This story is written by Belawal Khan, CFO at Dagens.
The majority of the systems our society is built upon are fragile. They are fragile because a large portion of the system’s output is concentrated in the hands of a few major players. An example of a relatively weak system is the financial system of 2008. Big amounts of meaningful assets were concentrated in the hands of a few players, and when one of these major players faltered the entire system was on the brink of collapse.
After a long period of shortcuts and false optimization crisis struck. Lehman Brothers went bankrupt, and other “too big to fail” financial institutions were on the verge of following suit. Note that “too big to fail” in this context does not describe companies with a competitive advantage because of their size, but rather that if they fail, their failure will have severe negative consequences for our society. A robust system can be described as one with many nodes capable of performing the same task without being dependent on each other. This can mean that when one node, i.e., company, part of a value chain, goes down, the other nodes can easily pick up the slack without affecting the output. In other words, one can say that a system is robust if it does not collapse or negatively impact the well-being of its participants when certain parts of it fail. Now, I am well aware of the fact that the statement about the factors leading to the 2008 financial crisis is somewhat an oversimplification of the massive failure of our systems, but the point is merely the following. If a system has too many players that can be categorised as “too big to fail”, the system is fragile.
There are however silver linings after a big shock like the one in 2008. For instance, after a major shock, we often witness significant innovation simply because there is a need for it coupled with people being more willing to try new things. The reason for the latter point might be that a shock often punctures established truths leading to the market being more willing to try something new. Consider short-term renting of your primary home. This was previously unheard of, but post-2008 it became fairly normal as many people had limited funds but still wanted to travel. Along came Airbnb to provide budget-conscious travellers with a cheaper alternative to hotels offered by people who saw that they could earn an extra income from these travellers.
Although the above is a form of innovation it is a business model innovation, which does not necessarily seek to make our financial systems more robust. That task was taken up by Blockchain. Blockchain technology’s core principle, as you probably know, is to make a system more robust and secure by decentralising it. In my opinion, anything that seeks to make something more robust and secure is great. Note that in this article, I am neither praising nor criticizing Blockchain; instead, I am applauding the logic that forms the basis of Blockchain, namely a decentralized system that does not allow any one party to consolidate in a way that makes them “too big to fail,” thus making the entire system more robust.
Our most important system is too fragile.
Now that some high-level background into what a fragile system is let us look into some of the ways in which our food system is weak. The food system has for decades seen centralisation/consolidation and as a consequence of this has made us increasingly exposed to potential terminal shocks. The risk discussed today is how the food system is controlled by the very few and how this consolidation has led the entire system to be more fragile. This centralisation might have for the first time in a long while, increased the likelihood of famine in the West.
Now, I understand if you believe it to be rather dramatic to mention famine, but would it be so still if I told you that 60% of the calories, we consume come from four commodities (wheat, rice, corn, and soybeans)? Would you still believe so? You might argue that it still is dramatic because this in itself is not a problem. Ok fine, but what if I told you that a handful of countries produce over 60% of the production of each of the mentioned calorie sources? Perhaps you are still unsure. Okay, but what if I told you that one of the major producers of one or more of these calorie sources declared war on another significant producer of these same commodities? Now, I hope that if you were not unsure earlier, you are at least unsure now because this was precisely the case with Russia’s invasion of Ukraine. These two countries were 2 out of 5 nations responsible for 65% of the world’s wheat production before the invasion. This coupled with the fact that four countries account for 76% of corn production, five produce 77% of the world’s rice, and three countries contribute to 86% of soybeans, of which three-quarters are used for animal feed should at least make you want to research the topic about whether our food system is fragile or not.
Now you might say that geographical concentration is to be expected. Not all parts of the world have the appropriate climate for food production. This is correct, but it is not only in terms of geographical centralisation we have made ourselves fragile. The trade also is controlled by very few players. For example, four companies control 90% of the world’s grain trade, four companies control 66% of the agrochemical market, four companies control 66% of the seed market and lastly and perhaps most concerning, 70% of all arable land is owned by 1% of all “farmers” who are not farmers but rather financial institutions. A financial institution’s primary job is to create value for its shareholders and more often than not the value created is limited to financial gains, which is often achieved through centralisation. Centralisation in most cases leads to better margins through economy of scale benefits and bargaining power over suppliers and buyers.
Another consequence of centralisation not being spoken enough about is that centralisation does not only mean consolidating power. It has also meant standardising food production methods, which has historically led to less product diversity and worse soil health. I am here referring to farming practices. Farming practices and soil health are two very important issues that need to be solved to get a truly resilient food system. I will not in this article discuss them in the detail they deserve, but I recommend you read about them. The purpose of this article, if not already gathered, is to discuss the centralisation of food production and its supply chains.
