DEMOGRAPHICS

Food sustainability

By 2050 there will be more than 9 billion people on this planet. Taken into account the current and future economic shift where emerging economies will mature and therefore global wealth will increase, this implies that the world needs to produce 70% more food than today. We are already facing difficulties to feed the world population today. Currently 1 in every 7 persons is hungry worldwide. Hence any improvement in food logistics would be more than welcome.

According to a study by the UN 1/3 of perishables is lost or wasted globally. This equals 1.3 billion tons per year. Problems in the cool supply chain are a major concern in this respect. Huge amounts of resources are used in vain to produce and transport these perishables, which subsequently have a tremendous cost impact. Besides a higher cost this loss also affects the environment. Agriculture accounts for roughly 14% of all global CO2 emissions. If 1/3 of the food loss can be eliminated then subsequently this would result in a large reduction in total global emissions. 

Balancing global food supply shortages and surpluses will be the challenge for logistics service providers and therefore local and global supply chains must be better integrated in a sustainable way. If losses in the food supply chain are being reduced, these cost savings will not necessarily result in more profits for certain players within the supply chain but it most likely will create a level playing field where cost will be reduced and therefore consumer prices will go down.

Relief logistics

A larger global population combined with economic growth is resulting in a wealthier world where there is more wealth at risk. Natural disasters will therefore have more impact on global supply chains than in the past. The tsunami and earthquake in Japan and the flooding in Thailand last year had a tremendous impact on supply chains all over the world. J.P Morgan estimates that the flooding in Thailand alone decreased global production by 2.5%. Munich Re, a reinsurer, estimates the total economic cost of last year’s disaster at USD378 billion, a record number in history and unfortunately an increasing trend over the last 30 year.

On one hand relief logistics offer opportunities for logistics service providers, since goods need to be moved to areas sometimes difficult to access at a short term. But on the other hand the production slowdown and other negative economic effects caused by natural disasters will eventually outweigh the occasional relief logistics benefits for the logistics service providers. 

Pharmaceutical developments

Of the 9 billion people in 2050, the share of older people will only increase. In 1970 the average family had 4 or 5 children, it is now 2.45 worldwide. In general people are living longer and therefore the dependency ratio (the number non-working people, like children and seniors per 100 working adults) in many societies will increase, putting a burden on global social healthcare systems. 

The pharmaceutical industry will play a very important role in these demographic challenges. Since people will live longer and the population will grow in absolute numbers, the pharmaceutical industry will probably outperform many other industries in terms of growth. For logistics service providers this industry will be very interesting since it is demographics and to a lesser extension economic trends that influence the volumes. Also the effect of seasonality is much less than in other sectors, like perishables where the seasonality varies much more than in general cargo.

The patents of many blockbuster drugs will expire soon and there seems to be less development in the pipeline. In the next two years, six of the 10 top-selling drugs will lose their patents, meaning other companies can make the medications and sell them at reduced prices. Of course this will benefit the consumers and give a bit of relief to the social healthcare challenge faced by many debt burden countries.

On the other hand the increase of generic drugs will also increase competition between pharmaceutical companies where cost differentiation will play a more important role. Logistics is a small fraction of the total cost for a pharmaceutical company, but is essential in the supply chain in order to get the products to the end consumer. Any disruption in this supply chain can have huge consequences for people’s health.

The shift to more generic drugs will most likely not change the high standards required for logistics, but might have an effect on modality. Where nowadays many of the patent drugs are transported via airfreight some of the competing generic drugs might chose a different modality, like sea transport, due to the fact that cost of inventory will be lower. The increased competition might also force the logistics service providers to cooperate more closely in order to bring the cost down and be more efficient, of course always keeping the same high standards of quality required.

