Eoin McDonald is managing director of GreenAgCapital, an investor in food and agriculture.
It’s not often that the combined net effect of decades of monetary policy, globalisation and private equity are seemingly summed up in one tweet photo.
Behold, a crustless NYC sandwich on “Health Bread” (?) for $29. Plus tip and tax, that’s probably closer to $38? (NB below is a screenshot because Elon seems to be messing Twitter up again, but the tweet can be found here).
Europeans cannot fathom such lunacy, wondering if it comes with a side order of diamonds. My WhatsApp finance groups also laughed and were quick to make comparisons to my personal favourite, Pret’s Chicken Salad & Avocado Sandwich, which costs a more reasonable £8.79. But what is in the price of a sandwich, really?
Anyone who has braved the aisles of American supermarkets and delis know the stark difference in grocery prices between the two continents. A single loaf of bread (that never seems to age) can set you back a small fortune in the US. Meanwhile, even on the indulgent coast of Portofino, Italy, high-quality pastries only cost a few euros.
Ignoring the incredulous responses from social media — which attributed the price rise to what was once “transitory” and now “stubborn” inflation — it is worth reflecting on whether the “Health Bread” sandwich is forewarning European consumers.
Because Europeans might soon be exposed to the same exorbitant prices for fresh food, as the continent’s agri-food sector slowly shifts towards the consolidated US model.
Food for thought
Over the past three decades, European consumers have enjoyed an unprecedented abundance of produce at affordable prices, available year-round on supermarket shelves.
Ever buy Spanish strawberries and wonder how they are so cheap? That’s because the European market — one of the most lucrative and competitive in the world — has been dominated by major retailers such as Aldi, Tesco, and Auchan. Over the past decade, they have exerted increasingly significant control over the landscape, and benefited from the highly fragmented and subsidised European farmers that rely on support from the European Common Agricultural Policy (CAP).
This asymmetric power dynamic has overwhelmingly benefited les supermarchés and their associated consolidators, as they dictated fresh produce pricing.
However, the future of the global food supply chain is going to look very different from the past. Two core trends — market consolidation and climate change — are poised to bring irreversible change to the European food industry.
Industry consolidation
À la style in the US, one of the main drivers of change is industry consolidation, driven by the need for extreme efficiencies and economies of scale to offset higher input, capital investment, and regulatory compliance costs.
As a result, farming operations are being forced to consolidate and integrate across the value chain. Hence, ye olde simple farm model that we’ve grown up with must now give way to more complex corporate family businesses; larger farms with better access to technology, equipment, and non-family labour. (And yes, for the British, this means that Brexit has screwed them.)
Consolidation not only allows for greater negotiating power with suppliers and buyers, but also improves access to credit and capital. The result is a more streamlined and efficient food production process that can better navigate the challenges posed by a changing climate and supply chain disruptions.
But consolidation also means an increased likelihood of $29 sandwiches.
Climate change
Nelly put it well when he said that it’s getting hot in here. Increased climate volatility — in the form of increased periods of prolonged drought, severe flooding, unseasonable heat spikes and frost events — will probably have a significant impact on food production. The result will be more frequent shocks to the system.
Although technological advances within the agricultural industry continue to mitigate the impact, they may not be enough to eliminate the extremes. Remember the Napa Valley fires and the unseasonably late Bordeaux frost that horrifyingly destroyed the wine grapes that we need to get through the week? Those types of extremes.
Farming technology that could help includes new patent-protected crop varieties that are more resilient to extreme weather events. But will this technology be enough? Maybe, but science says probably not.
And these technologies are capital-intensive. That means that farmers unable to afford them will exit farming altogether. In turn, that leads to even greater consolidation, and ultimately to higher prices.
The more we need these technologies, the more our lunchtime Prets are going to cost us.
I Am America (And So Can You!)
They say that those who laugh last, laugh the loudest; and I suspect we’re laughing too soon at the crazy Manhattanites. The continued consolidation of the food supply chain will create a winner-takes-all phenomenon with a smaller number of suppliers controlling the wider food industry.
Indeed, it is also likely that periodic disruption of global food chains will persist, if not increase. I would nearly bet that fresh produce will soon be marketed as a luxury good. Europe’s future is written on the US wall: close to monopolistic integration of the food supply chain and significantly more expensive food.
The question is, who in Europe will be willing to pay $29 for a sandwich? And will it, at least, have the crusts still left on?
