
of
coal and oil during the Industrial Revolution that spreads from England to Europe, North
America, Japan, and many other countries as well.

Anyway, according to the IPCC, the Intergovernmental Panel on Climate Change,

about half of cumulative anthropogenic CO2 emissions have occurred in
the last 40-50 years during a period of great acceleration of population and economic growth,
and development of new energy-intensive technological solution. According to the last
available data published by the United Nation, in 2017 the total annual greenhouse gas
emissions,
including land-use change, reached a record high of 53.5 gigatons of CO2 emission
equivalent.

At a global level, fossil fuel combustion is the main driver of climate change.
In the last decade, the contribution of population growth has remained roughly identical to
the previous three decades, while the contribution of economic growth has risen sharply.
Climate change is produced by greenhouse gases, such as water vapor, carbon dioxide,
methane, nitrous oxide, and chlorofluorocarbons.

The more greenhouse gases are released into the atmosphere, the more the heat generated by
the sun gets trapped, strengthening the greenhouse gas effect, and increasing our planet's
temperature.
If we analyze the anthropogenic greenhouse gas emissions per year by sector, we can identify
two main types of contribution: direct and indirect. Greenhouse gases’ direct emissions
correspond to about 75 percent of the whole, while indirect CO2 emissions are about 25
percent.

Considering different sectors, energy, both through direct utilization and through electricity
and heat production, is the most important contributor. Industrial activities come second,
generating more than 30 percent of the total direct and indirect emissions. Transport
contributes to more than 14 percent.

Another key sector is agriculture. Let's consider agriculture, forestry, and other land use,
which includes, for example, land-based CO2 emissions released from forest fires and pit
fires.
This sector contributes to about a quarter of global greenhouse gas emissions per year.

Over the last decade, emissions from agriculture, forestry, and other land use have remained
similar, thanks also to a global decreasing of deforestation activities.Agriculture, forestry, and
other land use play a central role for global food security and sustainable
development. However, leveraging the mitigation potential in this sector is a key factor in
reducing global emissions.

An important target to tackle climate change, keeping the temperature below 1.5
degrees. This way, it will be possible to maintain a safe world. Agriculture, forestry, and
other land use activities also play a double role when we consider greenhouse gas
emissions. On the one hand, plants absorb carbon dioxide from the atmosphere, and nitrogen
from the soil when they grow,
and redistribute them to other pools. On the other hand, they release into the atmosphere CO2
emissions, but also methane, which contribute to 44 percent of livestock emissions, and
nitrous oxide contributing to almost 30 percent.

These emissions are the result of land use activities, such as crop land, cattle, and manure
management, but they also stem from changes in land use coverage, such as deforestation and
afforestation. Some additional data can help illustrate the different sources of greenhouse gas
emissions with regard to agriculture activities. According to the Food and Agriculture
Organization by the United Nations, the total emissions from global livestock represent
14.5 percent of all anthropogenic greenhouse gas emissions. More specifically, beef and
cattle meat productions account for 41 and 20 percent of the sector’s emission.

Pig meat, poultry meat and eggs contribute, respectively, nine and eight percent.
These figures are expected to increase sharply in the years to come, because of the expected
growth in production. In terms of activities, the production and processing of food, including
the land use change and enteric fermentation, digestion from ruminants, represent two main
sources of emission, corresponding to 45 and 39 percent of total emissions respectively.

Manure storage and processing represent 10 percent. The remaining part relates to the
processing and transportation of animal products.When we consider how agricultural
activities at large can contribute to mitigate climate change, we can identify the following
main strategies. The first one is about conservation of carbon sinks in soil and
vegetation, preventing the release of greenhouse gases into the atmosphere, or enhancing the
sequestration of
carbon dioxide in terrestrial reservoirs through afforestation. A second strategy refers to the
substitution of biological products for fossil fuels and energy-intensive products.

A third one is about increasing the efficiency in the utilization of natural resources in the
animal production per unit of final resources. A huge amount of nitrogen, energy, and organic
matter are lost during the value chain, undermining the overall efficiency and
productivity. The reduction of losses and waste from food can be favored by the diffusion
of new technologies and better practices. Finally, another option - a little more complex to
implement - refers to the intervention at the supply-side level, and it includes both lifestyle
changes and changes inhuman diets towards more sustainable food consumption.