Cool chain requirements

In general the reduction in food loss and the improvement of the supply chain of pharmaceuticals will lead to less hunger, more health, reduction of inflation and therefore also a contribution to global economic growth. In order to achieve this, logistic service providers need to cooperate more. This will require both vertical as horizontal collaboration. However, some supply chain and purchase managers of the shipping companies should treat logistics less as a cost center but more as a value center, where value in the combined chain should be achieved and where this value should be shared amongst all players. 

INEFFICIENCIES

Unfortunately we still need to overcome some inefficiencies in the industry that hinder further growth and overall prosperity, especially in Europe. 

Logistics workforce

Changes in economic cycles have a leveraged effect on logistics volumes. If trade and GDP grow, logistics volumes in air, sea, train, and road freight will grow higher but the opposite is also true. The last years of economic slowdown have had a huge negative effect on global logistics. It is therefore important to be able to be flexible to react to these market changes.

Regrettably European labor laws do not allow companies to react quickly to market changes. The U.S. has much more flexible labor laws, which explains why their economy is already doing better than Europe’s at this moment. Moreover at the end this is causing more unemployment because no firm wants to hire if they know it will be too costly to adjust their labor force in a downturn. This is a vicious circle in Europe and leaves it uncompetitive against the U.S and especially emerging economies that are much more adept to changes in the market.

European logistics companies need to able to adjust their operations according to the economic cycles just like their counterparts in emerging economies. 

Air transport

Bankruptcy laws are another way to accomplish flexibility to market changes. Unfortunately the European bankruptcy laws are not as flexible as for example in the U.S. where chapter 11 gives the debtor a fresh start, subject to the debtor’s fulfillment of its obligations under its plans of reorganization. 

Some of Europe’s legacy airlines need to readjust their operational cost at par with the increased competition from the Middle and Far East. A similar chapter 11 exercise would help some of these European airlines to bring down for example their crew & other overhead cost which has increased over many years and is therefore way higher than many of the younger airlines from the Middle & Far East. If they are not allowed to reduce these costs they will inevitably lose market share and consequently most likely more jobs would be lost.

Even though aviation is more liberated through more global access to traffic rights than in the past, complete open skies will also allow airlines worldwide to make use of all traffic rights and as a result create a level playing field where cost and prices will come down and thus will contribute to more economic growth. Since 1992 the inter-European liberalization caused a rise of 33% in European air travel, which again resulted in 1.4 million extra full-time jobs and a GDP growth of $85 billion.

However there are still some countries in the world that prefer to protect their flag carriers, rather than improving the overall welfare of the broader public interest. This places European carriers in a relative competitive disadvantage since Europe is more deregulated than certain other areas in the world. 

Ownership rules in the aviation industry in many countries limit necessary integration and therefore further growth. For example the U.S, China and Brazil are some of the large markets that restrict foreign ownership. Eliminating these ownership rules would result in a unified global and fully liberalized market for the aviation industry. It would also result in further necessary integration where inefficient national airlines will no longer distort the mechanisms of an open market economy in which consumers benefit from better service and lower prices.

Notwithstanding its impact on the European economy, the current air transportation system is not operating in an efficient way resulting in additional costs, delays, noise and CO2 emissions. The main reason for this is that the standards and systems are still based on approximately 50 years ago when the aviation industry was completely different than it is right now. 

Currently the aircraft in Europe are flying pre-defined routes that are managed by air traffic controllers of each member state. As a consequence of this inefficiency each flight is about 50 km longer than needed, which again results in unnecessary emissions of around 5 million tons of CO2 per year. 

Fortunately the Single European Sky (SES) initiative and its technological pillar, SESAR, will address these issues in the future, especially given the fact that demand for air travel in Europe will grow by over 70% in the next 20 years. The implementation of SESAR should lead to a reduction of 10% per flight, an equivalent of 9 minutes, as well as 50% decrease in cancellations and delays within Europe. These reduced flight times will subsequently result in an elimination of 50 million tons of CO2 during the period of 2013-2030. 

Road transport

Another challenge Europe faces, according to the roadmap commissioned by the European Commission in 2011 is the increased road congestion and hence worsening accessibility in Europe. 