Anyway, and again, if the above does not strengthen your belief that the food system is overly concentrated and therefore not robust, it should at least compel you to explore the topic of our food system’s resiliency.
What happens when a system is on the verge of collapse?
Well, firstly it depends on what kind of system it is. Is it a social construct or is it a natural construct? Let us start discussing a system that is a social construct with the financial crisis of 2008 as a use case. In 2008, when Lehman Brothers went bankrupt and other financial institutions began to falter Central Banks had to resort to, amongst other tactics, Quantitative Easing. Quantitative Easing in its simplest form way can be viewed as Central Banks printing money to prevent the system from falling apart. Essentially, we created more of something that is a social construct to solve a problem created as a result of another social construct. Such measures are only possible in systems that are constructed by us not for natural systems — in the vast majority of cases.
Before we proceed, note that I am not saying here that financial systems have no value because they are social constructs, or that other systems created by us have no value. They certainly do have value. Value after all is determined by the participants in a system, and the more participants there are who trust a system, the greater its value, regardless of whether it is a construct. The financial system in this way, despite its many faults, is still a system that we trust and value evident through our actions.
Returning to Quantitative Easing, as mentioned, tactics like producing something out of nothing to solve a problem can only be done in systems that are not natural, allowing an escape from potential disaster if a robust system has not been built. The food system is not such a system because it is constructed from the resources our planet naturally provides. If the inputs this system requires to produce its output cease to exist, both natural and unnatural, and it collapses, we cannot simply create new food with a keystroke. Hence, if the food system collapses, it could lead to the collapse of all other systems because the participants in those other systems (humans) cannot survive without the food system, at least not in the foreseeable future.
So, what happens when a natural system is on the verge of collapse? Well, often it depends on what is meant by “verge”. Maybe verge means that we have time and we fix it and nothing happens, maybe it means we do not have time. If we do not have time then let your imagination run wild because no one really knows what truly happens when a natural system collapses. At Dagens, we believe the food system is struggling, but we do have time to heal it — the cancer is not terminal. However, we must act today. It does not matter the size of your contribution, but it does matter that you contribute to the effort to make our food system more robust.
How can we make the food system robust?
There are several ways to make our food system more robust. This includes but is not limited to, strengthening competition among actors so that the consumer’s product choices do not all come from the same five or so companies. It includes revising outdated subsidies that incentivize outdated methods of food production. It involves revising how we price products and services based on their contribution to society and the environment, including through an accounting system that accounts for the environmental cost to society for producing a product or service. Such an accounting system is being developed by many countries and also in Norway, albeit in most countries, the first version is scheduled to be ready in 2025 and later.
Another point on how to make our system more robust, which might be the most important one in this context is to decentralise the production of food so that no part of it is “too big too fail”. One meaningful way in which to do this is to maximise the amount of local and seasonal direct trade consumers and businesses do. If you do this, you will as a consequence of buying directly from the source decentralise the value chains and strengthen local supply chains, which after the last three years have never been more important for a country.
Local, seasonal and direct trade has long been dubbed as too expensive, cumbersome, unable to handle big volumes and not reliable. This is no longer the case with players such as us (Dagens). Not only have we created a simple and reliable way in which buyers can find local and seasonal produce at competitive prices, we have created a model that is able to handle tens of thousands of kilos a day and this is only scaling with demand. Our mission is to make the food system more resilient. By cutting out expensive intermediaries, we provide farmers and buyers with better margins on their transactions while at the same time decentralising the trade and strengthening local value chains.
While behavioural changes and the revision of business models and systems are necessary, we cannot afford to wait for a shock or recession before that happens. A shock in the food system could entail losses we might not come back from. Hence, we need to do something now. It is therefore important to understand that we are all on the same team. Everyone is part of the solution. It is not us against them. The problem we face is incredibly important, and we must avoid stumbling at the starting line by polarizing the issue to a point where nothing significant happens. We are where we are, and now we must solve the problem. Everyone must contribute. Some are ahead of others. Those who are ahead can step up as leaders and demonstrate that changing or revising the food system is possible so that others can follow suit.
It is also important to understand that the existing food system is not bad. It has brought about many good things, including safety, health, increased longevity, and more. But the system that has given us so much must be optimized based on the new reality so that it can continue to provide us with even more. The problem is significant, it is, but so are the opportunities so let us not find out what truly happens when a natural system collapses.
PS: If you think your workplace could increase the amount of local and seasonal food it serves in the lunch, or you are a chef at a canteen, restaurant or hotel and want to increase the amount of local and seasonal food you include in your menus, get in touch with us to learn how that is a possibility today!