Water is a fundamental element for growing plants and livestock. The creation of
Infrastructure
to stock and distribute water is historically allowed the evolution and development of
agriculture in quasi-natural ecosystems. Nevertheless, the intensive use of water and
chemicals in agriculture generates negative impacts on such ecosystems and consequently on
the services they provide. Then, it's extremely important to manage these delicate trade-offs
to keep developing agriculture and fulfilling the United Nations Sustainable Development
Goals.
Worldwide, it is estimated that some 70 percent of water
withdrawn from the environment is used for irrigation. The rest of water withdrawn is,
instead, utilized for manufacturing, more or less 22 percent, and only some 8 percent for
domestic use and services. Some 30 to 40 percent of agricultural commodities worldwide
are,
in fact, grown on land with irrigation infrastructures, equivalent to only some 16 percent of
the
global utilized agricultural area. With regard to Italy, figures and data are significantly
different,
with 47 percent of water used for irrigation, 2 percent for livestock, 28 percent for domestic
use and services, 18 percent for manufacturing, and 8 percent for power plants.

Despite the larger quantities of water taken for irrigation, the area irrigated in Italy is just
over 2 million hectares, equivalent to 19 percent of the utilized agricultural area. In such
terms, among European countries, Italy is second only to Spain, with about 3 million
hectares. As far as Italy is concerned, we can ideally split the peninsula in three macro
areas in terms of irrigation infrastructures, the north, the center, and the south and the
islands. The north has a network of reclamation channels used in the irrigation season for
water distribution, a so called ‘promiscuous network’. Supply sources are mostly represented
by direct intakes from water courses and springs, while irrigation management is largely
collective.

In central Italy, the reclamation and irrigation network, on average, is quite developed and
irrigation consists mainly of specialized areas of small and medium size. In the south and on
the islands, the irrigation areas concern the coastal floodplains. The main irrigation network
covers 23,000 kilometers in length, about half of which located in the river Po
district, followed by the Southern Apennines with 4,000 kilometers. The most modern
networks, such as
pressure pipelines, prevail in the southern and central regions, while the north is
mostly characterized by open channels.
Despite the development of modern and more efficient technologies for irrigation in Italy,
sprinkling and floor irrigation are the two most used techniques, with about 75 percent of
cases,
followed by localized irrigation, 12 percent. The submersion typical of rice cultivation is used
in 8 percent of irrigated areas. Finally, infiltration techniques are applied at around 5 percent.

Irrigation systems, adopted by irrigated farms, depend on various factors: availability of

water,
cultivation choices, territorial characteristics, and, finally, extension of the irrigation
network.
In the north, flow irrigation represents the prevailing methods, while in the Apennines and
Sardinia, the sprinkling is at the first place, and localized irrigation is the method that prevails
in the south. Under the pressure of European and national policies, a slow conversion
of irrigation systems towards methods with lower water consumption and greater efficiency is
on the way.

The price of water is not currently a stimulus to efficiency. A cubic meter of water for
irrigation costs only €0.01-0.8 per cubic meter. This is just an estimate since by not
measuring the quantities of water distributed, the price of water for irrigation purposes is
expressed
according to the extent of the areas to be irrigated, euro per hectare. On average in Italy, the
price of water covers 50 percent of the total cost of the irrigated Infrastructure, and I'm
talking about the Capex and Opex, still depending on public funding, that means national and
European funding.

Certainly, a booster to the adoption of more efficient irrigation systems, is given by

the impact of climate change on the availability of water. In the last 20 years, we have
witnessed to several water scarcity events which have highlighted that there is competition on
water use.

A research carried out by Certet Bocconi has highlighted that this competition is not between
different uses, for example agriculture versus energy production, but between agricultural
producers located in different areas, for example the case of Lombardy and
Piedmont, towards areas of Emilia-Romagna. The correct knowledge of the water needs of
crops, the efficiency of irrigation networks, and the measurement of water volumes would
allow the reduction of damage generated by water scarcity events. For this reason, based on
the experience
started by the Po River Basin Authority in 2003, some observatories on water use have
been established throughout the Italian territory,
whose objective is on the one hand to manage emergencies, and on the other hand to facilitate
information sharing and planning.As mentioned at the beginning, agriculture generates
significant negative impacts on the environment due to excessive water withdrawals and the
abuse of chemical impacts. However, proper agricultural practice can instead generate and
maintain ecosystem services.