According to this roadmap, congestion costs are projected to increase by about 50% by 2050, to almost € 200 billion per year. In the Netherlands alone congestion caused a cost of €400 million for transport companies and around €1 billion to businesses in general in 2010.

Also the U.S is facing a similar problem. A study by the Texas Transportation Institute claims that the cost of congestion to hauliers in the US – measured as wasted fuel and delay – amounted to $23 billion in 2010. On top of that, according to the World Economic Forum, 24% of all trucks drove empty within the EU due to positioning and imbalances in 2009. Moreover the average load factor of the non empty kilometers was just 57%.

This waste of economic resources and CO2 emissions can only be reduced through more cooperation, extension of cabotage regulation and of course general economic growth. The EU already has given more access to the domestic market for transport companies from member states. Currently hauliers from member states are allowed to carry out up to three domestic transport operations in another country of the EU as long as it is combined with another international route within a 7 day period. 

Ideally cabotage should be allowed without any restriction, resulting in less empty kilometers, higher load factors and therefore less carbon emission and lower operating cost. 

Capital asset management

Unfortunately the order cycle of aircraft and large ships is still far from perfect. Traditionally aircraft and ships are ordered after some time of economic growth where first of all management and then after some time shareholder boards are convinced that the markets are growing. They subsequently order large quantities of aircraft & ships based on the present facts which will then be delivered some years after, in many occasions when there is an economic downturn. Ideally these planes and ships should be ordered in a recession when prices are low and they will be delivered when there is sufficient growth to make economic use of these expensive assets. However this countercyclical investment behavior will require different cash flow management where savings in good times only will be used to acquire assets in an economic slowdown. 

Many asset-heavy logistics companies in Europe are still artificially being kept alive. Many banks are not taking their losses. The banks are hindering the Darwinian effect in the market by keeping loss making asset heavy transport companies alive instead of taking the hit and sell devalued assets at even bigger losses. The big question is whether these banks have made sufficient provisions to eventually cater for these losses; otherwise this could be another bubble. 

Nevertheless S&P predicts that the percentage of European companies going bankrupt will increase from 4.8% in 2011 to 6.1% in 2012, so hopefully some necessary Darwinian adjustment will be made in this market. 

Economic Shift 

Studies have shown that when average income reaches a threshold of over USD 16,000 per capita in emerging economies double digit economic growth is no longer achievable. China is currently close to this threshold and hence consumption will most likely rise, but production will become increasingly expensive. This will also affect the current (im) balance in trade where imports to China from the US and Europe will outgrow exports from China in the future. 

The traditional trade lines, like Asia-Europe and Asia-US are shifting towards more transport volumes between Asia and Africa & Latin America. Hubs in Asia, like Singapore and in the Middle East, like Dubai, Abu Dhabi, and Doha will benefit from these trade developments. Near sourcing will also fuel growth in Eastern Europe. More aircraft and ships are going directly to airports and ports in Eastern Europe instead of via hubs in Western Europe. Hence Western Europe might lose its position of global logistics hub. 

Shift happens; Emerging economies in general will mature undoubtedly. The economic balance of power will shift and if Europe does not become more competitive on a global level it risks losing global market share. 

Backed by sovereign wealth funds and by more favorable economic conditions in their home markets, companies in emerging economies will eventually be acquiring more companies in Europe. If European logistics service providers will not be allowed to be more competitive on a global scale, in the future the European logistics market could be dominated by Asian and Middle Eastern companies some of them supported by sovereign wealth funds. From an open market perspective this is perfectly fine, but an economic balance of power is also desirable. 

Sebastiaan Scholte

CEO of Jan de Rijk Logistics (www.janderijk.com) 

Secretary General of the Cool Chain Association (www.coolchain.org) 

10000 years BC	1	million people
AD1	200	million people
1750	791	million people
1950	2.5	billion people
2010	6.0	billion people
2011	7.0	billion people

But it gets really scary over the last 300 years, when the world population increased ten times.

