Achieving High Performance in the Agribusiness Industry

Consulting Technology Outsourcing

A combination of sheer scale, outstanding operational efficiency, astute investment management and a sophisticated approach to tackling risk distinguish the high performers in Agribusiness. In the future, upstream players will need to focus increasingly on innovation in order to create commercially viable options for the customer and end consumer, downstream.

The future outlook

By 2030, thanks to population increases worldwide, changing diets in rapidly emerging economies, and the rising popularity of biofuels, the United Nations estimates that demand for agricultural products will be about 60 percent higher than it is today.1 Global food production will need to increase by 40 percent to meet this surge in demandhelped by productivity improvements in central and Eastern Europe and sub-Saharan Africa, and the expansion of productive land in North Africa, Latin America, and Asia. China, for example, will increase food production by 26 percent and India by 21 percent. These developments represent a huge opportunity for upstream agribusinesses seeking to maximize returns on their commodity streams. Sufficient scale will be essential to success. But our research also suggests that the future belongs to those companies that can leverage scale by combining internationalization with downstream integration in order to innovate new consumer products and services. Meanwhile, the industry confronts significant challenges. In the next decade, for example, the costs of inputs such as oil and fertilizeralready at record highsare expected to climb higher still. Environmental issues are also a growing concern, especially in emerging markets, where much of the worlds food is grown and where extreme weather conditions will inevitably impact crop production. Mounting consumer demand for sustainable farming will increase the pressure on governments to regulate the industry, or even to erect protectionist barriers. Concerns about food safety will have a similar effect, forcing companies to invest heavily in safe, secure and exceptionally flexible supply chains (see Figure 1).

Figure 1.
Growing role of developing economies in global trade
By 2030, global food production needs to increase by 40% to meet demand Production growth will be driven by productivity improvements in Central & Eastern Europe and sub-Saharan Africa and expansion of productive land in Latin America, Africa and Asia.

Demand from growing middle class

Diets are changing signficantly in China, India, Russia and Brazil By 2030, the United Nations estimates that demand for agricultural products will be about 60% higher than today

Development of a whole new energy market with biofuels

Demand for renewable energy sources rapidly expanding around the world

More Volatile and Complex Business Context

US and other developed nations set targets to assure a significant percentage of renewable fuels in energy sources matrix

Growing ecological and social concerns

Extreme weather conditions and temperature variations significantly impact productivity Growing regulatory pressure from governments & NGOs to operate businesses sustainably

Increase in food security concerns

Exporting bans limiting trade flows in key producing regions Quest for food security pressuring nations to acquire land abroad

Rising input costs

Commodity boom with Chinese growth has led to significant cost increases in major agricultural inputs such as oil and fertilizers In the next decade, input costs will continue to rise to levels at or above those of the decade preceding the 2007/2008 peaks

Consumers increasingly demand safe and sustainable food

1World agriculture: towards 2015/2030, Summary report, Food and Agriculture Organization of the United Nations.

The industry background

The global agricultural products market is valued at almost US$1.4 trillion, or 4 percent of global GDP. Accentures study looked at four principal agribusiness sectors sugar/ethanol, grains, protein (bovine meat and poultry), and dairy. Emerging market producers have steadily increased their share of global trade across all four sectors. Rising incomes in emerging markets have led to an increase in meat consumption, for example, and while high feed prices have kept cattle numbers low in traditional producer markets, bovine meat output is expanding in Brazil and India. Rising meat consumption has also boosted Asian corn producers. Dairy output, similarly, is rising in emerging markets. And Asian producers, especially in Thailand, have benefited from rising sugar consumption. Meanwhile, the development of a whole new energy market in biofuels has boosted demand for ethanola market dominated by Brazil (in terms of ethanol derived from sugar cane) and the US (in terms of ethanol derived from corn). Players in all sectors have been grappling with rising input costs and intense margin pressure. All are vulnerable to climate change. And although meat protein players are perhaps most exposed to food safety concerns exporting bans have curbed trade in key producing regionsall are feeling the effects of consumers increased environmental awareness and consequent changes in buying behavior. Confronted with this complex business environment some companies have sought to grow by internationalizing. Those from emerging markets have expanded into Europe and the US, and players from mature markets have focused on new and emerging markets. Brazil is of particular interest. South Americas dominant economy is now one of the largest and certainly the most diversified Agribusiness regions in the worldthe biggest global exporter of five internationally traded food products (orange juice, sugar, coffee, chickens and beef) and the number-two exporter of soybeans and maize. The country still confronts significant infrastructure challenges and credit is tight; but its achievement is especially striking given the low level of government subsidy: 5.7 percent, compared with 12 percent in the US and 29 percent in the European Union, according to the Organization for Economic Cooperation and Development (OECD).2