For example, in addition to transporting water to crops, an uncoated irrigation

canal, equipped with riparian vegetation, allows the capture of nitrogen and phosphorus in
excess, favoring the self-purification of water, the infiltration of water in the water table,that
is a strategic reserve of water, and contributing to an attractive rural landscape.
Despite the huge variety of products, lands, techniques, technologies and subjects forming the
agribusiness supply chain we have seen so far, agribusiness is mostly a commodity-based
business. We could say that if agriculture is about producing commodities, then agribusiness
is about making this production possible, and it's about transferring it to markets where
commodities are used for manufacturing other commodities or specialty products.
Earlier in this course, we said Italy is a specialty country. Well, actually it is the specialty
country. So why bothering with commodity-producing agriculture? Well, you might think
commodities are grains, staple crops in general like coffee or cocoa or maybe
cotton, livestock and milk and of course they are, but not only. Most agricultural products, in
fact, are commodities and many are on the edge of commoditization.

But let's take a step back, asking ourselves: What is commoditization?

Commoditization takes place when a particular good that has economic value and
is distinguishable in terms of attributes, ends up becoming a simple commodity in the eyes of
the market or consumers. In other words, it becomes an undifferentiated
product, distinguishable from its peers only in terms of price and quantity. This is the
movement of a market from differentiated to undifferentiated price competition, and from
monopolistic competition to perfect competition. Hence, the key effect of commoditization is
that the pricing power of the manufacturer or brand owner is weakened.

When products become more similar from a buyer's point of view, they will inevitably tend
to buy the cheapest. This is exactly what happened and still happens today for many
agricultural products. Tomatoes are tomatoes all in all. Why shouldn't you just buy the
cheapest, right? According to Reimann, Schilke, and Thomas, commoditization has four
distinctive aspects. The first one is product homogeneity. It means that products are
perceived in the market as being interchangeable.

The second is price sensitivity. Buyers are looking for the best price for a standard product on
the assumption that products with essentially equivalent qualities and features will continue
to be available. The third aspect is switching costs. The direct and indirect costs of changing
from a supplier to another are basically inexistent or negligible. Then, the last aspect is
industry stability.

That means a predictable market demand, a consistent competitive structure and a few
changes in the set of customers. Now, agricultural raw materials are primary commodities by
definition,
and such commodities in the form of raw or partially processed goods have been traditionally
case examples of traded goods across borders and account for a significant share of
international trade.

The process of commoditization in agricultural products started a long time ago, and it is one
of
the concurring factors that led agriculture to progressively reduce its weight on domestic
economy in Italy and other countries.

Since price indexes of commodities are based on several different factors like crude oil
and fertilizers prices, to grains, fruits, meats, oil seeds, and sugars, to produce agricultural
commodities for which price is the variable on the market is just a matter of volume
capacity, efficiency in operations and logistics, easy access to global trade. Let alone the fact
that the evolution of global economy naturally moves value from agriculture
to manufacturing and services in any country, sooner or later, countries suitable for agro-
industrial production like the US, Ukraine, Brazil, and Canada, are still making business and
politics out of commodities. But here comes the first question about commodities.
Is every country with an agricultural system in the world suitable for commodities? Evidently
not.

As seen in week one, Italian agriculture was developed under the European policy to ensure
food availability. It means the agricultural system had to adapt and industrialize as far as
possible,
and it was not that far.

With constrained physical spaces and widely poor infrastructures, the system was never
suitable for commodity production and never sufficient to fulfill domestic demand. Luckily,
as seen, Italy was able to develop niche markets for high-value specialties in many
cases, although large portions of agriculture are now facing the worst side of continued
commoditization, namely low prices and uneven distribution of value along the chain.