And as we all know, the estimate for 2050 is around 9 billon inhabitants.

And lets not forget; we live on a planet that is rather unique in our galaxy with a couple of million other planets or stars - actually most likely “very unique” in the numerous galaxies that scientists have discovered in the “observable universe” with probably more than a 100 billion galaxies (no need to try estimate the trillions of stars and planets!). And so far, they have found no signs of a planet Earth with sustainable life as ours. So our planet, we humans and the rest of the planets living species as well as nature itself, is – very, very unique. That’s why we really have to take good care of this planet of ours and secure its well being for future generations.

We have to learn to live a comfortable and good life with the sustainable resources we have at hand, getting away from non-renewable resources such as fossil fuels - oil, coal and gas. The million of years that is has taken to create life on earth, has served us these resources on a silver plate (probably a bad expression as silver is considered non-renewable but of course, re-cyclabel). This resource is called nature and if we learn to respect it and use it correctly, it can - together with solar, wind, geo-thermal and other energies – provide us with all the resources we need for a good life; we do not need to go back to middle age civilization; we can live well with plenty of energy. But we must learn to master it correctly, use it efficiently and definitely not waste it; nature is generous but there is a limit!

Food is another matter; planet Earth can produce enormous quantities of food, but the planet has limited land areas that do not expand as well as limited quantities of fresh water. And both food and water is part of a biodiversity that depends of the right climate and temperatures and are subject to numerous other conditions that must not be distorted. And food can not be produced in unlimited quantities to meet the ever growing demands of an ever growing population; the planet is not expandable.

To quote Wikipedia; from 1950 to 1984, as the Green Revolution transformed agriculture around the world, grain production increased by over 250%. The world population has grown by about four billion since the beginning of the Green Revolution and most believe that, without the Revolution, there would be greater famine and malnutrition than the UN presently documents (approximately 850 million people suffering from chronic malnutrition in 2005). The energy for the Green Revolution was provided by fossil fuels in the form of fertilizers (natural gas), pesticides (oil), and hydrocarbon-fueled irrigation.

But the potential peaking of world oil production shall affect agriculture and food production as well as prices, as oil is of crucial importance to global transportation, power generation and agriculture. In May 2008, the price of grain was pushed up severely by the increased cultivation of biofuels [not proven!], the increase of world oil prices to over $140 per barrel ($ 880/m3), global population growth, the effects of climate change, the loss of agricultural land to residential and industrial development, and growing consumer demand in the population centers of China and India. Food riots subsequently occurred in some countries across the world. However, oil prices then fell sharply, and remaining below $100/barrel until around 2010, but it is unclear whether rising living standards in developing countries will once again create resource shortages.

Some may say that mankind is innovative (yes) and shall find new technologies (yes) that can solve or replace nature (doubtful) and that could meet our future demands for nutrition (very doubtful). Or we can move to another planet! But as I said, so far none has been found that matches planet Earth in terms of life conditions as we know them. The next exploration of mankind is to travel to Mars; 520 days travel back and forth – and with a surface temperature of minus 5 to 87 degrees Celsius - and the atmosphere is 1% of Earths surface pressure; hardly a place for living, even less for agriculture and food production. No need to make any further space exploration, nor build any expectations. So without doubt and whatever the views are, we shall face difficulties in meeting the food demand of the future as can be seen from the following statements (also Wikipedia).

Food security refers to the availability of food and one's access to it. A household is considered food-secure when its occupants do not live in hunger or fear of starvation. According to the World Resources Institute, global per capita food production has been increasing substantially for the past several decades. In 2006, MSNBC reported that globally, the number of people who are overweight has surpassed the number who is undernourished - the world had more than one billion people who were overweight, and an estimated 800 million who were undernourished. According to a 2004 article from the BBC, China, the world's most populous country, is suffering from an obesity epidemic. In India, the second-most populous country in the world, 30 million people have been added to the ranks of the hungry since the mid-1990s and 46% of children are underweight. Quite an imbalance!

