Deutsche Bank – Responsibility

Commodity speculation and food prices

Ongoing debate on the impact of commodity speculation has prompted Deutsche Bank to reflect on its role in solving global hunger.

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The first step, however, in the wake of a flood of accusations, was to review our own businesses that touch upon foodstuffs. Our conclusions (as set out in our 2011 CSR report) are in agreement with those of several international policy-makers: transparency in commodity derivative markets does need improving, but the agricultural derivatives markets remain a crucial tool in providing financing mechanisms across the agricultural value chain. Moreover, it is these markets that in fact catalyze investment in other critical areas of infrastructure development as well as improve health and sanitation.

Deutsche Bank’s Climate Change Advisory Board concluded in May 2012 that the need to double food production and reduce food waste creates significant investment needs and business opportunities across financial institutions such as Deutsche Bank.

The determinants of food security

Global food security is most severe in the developing world, where the proportion of underweight children under 5 years of age declined only marginally from 31 percent to 26 percent between 1990 and 2008. The UN Millennium Development Goals have largely focused on the treatment of malnutrition, with an emphasis on the health sector. Other strategies such as improved productivity of staple grains and increasing local horticulture are important; however, the multi-sector approach that addresses the longer-term drivers of under-nutrition remain central to combating global hunger.

A multi-sectoral approach brings together a coherent range of strategies with the aim of enhancing food and nutrition security. These necessarily include interventions in agriculture and business development, health care, clean water, hygiene and sanitation, basic infrastructure, gender equality, and education.

Successful strategies have focused primarily on the treatment of malnutrition and have found that the problems of hunger and malnutrition are deeply rooted within the health sector. Major strategies to tackle under-nutrition rely on the production of staple grains within the agriculture sector, although a comprehensive strategy to address under-nutrition will also require countries to increase the availability and reduce the cost of nutritious food beyond just staple crops and cereals.

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Agricultural production must double to meet future needs but faces significant challenges

According to many estimates, the world’s agricultural production must increase by substantial amounts to meet demand for food, feed, fuel and fibre. Moreover, the world’s food systems suffer from gross complexity, which results in enormous inefficiencies.

Demand for increased food, feed, fuel and fibre is driven by increased population, and an increase in the middle class in emerging economies. Coupled with a shift in dietary preferences from grains and staple carbohydrates to more protein-based diets including pork and beef (and perhaps fish), as well as biofuel production, more grains will be used to feed animals and fuel our automobiles.

As an energy-intensive sector, agriculture is closely linked to energy markets, with crop production and demand potentially adversely affected by higher oil prices, while crop inputs (such as fertiliser) may benefit from lower natural gas prices. These shifting dynamics will affect profit margins in different segments of the agricultural supply chain.

In addition to energy prices, likely constraints to the productivity growth of agriculture include climate change, water resources, infrastructure, education and training of producers, and social or governmental policy that distort agricultural markets.

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Investment opportunities

New technologies, product platforms and innovative business models in agriculture technology and food systems will dominate the shift from a conventional polluting industrial and socially detrimental industrial agriculture to a more socially just and environmentally sustainable food production and distribution system.

The agricultural technology sector is large. In the US alone it comprises over 8,500 companies generating over $1.3 trillion of revenue per year. Moreover, the volume of transactions in the agricultural sector is greater than $15 billion per year, with an estimated peak of over $70 billion in 2007.

Agricultural supply is expected to fall far short of demand over the coming decades, particularly as developing and emerging economies develop further and consumption levels increase. McKinsey, for example, estimates that land supply would have to increase by 250% over the next two decades, compared with the rate at which supply expanded over the past two decades (see figure). There is, therefore, vast room for technological development in today’s agricultural sector to boost productivity and efficiency, and we expect a transition to “smart” agricultural technologies over the next decade and beyond. Agriculture is a vast and growing sector, and as such it presents massive investment opportunities.

Going into the future, "smart" (and "climate smart") agriculture will include advanced irrigation and precision technologies, benign environmental residues from chemicals, an efficient distribution and marketing system for producers and a consumer-led demand market for sustainably grown foods.

