Over the past few decades, the food and agriculture sector has consistently faced challenges in meeting the world’s food needs. Throughout the late 20th century, population growth significantly increased global demand for nutrition, and as the 21st century has progressed, severe weather events as a result of climate change have complicated food production around the world.
Despite these challenges, participants in the food value chain—including farmers, agribusinesses, processors, and distributors—have made great strides in increasing overall per capita caloric availability. However, they have not yet overcome environmental challenges associated with food and agriculture. In fact, in 2019 the world’s agri-food systems accounted for about 30 percent of human-caused global greenhouse-gas (GHG) emissions, making them a critical focus for meeting increasingly bold climate targets.1“New FAO analysis reveals carbon footprint of agri-food supply chain,” UN News, November 8, 2021.
One opportunity to meet climate targets while adding new revenue in agriculture is to remove carbon through regenerative agricultural practices such as planting cover crops. Such carbon removals could sequester 0.5 to 1.2 metric gigatons (Gt) of CO2 out of the 6.0 to 10.0 GtCO2 of annual sequestration needed by 2050.2Deborah A. Bossio et al., “Global sequestration potential of increased organic carbon in cropland soils,” Scientific Reports, 2017, Volume 7; The case for negative emissions: A call for immediate action, Coalition for Negative Emissions, June 2021. They can also help agriculture play a critical role in addressing other sustainability crises, such as biodiversity loss, nutrient pollution, and freshwater consumption.3“Nature in the balance: What companies can do to restore natural capital,” McKinsey, December 5, 2022.
That said, public incentives are forcing many companies to rethink their business models and pursue innovation. For example, the Inflation Reduction Act in the United States addresses climate mitigation and agriculture, consumer willingness to pay green premiums is increasing, and voluntary carbon markets have been established in the state of California, the European Union, and the United Kingdom.
About the survey
In mid to late 2022, we surveyed 162 industry professionals: 87 representing food, agriculture, and agtech, and 75 from investment groups, incubators, and other financial organizations. Respondents spanned the globe, coming from North and South America; Asia–Pacific; and Europe, the Middle East, and Africa. We asked these professionals about how they expect agriculture to evolve in the coming years and which of the five shifts identified will be the most significant, as well as their reactions to 11 business concepts and how each can disrupt incumbents’ operations today.
Moving forward, significant shifts in global food systems are necessary to meet the world’s demand for food, fuel, and fiber without harming the planet—and innovation at scale is key. With this in mind, we surveyed some of the sector’s leading thinkers, including executives of incumbent companies, venture capital (VC) firms, and start-ups, to get their thoughts on five recent shifts (see sidebar “About the survey”). The results helped us identify 11 food and agriculture business concepts that are emerging to support the future of farming and to meet the sector’s sustainability challenges for a green and resilient future.
Five shifts to meet society’s goals for 21st-century food and agriculture
As the food and agriculture sector approaches the future, regulatory environments and private-sector commitments could be major drivers of change. On the regulatory side are ambitious policy agendas; for example, the European Commission’s Farm to Fork Strategy, part of the European Green Deal, aims to make food systems “fair, healthy, and environmentally friendly” by promoting organic farming and pushing for a 50 percent reduction in synthetic inputs.4“Farm to Fork strategy,” Directorate-General for Health and Food Safety, European Commission, accessed April 17, 2023. Meanwhile, more than 1,500 corporations have made emissions-reduction commitments through the Science Based Targets initiative (SBTi), including many companies in the food and agriculture sector.5For more, see “Science Based Targets” (website), accessed April 17, 2023. And many of these companies have gone even further to focus on broader environmental, social, and governance (ESG) goals, including regenerative farming, reduced waste, water quality, and biodiversity.
Based on these commitments, five shifts are needed to support the goals of 21st-century food and agriculture: building land value beyond crops, fueling the biorevolution, eating sustainably, ESG transparency and accountability, and taking out the waste. Of the five key shifts, survey respondents said three present particular challenges for incumbent agribusinesses.