Furthermore, intensive farming often leads to a vicious cycle of exhaustion of soil fertility and decline of agricultural yields. Approximately 40% of the world's agricultural land is seriously degraded. In Africa, if current trends of soil degradation continue, the continent might be able to feed just 25% of its population by 2025, according to UNU's Ghana-based Institute for Natural Resources in Africa

Land deals and Climate Change shall also have an impact. Rich governments and corporations are buying up the rights to millions of hectares of agricultural land in developing countries in an effort to secure their own long-term food supplies. The head of the Food and Agriculture Organization (FAO), Jacques Diouf, has warned that the controversial rise in land deals could create a form of "neocolonialism", with poor states producing food for the rich at the expense of their own hungry people. The South Korean firm Daewoo Logistics has secured a large piece of farmland in Madagascar to grow maize and crops for biofuels. Libya has secured 250,000 hectares of Ukrainian farmland, and China has begun to explore land deals in Southeast Asia. Oil-rich Arab investors, including the sovereign wealth funds, are looking into Sudan, Ethiopia, Ukraine, Kazakhstan, Pakistan, Cambodia and Thailand.

Some countries are using the acquisition of land for agriculture in return for other gains. Egypt is seeking land acquisition in Ukraine in exchange for access to its natural gas. Qatar has plans to lease 40,000 hectares of agricultural land along Kenya's coast to grow fruit and vegetables, in return for building a £2.4 billion port close to the Indian Ocean tourist island of Lamu.

Approximately 2.4 billion people live in the drainage basin of the Himalayan rivers. India, China, Pakistan, Afghanistan, Bangladesh, Nepal and Myanmar could experience floods followed by severe droughts in coming decades. In India alone, the Ganges provides water for drinking and farming for more than 500 million people. The west coast of North America, which gets much of its water from glaciers in mountain ranges such as the Rocky Mountains and Sierra Nevada, also would be affected. Glaciers aren't the only worry that the developing nations have; sea level is also reported to rise as climate change progresses, reducing the amount of land available for agriculture.

In other parts of the world, a big effect will be low yields of grain according to the World Food Trade Model, specifically in the low latitude regions where much of the developing world is located. From this the price of grain will rise, along with the developing nations trying to grow the grain. Due to this, every 2-2.5% price hike will increase the number of hungry people by 1%. Low crop yields are just one of the problem facing farmers in the low latitudes and tropical regions. The timing and length of the growing seasons, when farmers plant their crops, are going to be changing dramatically, per the USDA, due to unknown changes in soil temperature and moisture conditions.

Consequently, sustainability in the food chain is a very complex and complicated issue to handle. As a cool chain association, we are in the challenging position to handle and transport PTSPs from the growing area to the destination where the consumers are – often half around the globe. While there shall be certain trunk routes - like Africa to Europe and South America to North America and so forth – there shall also be challenging demands for unforeseen transport requirements as climate change shall reduce or eliminate some growing areas due to draught or too warm or too cold and even consumer demands may change. But at the same time, for various reasons as mentioned above, new land areas shall produce food that needs handling and distribution over new routes and with new logistics.

At the same time, we shall have to face and cope with the new demands of sustainability issues in order to reduce global warming, eventually returning to a global average temperature level that was prevailing in the world before the industrial revolution (1750-1800). As a consequence, you may say that food patterns may also change over times. It shall require a transition from use of fossil fuels to sustainable energy for agriculture and transportation. It shall require a more intelligent use of food resources and a respect for climate change, biodiversity, reduced use of fresh water, sustainable packing materials as well as handling in order to meet the demand of the future, being a sustainable economy and society. Not easy challenges, yet not insurmountable either. At the same time, moving food from where it’s grown to were it’s needed is going to be another - sustainable – challenge.