Reducing waste in the food system presents an investment opportunity with resource productivity savings worth $340 billion globally, per year, by 2030. This opportunity spans both high-income economies where supply chains are more efficient to middle- and low-income economies with less advanced supply chains (such as modern cold storage systems). In high-income economies a majority of the waste is either at the farm - where products are discarded because they do not meet quality specifications or because of over production - or by the end user. In middle- and low-income economies, however, inadequate supply chain infrastructure means that waste is concentrated, from post-harvest to distribution.

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The role of a global bank in investing in agriculture to mitigate climate change

The global agribusiness value chain is complex and represents significant opportunities for financial institutions. Each stage of the agriculture value chain has its own rewards as well as sector-specific environmental and social risks.

Global Capital Markets

In providing debt and equity financing through origination, structuring and underwriting, capital markets businesses are integrating climate mitigation and adaptation strategies into their advisory services. While the structuring of these deals may be no different, an orientation is given to identify and originate much needed emissions education and adaptation opportunities. They include creative structures to finance advanced irrigation systems, tailored agricultural derivatives opportunities that emerge from unique production systems, and corporate treasury solutions for financing commodity movement, risk management and trade finance.

The growing grain and resources trade results in increasing storage, transportation, port and logistics infrastructure. When evaluating deals pertaining to agricultural markets at large, keeping a diligent standard of reducing climate emissions is a needed core competence. While hedging products like swaps and options are routine for a large bank, tailoring solutions to account for the need to cut emissions is not. A transaction requires not only a sophisticated knowledge of direct agricultural commodity markets, but also experience with the carbon markets (both voluntary and mandated) as well as technical knowledge of the emissions abatement potential of a given project.

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Corporate Finance and Investment Banking

Advising major corporations, financial institutions, financial sponsors, governments and sovereigns on financing climate mitigation activities is another role of banks. Advising clients on M&A opportunities that seek to advance the climate mitigation and adaptation mission is also a key core competence of a modern climate-sensitive investment bank. Institutions or investment banks can promote these types of investments by financing projects for firms, raising funds dedicated to climate change mitigation, or by adaption including its underwriting standard to include mitigation clauses. As resource productivity and climate change becomes an ever-increasing imperative for competitive businesses, corporates will need advice on M&A and innovative financing structures that capture business opportunities.

Equity Research

Building on the results of macroeconomic  and trend research, food and agribusiness equity research provides a research platform that can enhance the understanding of the sub-industries and help determine the financial value of resource efficiency and adaptation projects to corporate earnings. It is essential that sustainability and climate change risk factors are integrated into valuation models of global agribusinesses.

Asset Management

The Asset Management business is a key provider of capital and of exposure to all aspects of the agricultural value chain as well as across all asset classes.
Funds focused on agribusiness can provide trading liquidity for these firms. Beyond this, asset managers, through their ownership of large blocks of shares, can engage companies and promote mitigation activities. Agricultural commodity funds provide exposure to the sector through futures contracts and are able to manage the optimum roll strategy.

Real asset funds can provide investors with several models of agricultural investing, including buy and lease or buy and operate. These funds exhibit a variety of diversification benefits as well as inflation protection. Moreover, real asset funds focused on mitigation projects, such as carbon-efficient logistics, storage facilities and new transportation corridors, will provide benefits for mitigation projects and provide financing for smaller projects with mitigation benefits. Sustainability-focused real asset funds that adhere to the UN principles for responsible investment (PRI) will seek to finance mitigation activities or at least consider mitigation in the due diligence of the investments.

Private Equity funds offer thematic investments in growth stage agri-technology companies as well as expansion capital needed for companies providing mitigation solutions, whether they be farm land, farm management or vertically integrated production, processing and distribution. Technological advances at any point in the food supply chain (production, handling, logistics, processing or distribution) will require financing at various stages of development, across many countries.

Additional fund opportunities include public-private partnerships, which bring both the asset manager and the public entity (government agencies or international aid agencies) closer to their goal, providing much needed debt capital as well as equity capital.

Jamshed Irani: Fighting Global Hunger by Throwing Away Less

Jamshed Irani
Dr. Irani is a former director of the Indian conglomerate Tata Sons Ltd, and is a member of the Deutsche Bank Climate Change Advisory Board

The need to double food production and reduce food waste creates the need for an integrated response. Jamshed Irani, Former Director, Tata Sons Limited (India) and Member of the Deutsche Bank Climate Change Advisory Board, on the determinants of food security in India and the challenges that are ahead.