Change is coming fast. In fact, 50 percent of respondents expect these shifts to have a meaningful impact on the industry within the next two years, while approximately 20 percent believe these shifts already have impact today. Investors expect shifts to occur faster than incumbents do. Overall, respondents believe the greatest material impact will come from eating sustainably and ESG transparency and accountability (both at 58 percent of respondents), followed by fueling the biorevolution (55 percent), taking out the waste (53 percent), and building land value beyond crops (47 percent).
Eleven 21st-century food and agriculture business concepts
Despite the challenges these shifts present, leading and new agribusinesses will have meaningful opportunities to pursue business-building opportunities. In our discussions with survey respondents, we identified 11 business concepts that will be key to feeding the world sustainably.
Building land value beyond crops
Land is a limited resource that can provide direct benefits from production as well as indirect benefits from passive use, such as increased biodiversity and naturally occurring carbon sinks in the form of forests and oceans. Landowners, farmers, input providers, and other value chain participants can consider comprehensive aspects of land valuation, including those with benefits that may take more time to materialize.
Land preservation and conservation. The importance of cropland is expanding beyond conventional crop production in recognition of the vital role that climate-smart agriculture can play in supporting both stakeholders and decarbonization. Practices that sequester carbon and reduce biodiversity loss can create benefits such as soil preservation for farmers and can also create new revenue streams, such as carbon credits, for landowners, farmers, and investors.
New businesses can assess land’s full economic value to include natural and societal benefits such as fresh water, flood control, and forest products so stakeholders can capture ecosystem benefits and carbon-credit revenue streams.
To decrease biodiversity loss and nutrient pollution, new businesses can develop techniques to reduce the cost of agroforestry deployment. According to McKinsey estimates, this could reduce costs by approximately 10 percent to $180 per hectare by 2050, depending on the practices used.6“Nature in the balance: What companies can do to restore natural capital,” McKinsey, December 5, 2022.
How incumbents can help smaller players implement sustainable practices
An incumbent in the agri-food sector has set out to provide sustainable farming as a service. It leverages its advantages as an incumbent to help smaller farmers overcome challenges of scale, such as the following:
Seasonality slows time to scale. Agriculture is a uniquely slow sector for commercial innovation because farmers tend to operate on a seasonal basis. This can create lags in revenue that are difficult for new ventures to endure and that encourage incumbents to focus on the core business instead of on reinvention.
Behavior change requires an outsize share of fragmented attention. Farmers often have significant capital tied up in their operations as well as debt on their land and equipment. Naturally, there is a high bar to change practices or try new technologies that could risk cash flow and lead to default. At the same time, farming is a complicated business, and most farmers are making many simultaneous decisions around equipment, crop mix and rotation, inputs (such as type, supplier, application rate, and application timing), crop marketing, compliance reporting, labor, and more.
Ability to confer incumbent advantages without smothering growth. Incumbents have an unfair advantage, with access to talent, capital, and farmers that start-ups and other new entrants do not have. However, it is critical to give the new business space to grow to keep it from being smothered by the existing processes or biases of the parent organization.
Regenerative agronomy services. Regenerative agronomy supports the deployment of regenerative agriculture, which can help sequester carbon, reduce biodiversity loss, reduce freshwater use, and decrease nutrient pollution. Despite the recent launch of numerous new ventures to support decarbonization on the farm, businesses have not yet achieved significant scale or fully succeeded in supporting farmers in the transition to regenerative agriculture. However, capital is ready to be deployed: investors expect to increase fund allocation of new farming methods by 15 percent in their next rounds of funding, indicating that they recognize the importance of regenerative agriculture. This area urgently needs to be scaled so that farmers have the right incentives and do not get left behind (see sidebar “How incumbents can help smaller players implement sustainable practices”).
New businesses can develop new technologies and achieve data transparency sufficient to support incumbent and investor ESG goals. These can both help farmers gain value from the sustainability transformation via consumer premiums, government incentives, and voluntary carbon markets.
