Profit margin control and increased competitiveness in agribusiness in a scenario of increasing costs
The agricultural sector ranks among the top three segments contributing the most to the global Gross Domestic Product. According to data published on the Statista website, in 2021, the production of agricultural products came in second after the service and industry sectors, responsible for 4.3% of the entire GDP generated worldwide. In the year, global agricultural production surpassed 1 trillion dollars in the United States alone.
However, even with a large share in the generation of wealth, the sector has been facing increased challenges. Climate change, regulatory acts, high competition, more expensive inputs, and other factors have led to an increase in agricultural production costs all over the planet. According to data from the Food and Agriculture Organization of the United Nations (FAO), the costs of agricultural production worldwide increased by about 70% between 2000 and 2018.
In contrast, the world’s need for food production will continue to grow each year. According to the FAO’s Agriculture at a Crossroads report, the demand for food is projected to increase by around 70% by 2050. This pattern characterizes agribusiness as one of the sectors with the most challenging perspectives for the coming years.
An increase in demand associated with rising costs and the challenges imposed by environmental regulations and global competition requires that agribusiness companies bet on cost control tools and increase profitability, without losing space in the disputed commodities market.
The main sources of costs and the most underestimated costs in agribusiness
One of the most underestimated sources of costs in the sector is that of storage and transportation operations of the production. According to a study published in 2020 in the scientific journal Nature Food, which evaluated losses at various stages of the agricultural production chain, food losses during transportation and storage represent a cost of US$ 220 billion per year for companies in the sector.
This data reveals an important opportunity for agribusiness organizations that need to control prices and increase market demand. Understanding exactly what is the weight of the loss generated by storage and logistics operations within your production chain and in which stages of distribution it occurs is a crucial step to determine actions to mitigate the problem and thus expand your margins without necessarily increasing prices, which are already skyrocketing due to the high input costs.
The other cost centers of each company vary according to the products in its portfolio, the extent of its crops, climatic factors, labor, investment in mechanization, and many other aspects. It is up to each organization to develop methods to identify the different cost drivers and how each one of them impacts the profitability of the business.
Keeping an eye on the costs of agribusiness’ future
As if the losses in the production chain and the rise in input prices were not to mention, agricultural production is facing a particularly complex scenario. As production must be expanded to meet demand in the coming years, food production is expected to become increasingly expensive and difficult.
The sustainability and environmental responsibility requirements will weigh increasingly on the sector, demanding that agribusiness take measures to reduce the negative impact of its activities. The agricultural sector currently accounts for 25% of global carbon emissions (FAO data) and is responsible for half of the world’s soil erosion annually, making 1.3 billion tons of soil unusable each year. For this reason, governmental pressures with new regulations for the sector must become ever greater.
In this context investing in technology and action to reverse these numbers is necessary not only to comply with the regulations but also to enable the continuity of the operations themselves in the long term and to position the companies in the sector competitively as allies of environmental causes. But this comes at a great cost. Adopting less destructive production techniques while maintaining productivity is neither simple nor cheap.
For this reason, we are living in a moment where it is now essential to invest in technologies that allow us to accurately track the various sources of production costs. Organizations that invest in technologies capable of tracking costs accurately and simulating scenarios based on reliable data will be better able to maintain their margins even in the face of rising production costs, taking advantage of opportunities generated by increased demand, and gain the financial flexibility to invest in actions and sustainable positioning without compromising business gains.
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