Climate change policies and technology developments are shifting consumer demand towards more sustainable diets, leading to significant disruptions for the global agriculture sector, according to a report.
The sector is facing pressure to address drivers of deforestation and land-use change, which could lead to higher raw materials costs, more supply chain investments and reduced demand for certain products, Fitch Ratings said.
The emergence of cell-based meats and meat alternatives could create opportunities for some players in agribusiness while causing demand destruction for others, it said.
“The agribusiness sector has been largely shielded from climate-related policies because of the difficulty in monitoring emissions from the sector and concerns that it would raise food prices,” the credit rating agency said.
“In addition, curbing emissions is often equated with reduction of production volumes, which is unpopular in view of food security concerns and the economic importance of agricultural exports for some countries.”
The agriculture, land use and forestry sector is the second-largest contributor to global climate change emissions after energy, accounting for 22 per cent of global greenhouse gas emissions in 2019, the report said, citing the Intergovernmental Panel on Climate Change. Agricultural production made up about half of the sector's emissions.
Most emissions from agriculture are in the form of methane and nitrous oxide, which have a much more significant warming effect than the carbon dioxide that the energy sector emits.
Agriculture also accounts for 70 per cent of all fresh water withdrawn from rivers, lakes and aquifers, and for 80 per cent to 90 per cent of fresh water consumption by human activities.
Fitch expects governments to act on Cop26 pledges related to agribusiness by broadening emissions-trading schemes, implementing environmental trade protectionism rules and increasing funding for private sector-led climate mitigation initiatives in 2022.
The global agriculture sector will be reshaped by climate policies, more investor scrutiny and shifting consumer preferences for healthier and more sustainable products, the report said.
“Its main challenge will be to feed 1.5 billion more people sustainably and nutritiously by 2050, while reducing greenhouse gas emissions from its key sources, including livestock, fertilisers, rice production and energy use,” Fitch said.
This is a complicated task because emissions from agriculture are a result of the activities of two billion farmers and not large companies, making it difficult to enforce compliance with sustainability standards.
The responsibility will therefore lie with large companies in the value chain such as commodity traders and processors, as well as consumer-facing food companies.
As many of these businesses are privately owned, they face fewer requirements for disclosure and improving climate performance than publicly-traded companies.
“The fragmented nature of the agribusiness sector will present challenges for implementing tighter emissions standards, but pressure from investors and regulators to limit land conversion will grow,” Fitch said.
Animal protein producers will face the biggest disruption within the agriculture sector as a coming rise in regulations will increase operating costs and capital expenditure while reducing their potential market access and revenue, it said.
“Fitch expects the impact to be more imminent in developed countries as many of them have already introduced greenhouse gas emission reduction targets and regulation for agriculture,” the agency said.
Global meat consumption will peak by 2030 and decline quickly after meat alternatives become more affordable by 2035, Fitch said.
A technological breakthrough in cell-based meats will significantly reduce production costs and make the nutrition, texture and taste of cultured meat more similar to animal meat.
“This could accelerate the consumption shift towards alternative protein sources. Affordability could also make it easier for people in emerging markets to adopt new diets,” it said.
Alternative meats could have a 28 per cent market share of meat consumption by 2050, it said.
A decline in meat production will also reduce fertilisers used to make fodder as less feed will be required.
Part of the current pasture and range lands can then be replaced with forests and cropland, which will help to capture greenhouse gases from the atmosphere and further limit global warming, Fitch said.