2.The miracle of the cerrado, The Economist, August 26, 2010.

The high performers

Accenture defines high performers as companies that outstrip their competitors over multiple economic, industry and leadership cycles. In order to identify the high performers in Agribusiness, Accenture analyzed 56 players some purely upstream commodity producers and traders, some with both upstream and downstream focus and all with annual revenues in excess of US$1 billion across four core sectors: ethanol and sugar, grains, protein and dairy. We used our proprietary High Performance Business research methodology to analyze both three-year and five-year performance for this peer set across five key metrics: Longevity: Total return to shareholders (TRS) over the period examined. Profitability: The capacity to generate adequate returns for capital invested in the business. Growth: Increase in revenue during the relevant period. Positioning for the future: Percentage of enterprise value that can be attributed to future cash flow generation. Consistency: Percentage of years that the company outperformed its peer set median in growth, spread and positioning for the future. Our analysis revealed some truly significant outperformance in all four sectors. The top five performers in grains, for instance, achieved profitability of between 11.6 percent and 17.8 percent, compared with an industry average of only 6.9 percent. The top two performers in ethanol and sugar achieved returns on invested capital of 17.3 percent and 14.4 percent respectively, against an industry average of 7.3 percent. While some top performing protein and dairy businesses achieved double and even triple the capital efficiency scores of the average player (see Figure 2).

Figure 2.

In terms of return on invested capital, the achievements of the top five performers
20% 17.3% 15% 13.3% 11.0% 10% 7.9% 6.2% 5% 6.9% 10.9% 12.8%

0%

Grains

Ethanol/ Sugar

Protein

Dairy

In terms of profitability, achievement of the top five performers

20% 17.8% 15% 11.6% 10% 7.3% 5% 3.1% 2.9% 6.4% 10.1%

5.7%

0%

Grains

Ethanol/ Sugar

Protein

Dairy

In terms of capital efficiency, the achievements of the top five performers

10 9.8

8 6.5 6 2.5 4 2.8 2 2.4 1.3 2.5 Industry average Protein Dairy High Performance range 3.7

Grains

Ethanol/ Sugar

The building blocks of high performance

Like high-performance businesses in all industries, the leaders in Agribusiness share a competitive essence made up of three building blocks of high performance: market focus and position, distinctive capabilities and performance anatomy. These building blocks describe the organizational mindset that dictates howand how well an organization fulfills its strategic objectives.

Market focus and position

To position themselves for growth relative to the competition and within the value chain, high-performance Agribusiness players have both globalized and diversified. Led by grains, leadings players in sugar and ethanol, protein and dairy have built global scale in research, production, marketing and sales through expansion and consolidation. They have acquired competitors to create dominant businesses that are also more diversified in terms of geography, products and services. They have merged with key players in product segments with high growth potential (such as poultry or ethanol), expanding their global reach, especially into emerging markets. And they have formed joint ventures and partnerships with complementary businesses downstream (processed food producers, for example, or fuel distributors) to help secure access for their productsa crucially important consideration in todays complex and volatile trading environment.