I shall not review further the need for a sustainable agriculture, but a transition from fossil based energy and fertilizer as well as many other non-sustainable products and productivities shall be necessary in order that agriculture meets its part in reducing GHG emissions and pollution. Likewise, the cool chain distribution and handling shall face the same challenges; a transition away from dependence and use of fossil fuels and fossil based products and move towards a sustainable based industry and society. Over time, even the use of metal in machinery and equipment becomes an exception as we move towards composite materials and other bio based resources and recycling becomes the norm. Take an example - as mentioned in Braungart and MrDonough’s book “Cradle to Cradle – packing material. Up to 50% of our waste is packing material and many of these packing materials are NOT bio-degradable and are often designed to last longer than the products they contain.

But they could easily be designed to be bio-degradable and with a limited life span. As such – if done cleverly – could be returned to “nature” and be part of natural fertilizer instead of being burned or recycled to a down-graded product. But if so, they must not be mixed with synthetic chemical materials, such as a label with a print material that is not naturally bio-degradable – on bio-degradable carton. The solution is to make sure that everything is bio-degradable, even the type of print materials used. The technology is available and the cost would not necessarily be more expensive, but the product should be produced by having that objective in mind, using only bio-degradable materials. Likewise, the “remaining” 50% waste in the food chain could also be tackled; firstly by improving the temperature control prior and during the distribution and secondly, by sensible handling of PTSPs due to delays and common sense if the unforeseen occurs. Such action could further reduce the waste in the cool chain, leaving us with a small quantity of “unavoidable” waste (I bought too much, I did not eat all the salad etc), that again could be recycled where the biological residue would be re-used to grow new food - well explained in the “Cradle to Cradle”.

So why should the cool chain industry be interested in these issues – or even worried! - Simply because it’s our business! We handle and transport fresh, perishable and temperature sensitive products. The way we operate as well as the use of needed equipment and material shall be subject to the same rigorous and sustainable regulations and terms as all other industries shall be faced with over the coming years. And the faster we recognize this and the faster we act, the better off we shall be to face the challenges in the sustainable world of the future. This means that we must prepare for sustainable and renewable equipment, use sustainable energy and materials, move away from fossil fuels for all our transportation needs and replace it with electrical (based on sustainable electricity of course) vehicles, trains and for heavy trucks, sustainable gas and other renewable energy sources that meet the specific requirements of such type of equipment. The aviation industry is in a leading position as it’s already moving towards biofuels and by 2050 shall reduce its GHG emissions with up to 80% (certain types of biofuels have already been certified for use with up to 50% blend with fossil fuels and it’s now a question of how fast the large scale production of biofuels can be achieved. Also the Life Cycle Assessment (LCA) shall be a critical part of such future use of sustainable energy and products; in order words, the total GHG emission from manufacturing to recycle or destruction shall be accessed to stipulate the final GHG emission and its effect on the planet’s CO2 emissions, health and pollution. The LCA certification is still in its infancy, but there is no doubt in my mind that it shall be part of the mandatory regulations of the future.

Good luck - and let’s work together in the Cool Chain Association for a successful and sustainable PTSP industry of the future.

The pathway is variable, might be radical and coordinated action at many levels by multiple partners is needed in order to establish the conditions required to move global growth of food supply towards a more sustainable track. This will require major changes in terms of regulations, markets, consumer preferences, pricing and measurement of profit and loss. Large investments are also needed to improve current agriculture, including down- and upstream activities, and secure the sustainability of the global food supply.

Driven by these fundamental changes, new markets and business opportunities will emerge.

India can become the food supplier of the world. It has the cultivable land, all the seasons for production of all varieties of fruits and vegetables, an agribusiness system that works although it needs to be vastly improved. The single most important problem facing the Indian agricultural industry is the highly inefficient supply chain.

Interesting discussion paper from Indian School of Business.

Read this interesting article in the World Customs Journal