Smallholder support services. Service models can support smallholder farmers in making the transition from low-productivity, extensive agriculture to high-productivity, intensive, climate-smart agriculture. More than three-quarters of farmers around the world live on less than two hectares—meaning millions of farmers do not produce enough to earn a sufficient income or use their land effectively.7“Small family farmers produce a third of the world’s food,” Food and Agriculture Organization of the United Nations, April 23, 2021. For example, the yields of US corn farmers are 11 times those in sub-Saharan Africa, three to four times those in India, and nearly twice those in China, which is the second-largest producer in the world.8Hannah Ritchie, Pablo Rosado, and Max Roser, “Crop yields,” Our World In Data, 2022. Smallholders are exposed to climate risks such as drought, extreme heat, and flooding—for example, nearly 80 percent of all smallholders in Ethiopia, India, and Mexico could be affected by at least one climate hazard by 2050.9Chania Frost, Kartik Jayaram, and Gillian Pais, “What climate-smart agriculture means for smallholder farmers,” McKinsey, February 28, 2023. With an estimated one-third of the world’s food and 32 percent of agriculture GHG emissions coming from smallholder farms, solving the smallholder challenge will be imperative for both food security and climate needs. Solving this challenge could increase land productivity, reduce conversion rates of natural ecosystems to farmland to produce carbon sequestration and biodiversity benefits, and ensure climate-smart agriculture practices.
To reduce climate-induced volatility, new businesses can invest in climate-adapted technologies, such as pest-resistant seeds, fertilizer coatings, and biostimulants, as well as water-efficient agriculture techniques, such as optimized and water-efficient seeds.
Fueling the biorevolution
Production systems have become increasingly efficient over time, but there is still significant headroom to increase efficiency in the biofuel space as demand accelerates. For example, the International Energy Agency (IEA) expects US biofuel consumption in 2030 to triple compared with 2019 levels.10“Biofuel production in 2019 compared to consumption in 2030 under the Sustainable Development Scenario,” IEA, updated October 26, 2022. Thus, food and agriculture players can accelerate improvements to meet climate targets and emerging demands.
Considerations for start-ups raising capital
Raising capital has been one of the most significant challenges for the CEO of a start-up cleantech player converting manure to biogas and biofertilizer. With this in mind, he shared several lessons from the company’s journey.
Avoid complexity. The simpler the business model and the pitch, the better. Decision makers will have different levels of familiarity with specific business models, so make it easy for them to understand the business and its unique value proposition.
When raising capital, don’t just look for the right investment bank, look for the right team. Capital-raising teams should have experience with similar businesses—those with similar technology, end markets, and maturity. A team with the right experience can save precious time in raising capital by knowing where to go first. For example, American private equity funds may prefer different risk profiles than European private equity funds or smaller environmental, social, and governance funds.
Don’t overcommit. Avoid getting too excited about one potential investor such that you slow down discussions with others. It’s important to have many irons in the fire because hiccups on the path to “yes” are common.
Partnering. At first, partnerships can appear to dilute the value a company expects to capture. However, they can be an important way to de-risk and reduce the complexity of a business. Although it’s still important to understand potential trade-offs, partnerships also signal to potential investors that others have bought into a business.
Manure to fuel and fertilizer. By 2030, the world is expected to produce nearly five billion tons of manure each year.11David M. Berendes et al., “Estimation of global recoverable human and animal faecal biomass,” Nature Sustainability, November 2018, Volume 1. On the one hand, this volume is a potential environmental problem that could affect air and water quality due to nitrous oxide and methane emissions. On the other hand, manure could potentially meet crop fertility needs, improve soil quality, and deliver significant amounts of energy—enough to contribute 5.5 percent of national energy production by 2050.12Allison Crimmins, “The power of manure,” Massachusetts Institute of Technology (MIT) News, October 4, 2011. However, the challenge of producing, aggregating, and marketing this volume of organic fertilizer is not trivial (see sidebar “Considerations for start-ups raising capital”). Many farms lack the necessary scale for the economics of current approaches to be feasible. For example, only 10 percent of the approximately 60,000 dairy farms in France are of sufficient scale—around 100 cows—for small anaerobic digesters to make economic sense.13For more, see “French dairy farms,” Centre National Interprofessionnel de l’Economie Laitière (CNIEL), accessed April 17, 2023.
New businesses can help large and small farms deploy manure management techniques such as anaerobic digestion and manure sequestration to reduce nutrient pollution. They can also invest in innovative approaches to convert manure into desirable end products such as biogas and biofertilizer.