Imperfect price transmission in the chain is another issue when it comes to commoditization.
Price transmission on a supply chain refers to a situation where prices at one level of a supply
chain react to changes at another level. In general, products in supply chains pass several
stages before reaching end-consumers. In agricultural supply chains, agri-food especially,
raw products are transformed through packaging, distribution, and related services.

The evidence of a direct relationship among prices at different levels of exchange is very
difficult to evaluate. Several factors may explain the asymmetry in price transmission. First
of all, market power. Market power is discussed in literature as one of the major factors
for which price changes at one level of the supply chain are not transmitted to the other
levels. Typically, leveraging of market power, price increases are rapidly transmitted down
the chain, while price decreases are lagged.

Then let's talk about adjustment costs. Adjustment costs, such as labeling costs, advertising
costs, or cost of goodwill, may cause price asymmetry. In agri-food chain, response of retail
prices to changes in wholesale or farm-level prices is not immediate, but distributed over
time, sometimes months before adjustment. Then, we can mention the public intervention
factor.

You can see that the floor price policies and incentives are common in Europe, and not only
in agriculture. Basically, through incentives or direct intervention in fixing prices, the
government wants to stabilize income for industries in distress or newborn industries. The
renewable energy sector is probably the best example in this case.
Such policies - good in their intent - might easily backfire on the whole supply chain and kill
healthy competition in the market.

For example, an increase in farm prices caused by implementation of a floor price policy may
be viewed by the middlemen, that is the wholesaler, as permanent and transmitted more
rapidly and completely through marketing systems than a decrease in prices. Another factor
explaining price asymmetry in the chain, although it’s usually more or less transitory,
is publicity and food scares in general. When food scares of new scandals hit a supply chain
in particular, it is scientifically demonstrated that asymmetry in price transmission
occurs. Usually in this case, retailers are the first and most affected, being the front-
end facing the final customer.

Lastly, perishability of the products may also be a major contributing factor for the
asymmetry in price transmission. Particularly, goods perishing at one point of the chain will
increase the price at the next level because the player that suffered product losses will tend
to retrieve some of the lost value. Now, to track all these variables in such a complex supply
chain like agribusiness, where imbalance of power occurs at every stage,is anything but easy.

In 2016, the OECD collected data on the competitiveness of agriculture and food
markets. Although the data analysis of food price formation concluded that there is no
compelling proof of anti-competitive market behavior, a survey previously
conducted evidenced the perception of interviewees in many countries were aligned
in identifying unfair trading practices, and declining terms of trade for farmers as the main
cause of poor competitiveness in the industry.
Commoditization, price transmission asymmetry, all in all agriculture is, indeed, in an
unfavorable market environment. But allow me to provoke you with one last question and we
will try to answer this question all along the remaining part of the course.

Are all agricultural products actually a commodity?

Let's go back to the four main features identifying a commodity. First, product
homogeneity. Agricultural products are homogeneous as far as we consider
calories, vitamins, fibers or water contained, but extremely diverse in terms of intrinsic
values. Second, price sensitivity. We said buyers are looking for the best price for a standard
products on the assumption that products with essentially equivalent quality and features will
continue to be available.

In this changing climate, degrading arable land, and growing population, will they be
available? Third, switching costs. Would you give up organic products, for example, for an
equally good-looking conventional product? What is the cost implied?
Last but not least, industry stability. Predictable market demand, a consistent competitive
structure and few changes in the set of customers.
Customers are changing in numbers and kind and very quickly. The competitive structure
might also.
What we call a commodity today, will it still be a commodity tomorrow?
Agricultural value added is the net output of the agriculture sector, including forestry,
hunting, and fishing, and cultivation of crops, and livestock production, after adding up all
outputs and subtracting all intermediate inputs.

The question is, how much value added is attributable to agriculture?

Let's take a look at some numbers from the European Union Commission. The figures are
outdated, but the trend was already pretty clear in 2011. The figures are evidence that the
farmer’s share of consumer spending on food has been inexorably squeezed by an imbalance
of power between producers and retailers andother layers of the supply chain. This value
redistribution taking place in the supply chain is caused by some concurring factors. First of
all, the so-called marketing bill.
The marketing bill is the difference between what farmers receive for their products when
sold to first handlers, whether they are processors or consumers markets,and what the
consumer eventually pays for these products.