Distinctive capabilities
Our research has identified four distinctive capabilities that distinguish the high performers in upstream Agribusiness (see sidebar for the distinctive capabilities that distinguish the downstream high performers): Managing investments more effectively Improving operational efficiency Creating more effective trading and risk management capabilities Managing the innovation and generate a commercially viable portfolio

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Distinctive capabilities for downstream high performers

Accenture has conducted relevant research into the building blocks of high performance in Food and NonAlcoholic Beverages, where there are three distinctive capabilities applicable to Agribusiness companies that also focus on downstream operations Solution Marketingspotting consumer trends first and innovating (or renovating) portfolios with products that consumers favor or for which they are willing to pay more Customer and Channel Managementtailoring account strategies and tactics to b2b/ ingredients as well as retail partners priorities, including development of sophisticated trade management and promotional analytics and effective sales force and distributor network management Flexible and Low-Cost Operationsleveraging economies of scale delivered by a simple operating model across a global network, investing in lean processes and technologies to control costs

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1. Investment management
Managing investments carefully is a critical capability, especially in a volatile and unpredictable global economy where sudden changes in the competitive landscape and in regulatory definitions can dramatically impact supply and demand. In biofuels, for instance, blend mandates and import tariffs are subject to constant change. Indeed, no player in an industry as low-margin as Agribusiness can afford to be complacent. Our research shows that high performers manage their investments exceptionally well across three dimensions: project portfolio selection, capital expenditure, and post-merger integration. A high level of management rigor complements this skill throughout the project lifecycle. Top performers are outstandingly good at project portfolio selection, to which they apply advanced techniques such as scenario planning. They are especially adept at evaluating investment options in disruptive technologies, taking a structured, disciplined approach that goes beyond traditional Discounted Cash Flow (DCF) or decision-tree valuation techniques in favor of advanced S-curve analysis, based on engineering, yield and scale drivers. They also successfully combine a top-down, long-term view of which new geographies to develop with a pragmatic, bottom-up approach to growth options greenfield, brownfield, divestment or acquisitionemploying clear evaluation criteria including profitability, cost per ton, time to market and finance. As a result they establish strong, proactive positions as early movers.

Their capital expenditure is exceptionally disciplineda critical capability in an industry where half-billion-dollar investments in mills and factories are not uncommon, and where new crops and breeding programs and improved growing and origination methods require decades to become operationalized at sufficient volumes to be absorbed into the supply chain and transformed into products for the market. In fact, a 30 percent overrun in budget or time planning can put $200 million at risk. High performers are masters, too of post-merger integration. Out of the 300 major mergers and acquisitions in the past ten years 57% have resulted in lost value. In order to achieve success these high performers quickly and seamlessly integrate acquired companies, thereby avoiding operational interruptions, identifying synergies and optimizing value creation. Having successfully diversified across both products and geographies, high performers can mitigate the risks of excessive fluctuations in any single market: if one country temporarily closes to their products, for example, they can manage supply chain risk by leveraging operations in others. Finally, their project management is exemplaryhence their outstanding capital efficiency. Top performers apply advanced techniques such as strategic sourcing to the integrated physical and financial management of their product and service portfolio. They also exercise considerable financial discipline. Above all, they manage their investments well on an ongoing basis.

2. Operational efficiency
In Agribusiness, most of the cost of goods sold is accounted for by agricultural production costs; in the case of oranges, as much as 80 percent, and as much as 65 percent in sugar cane. Moreover, in an environment with an increasingly diversified set of customers that demands the continual optimization of the manufacturing footprint and supply chain network, agribusinesses are under constant pressure to improve their operational efficiencyand high performers are masters of the art. They boost field efficiency and yield maximization through the exceptionally efficient use of equipment, personnel and other inputs. Their maintenance planning and execution is better than their competitors. And they minimize losses and potential waste in the use of fertilizers, herbicides and fuel. The high performers reduce total cost of ownership by leveraging strategic sourcing. Whats more, thanks to their deep understanding of the varying levels of producer sophistication in terms of finance, operational and commercial practices, they establish optimized relationships with different producer segments more profitable relationships for both parties that also help boost security of supply. Thanks to the efficiency of their supply chain management, the high performers have higher service levels and lower transportation and storage costs. They tackle logistics challenges systematically, planning and executing for efficient transport infrastructures by integrating with logistics providersbuilding pipelines

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for ethanol transportation, for instance, instead of relying on expensive (and often unreliable) road and rail networks. High performers also optimize their back offices. They reduce General and Administrative (G&A) expenses through shared services. Their organization design is better than their peers. And they drive productivity by implementing the right package of incentives. By integrating worldwide operations on a common platform, some have increased synergies across business units and regions, driving down costs even more.