Biorefining. Some sectors are particularly difficult to abate, such as the transportation sector, especially aviation. A number of promising technologies are on the horizon, such as hydrogen-powered flight, but most are a decade or more away from scaling. Meeting our growing needs for fuel will likely require upgrading existing biofuel technologies and scaling nascent technology approaches such as conversion of crop and forest residues to sustainable fuels through advanced pyrolysis.14For more on the potential benefits of pyrolysis, see Zhou Peng, Theo Jan Simons, Jeremy Wallach, and Adam Youngman, “Advanced recycling: Opportunities for growth,” McKinsey, May 16, 2022. In turn, this will require careful management to ensure feedstocks are truly sustainably sourced and do not reduce carbon stocks or damage biodiversity. However, this space could provide excellent opportunities for new green businesses that have the dual mission of creating both value and social impact.
Efficiently producing food will not be enough. At the global level, diets will need to shift toward more sustainable sources of energy and protein. That said, some of these shifts are already happening today. For example, the alternative-protein revolution is currently in the early phase as companies develop and scale plant-based proteins.15For more insights on alternative proteins, see “Alternative proteins,” McKinsey, accessed April 17, 2023. These can be complemented by cultivated meats, plant-based meats, and other innovations to help meet consumer demand for tasty, healthy foods at lower carbon- and land-intensity per calorie—up to 20 times less than for beef.16Craig Hanson et al., “How to sustainably feed 10 billion people by 2050, in 21 charts,” World Resources Institute, December 5, 2018.
Plant-based protein. Alternative proteins and other plant-based foods have been a strong growth area, with numerous start-ups launching products targeting the sweet spot of tasty, trendy, and more sustainably produced. However, these supply chains remain subscale, resulting in higher costs than those of incumbent foods and ingredients. In turn, these supply constraints and high costs limit the appetite of food companies to launch new products.
To achieve economies of scale, new businesses can reduce costs and scale plant-based supply chains. They can also produce crops with low emissions per unit of protein, low-emissions transportation options, and low-emissions processing.
Lab-grown meat. Not all consumers will make the shift to plant-based proteins.17For more, see Tom Brennan, Joshua Katz, Yossi Quint, and Boyd Spencer, “Cultivated meat: Out of the lab, into the frying pan,” McKinsey, June 16, 2021. Thus, new businesses will need to be geared toward alternative proteins, such as lab-grown (cultured) meat alternatives. The lab-grown meat space could represent more than $25 billion in value by 2030.18For more, see Tom Brennan, Joshua Katz, Yossi Quint, and Boyd Spencer, “Cultivated meat: Out of the lab, into the frying pan,” McKinsey, June 16, 2021. However, consumers have strong preferences on what meat should look, feel, and taste like, which creates challenges for lab-grown-meat providers in meeting consumer expectations.
To optimize consumer adoption, new businesses can tailor lab-grown meat to consumer taste preferences.
Taking out the waste
As the saying goes, “What gets measured gets managed.” Nearly 30 percent of the food produced today is wasted—enough to feed two billion people, more than double the undernourished population across the globe.19“5 facts about food waste and hunger,” World Food Programme, June 2, 2020. Given this scale, reducing waste will be a critical component of the future food system. Solutions will likely involve preserving crops at the farm level and reducing food waste at the processing, retail, and consumer levels, all of which can lead to capturing more value from food production.
Optimizing crop storage. Unavailability of cold storage drives significant food waste. Up to 50 and 45 percent of postharvest output in India and Nigeria spoils because of a lack of cold storage, respectively.20Angela Wipperman, “Why sustainable food systems need cold storage innovations,” Global Center on Adaptation, December 16, 2020; Benson Kibiti and Heinz Strubenhoff, “How off-grid cold storage systems can help farmers reduce post-harvest losses,” Brookings Institution, October 16, 2019. Building solar-powered cold-store solutions can help increase microstorage or aggregation solutions for smallholder farms, reducing postharvest losses for remote farmers without connection to the grid.21For more on reducing postharvest losses, see “How to reduce postharvest crop losses in the agricultural supply chain,” McKinsey, November 18, 2021. A new method called hyperbaric storage, which uses pressure control to slow microbial development at different temperatures, could serve as an alternative to cold storage.