This factor represents the cost of all the goods and services required to assemble, transform,
pack, transport, store and eventually deliver this product to the final consumer. The increase
of the marketing bill is empirically demonstrated by the shelves of a supermarket. Over the
past 20 years, supermarkets shelves have changed profoundly,changing the composition
of consumption, especially in food products.

In the 90s, for example, the refrigerator of dairy products was still quite bare. Milk, the most
common cheeses, butter, cream and some flavored yoghurt. Today, their range of products
displayed has multiplied in a wide range of yoghurts, different types of milk in different
packaging solutions, many fresh and aged cheeses, milk-based nutraceuticals and so on.

We have seen the same product proliferation in the supermarkets’ freezers and even in the
meat counter, where product/service content has been combined with more or less common
cuts, reducing the preparation, time for meals for the consumer. Even in the fruit and
vegetable areas, we have witnessed a dramatic increase in product types. In any supermarket
aisle, what we find today is products with a high service content or with more extensive and
complex processing of the raw material. Needless to say, the higher the industrial
development of a country, the lower the value added left to agriculture and then paid in the
bill by consumers.

The limited possibilities for farmers to add value to the basic product or to get remunerated
for it, an increasing input costs due to competition for scarce resources, is thus steadily
reducing the value added of agriculture in the supply chain.
This is reflected in agriculture's contribution to national calories. Since food products are the
main agricultural product, figuring out what is the real contribution of agriculture to the
national calories need will tell us something more about how crucial and controversial it is to
invest in agriculture as a strategic industry.

The contribution of agriculture to the national calories is a ratio that can be broken down as
the product of three different ratios: the ratio between agricultural value added and the total
agricultural sellable production times the ratio between the total agricultural sellable
production and foods’ agricultural sellable production, times the ratio between foods’
agricultural sellable production and the total calories produced. By breaking it down to its
factors, we can more easily see how this indicator is a good proxy to determine the level of
industrialization of a country.
What happens to the single factors in the formula when a country moves from a rural
economy to industrialization?
Will the first factor, the ratio between the agricultural value added and the total agricultural
sellable production, increase or decrease?
Let’s have a look at it. As the country industrializes and incomes grow, the demand for food
will increase. Thus, the agricultural sellable production will tend to increase as well. But
while the denominator increases, the numerator decreases.
As we have seen in the history of Italian agriculture, and as it applies to any other European
country, when an industrial economy advances, raw materials from agriculture will not have
to satisfy the feeding needs of farmers’ families.
They will, instead, be transferred to industrial food manufacturers who will benefit from
economies of scale of large processing plants. Since food manufacturers’ demand for larger
standardized volume increases, agriculture will buy more production inputs, such as
fertilizers, improved seeds and breeds, and agrochemicals. The input cost will increase in this
way, and the farm gate prices will decrease due to larger volumes bulk purchasing from food
companies.

So, the first factor decreases, but what about the second factor?

As industrialization and the service economy advance, it may increase or decrease depending
on the country’s location. Where large land expenses and climate allow it, a portion of food
agricultural production will be converted to raw materials production for manufacturing in
other industries, for example oil seeds, fibers etc. As far as Italy is concerned, this
phenomenon is more contained and recent. As the production of energy biomass
increases, although it’s still marginal if compared to food raw materials. The third factor is
strictly related to our changing habits in the face of income increase.

When incomes increase, food consumption changes as the actual need for food changes. As
more people are working nine-to-five jobs, or rather we should say nine-to-nine in services
and factories, they buy food if it is fast,affordable, hopefully nutritious, but ready-made,
dietary and hedonistic, and they buy it as close as possible to their point of consumption. The
quantity of calories consumed directly produced by agriculture will decrease in favor of food
manufacturers and retailers. So, we can say that the third factor will decrease.
If we look at agriculture's contribution to the Italian national GDP, remembering that food
is the main agricultural product in volumes and value, what we see is a decreasing
percentage, today around some 2 percent, whereas manufacturing contributes for some 23
percent and services for some 75 percent. The same goes for any other industrialized
economy.