The high performers integrated optimized supply and commercial planning capabilities are critical to driving revenue and profit maximization. And because they leverage technology to trace and track commodity streams, their operational and sustainability risk management is also superior to the competition. This all in an international context with significant and increasing amounts of legislation in an area where government actively operate to protect their national or regional interests.

3. Trading and risk management

High performers take an integrated approach to trading (financial) and (physical) risk managementmajor challenges for any commodities business. Unlike their peers, whose operations tend to be fragmented and are thus often mired in turf wars between functions and departments, the high performers leverage standardized processes to improve their visibility, right across the enterprise. This boosts decisionmaking capabilities overall, and helps with operational risks in particular, accelerating their ability to take proactive steps to mitigate problems with producers, for example. When it comes to reducing financial risk, high performers use a precise hedging strategy to manage exchange rate exposures, as well as availing themselves of advanced tools in market simulation and planning, which together with predictive analytics can help identify market opportunities before competitors. Using these techniques to build scenarios and set up simulations has helped top performers forecast results more accurately and develop more effective reporting mechanisms in general. 13

4. Innovating valuable options

Consolidation has given the high performers the scale they need as upstream producers and traders to maximize returns on their chosen commodity streamsbe they sugar/ ethanol, grains, protein or dairy. But as value creation has moved downstream, closer to the end consumer, high performance has become much more than the ability to leverage scale alone. It also requires the ability to market and sell more sophisticated products and servicesin other words, innovation. Top performers have recognized that they need to manage the innovation pipeline effectively in order to generate a portfolio of commercially viable options based on their commodity streams. They have recognized, moreover, that diversification downstream requires them to address the needs of a diversity of very different markets B2B and B2Cand that doing so successfully requires specific go-to-market and commercial/sales models that are built internally or with partners. This has been especially true of ethanol/sugar and protein companies. The high performers in these sectors have leveraged M&A, joint ventures and partnerships

throughout the value chain to compete more effectively. They have formed joint ventures with oil companies to invent, market and sell bio-plastics, for example, leveraging a new, cost-effective polymerization process to produce high-quality polylactic acid-based (PLA) bioplastics from a renewable sourcebioplastics that can be converted into a variety of value added applications. And they have created similar partnerships to optimize the business benefits of innovations such as genetically modified cattle whose milk output is double that of normal cows, or hens eggs that can help combat common diseases of the eye and other human organs. Another example is the area of polylactic acid based (PLA) bioplastics and the development new cost-effective polymerization process to produce high-quality polylactic acid from a renewable source which can subsequently be converted into a variety of value added applications. Some of these innovations have created additional revenue streams, while others have enabled better ways of absorbing volume.

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Performance anatomy
The high performers in Agribusiness have diversified their portfolios, expanded their reach into key emerging markets and sought to satisfy the constantly escalating requirements of end consumersachievements that would have been impossible without a sufficiently lean, cohesive and performancedriven underlying performance anatomy (or culture). These leading companies welcome change. They have implemented incentive systems that motivate and reward their workforces from the highest to the lowest levels for embracing it. And they have boosted the ability of leadership to manage through increasing complexity. They are also masters of cost containment, driving out costs with common, global platforms in areas like the back office. Moreover, their globally streamlined operations have given them the transparency they need to sustain these capabilities going forward.

Intrigued? Accenture works collaboratively with the high performers and leading players in Agribusiness, leveraging an unmatched combination of research-driven insights, experience and skills to help them navigate the road to high performance. For a presentation of the detailed research findings and more information about how Accenture can help your company achieve high performance, please contact: Latin America Eduardo Barros +55 11 9281 3371 eduardo.barros@accenture.com North America Brian Burns +1 202-256-5951 brian.s.burns@accenture.com Europe and Africa Rob van der Krogt +31 20 593 9055 rob.van.der.krogt@accenture.com Asia Anish Gupta +91 11-429-80113 anish.gupta@accenture.com

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About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 223,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com

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