To reduce crop spoilage, new businesses can deploy cold-storage solutions with reliable renewable power sources independent of the grid. They can also continue researching novel storage methods.
Downstream food waste reduction. Even if food is not consumed by humans, it can still play important roles such as feeding animals. It can also be converted into energy or other products through techniques such as waste-to-energy, renewable natural gas (RNG), conversion to biochar for soil, and compost. For example, codigestion, anaerobic digestion, and composting can mitigate 0.5 to 0.6 tons of CO2 equivalent per ton of food waste while reducing waste disposal fees.22Calculated using the EPA’s Waste Reduction Model (WARM). For more, see “Waste Reduction Model (WARM),” US Environmental Protection Agency, updated October 7, 2022. Meanwhile, incumbent waste players typically use anaerobic digestion to convert food waste into a slurry to produce biogas, RNG, or compost.
New businesses can use anaerobic digestion to create co-products and continue investing in alternative waste conversion methods such as biochar.
Transparency and accountability for climate risk
Farm-level insights. Climate change is changing the risk profile of farms. There is a need for good quantification of risk factors to support land acquisition, farm finance, and other decisions. This would ideally allow more preferential access to capital for farmers with less systematic risk who have taken measures to build climate resilience (such as through regenerative agriculture practices). One example is the EPA’s monitoring, reporting, and verification (MRV) plan, which provides an approved method for plant owners and operators to report the amount of CO2 that is sequestered.23For more, see “Geologic Sequestration of Carbon Dioxide: Subpart RR,” US Environmental Protection Agency, November 2011.
New businesses can provide digital solutions for field-level crop insights throughout the growing season to optimize irrigation and nutrient application—optimizing yield while minimizing water and fertilizer use. They can also include climate practices and risk in crop insurance to provide incentives for climate-smart practice adoption through lower risk premiums.
Tracking outcomes across the value chain. Indirect land use change and soil carbon sequestration have only recently been included in key emissions tracking metrics. For example, SBTi’s Forest, Land and Agriculture (FLAG) Guidance was announced in fall 2022 for companies in land-intensive sectors to set near-term science based targets. New and more-accurate methodologies for end-to-end supply chain tracking of emissions and other important sustainability metrics, such as carbon accounting, can support a net-zero pathway and help farmers and food manufacturers build consumer trust in new green products and brands.
New businesses can offer cradle-to-grave carbon accounting and tracking software to build consumer confidence in low-carbon agricultural products.
What can today’s agribusinesses do to get started?
While regulation will undoubtedly play a major role in supporting the transition, the largest force for scaling a sustainable transformation in food and agriculture is arguably private-sector innovation, especially business model innovation. We are seeing capital being deployed at scale by incumbents and by new ventures. On the venture side, capital deployment has been remarkable, with 20 times more capital invested in agtech ventures in 2021 than in 2012.24Anjan Asthana, Tom Brennan, Dave Eickholt, and John Levene, “How agtech start-ups can survive a capital drought,” McKinsey, November 10, 2022. Investors are changing how they plan to allocate capital in their next funds, with new technologies such as new farming methods and production foodtech seeing growth at the cost of less novel areas such as traditional production and agricultural inputs. Overall, investors are more excited about concepts that are more mature, while incumbents prefer close-to-farm initiatives (Exhibit 3).
Agribusiness leaders can respond to these shifts by making several adjustments in how they think and operate25For more on how businesses can grow successfully, see Chris Bradley, Rebecca Doherty, Nicholas Northcote, and Tido Röder, “The ten rules of growth,” McKinsey, August 12, 2022.:
Although the future evolution of food needs remains uncertain, it’s exceedingly clear that urgent action is needed to respond to climate change and ensure that healthy sources of nutrition are available globally. There is significant pressure to get this right—and quickly. Businesses will need to be scaled to allow both incumbents and new entrants to adapt, and many of the concepts they will bring to the table are expected to achieve scale over the next three to five years. Decisions made today will have lasting implications, but a healthy understanding of the trends, players, and technologies involved can help plant the seeds for increasingly sustainable quantities of affordable and nutritious food.
This content was originally published here.