The State of Food and Agriculture 2023

Chapter 1 Factoring the Costs and Benefits of Agrifood Systems into Decisions

  • The unsustainability and lack of resilience of agrifood systems are major concerns, exacerbated by market, institutional and policy failures that generate losses to society and inhibit much-needed transformation towards sustainability.
  • To improve outcomes, decision-makers need a comprehensive understanding of agrifood systems costs and benefits for all stakeholders, including under-represented groups and future generations, which are not being systematically and consistently measured.
  • A comprehensive understanding would enable available levers – from fiscal support and regulations to voluntary standards – to be better realigned and used more effectively towards more nutrition-, gender- and environmentally sensitive investment and policy actions.
  • True cost accounting (TCA) is a powerful approach to uncovering the hidden costs generated by current agrifood systems, underscoring their unsustainability and guiding the use of available levers to improve their outcomes.
  • True cost accounting requires large amounts of data, however, which can be a challenge, especially in low- and middle-income countries. Therefore, already available data need to be used to the greatest extent possible to avoid inaction.
  • This report proposes a two-phase assessment process that relies on TCA, starting with wider, initial national-level assessments to raise awareness and moving towards in-depth and targeted evaluations to prioritize solutions and guide transformative action.

There are two sides to the story of agrifood systems. Both are true.

The first is that agrifood systems generate considerable benefits to society, not least because they produce the food that nourishes us. Agrifood systems are also the world’s biggest employer, providing jobs and livelihoods to over a billion people.1 Many farmers are also environmental stewards, supplying environmental services to society. Through sustainable practices, such as agroforestry, agrifood systems also generate public benefits, including biodiversity conservation, carbon storage and sequestration, and watershed regulation. As such, the value to society of agrifood systems is likely well beyond what is measured in gross domestic product (GDP). The other side is that, due to market, policy and institutional failures, agrifood systems are fragile and unsustainable, contributing to climate change and natural resource degradation while failing to provide healthy diets to all. With our existence relying on just one planet and fragile agrifood systems, we need to tread carefully.

Agrifood systems have been evolving since the beginning of agriculture, thousands of years ago. Thanks to technological change and innovation in the last 70 years, agricultural productivity has increased tremendously. Meanwhile, food trading has grown enormously, especially in the last three decades. These factors have helped feed a population that has tripled and become more urbanized. Consequently, the share of the population employed in agriculture has declined, while jobs have been created in upstream and downstream value chains and other sectors.

Today’s agrifood systems have access to a new generation of automated technologies with the potential to enhance productivity and resilience and address environmental sustainability challenges.2 Detailed socioeconomic and environmental data are increasingly available, giving agrifood producers and firms, as well as policymakers, the opportunity to make data-driven decisions relating to production, supply chains, trade, social protection and so on. With the rising challenges agrifood systems face, the growing means of gathering data and information provide an unprecedented opportunity to strategically fill knowledge gaps so that decision-makers are better prepared to transform agrifood systems towards economic, social and environmental sustainability.

How do we make decisions that will amplify the benefits of agrifood systems while addressing the key challenges that hamper their transformation? How do governments know which programmes to sponsor and which stakeholders to support? How do agricultural producers ensure that the natural resources on which they depend will renew for subsequent seasons? How can retailers promote nutritious foods? How can consumers be induced to use their purchasing power to support healthy and sustainable diets? And will these decisions affect the costs of production and, ultimately, food prices?

On a day-to-day basis, we do not have all the answers, but people, businesses and governments make decisions, nonetheless. To these, there are consequences – both good and bad – that are not always visible. This edition of The State of Food and Agriculture aims to initiate a process that aspires to analyse the complexity and interdependencies of agrifood systems and how they affect the environment, society, health and the economy through true cost accounting (TCA). Doing so will reveal their hidden impacts and inform actions that contribute to their transformation towards efficiency, inclusiveness, resilience and sustainability.

Unpacking the impacts and dependencies of agrifood systems

Agrifood systems are dynamic, from their layered composition to their interactions with the resources that underpin nature and society. They are also influenced by policy, business and consumer decisions. Figure 1 illustrates a conceptual framework depicting the inner workings of agrifood systems, their effects on resources (and vice versa) and the levers available to transform them. The framework helps to break down the numerous impacts and interdependencies of agrifood systems, as well as the opportunities for decision-makers to steer them for the better.

FIGURE 1 How assessments of capital flows can inform levers for agrifood systems transformation

An infographic lists how assessments of capital flows can inform levers for agrifood systems transformation.
SOURCES: Adapted from FAO, IFAD, UNICEF, WFP & WHO. 2022. The State of Food Security and Nutrition in the World 2022. Repurposing food and agricultural policies to make healthy diets more affordable. Rome, FAO.; TEEB. 2018. TEEB for Agriculture & Food: Scientific and Economic Foundations. Geneva, Switzerland, UN Environment.

The yellow rectangle in Figure 1 represents agrifood systems, showing how they comprise agricultural production and food supply chains, consumer behaviour, diets and interconnections with other systems, such as environmental and health systems. Agricultural production includes crop and livestock production, aquaculture, fisheries and forestry. Overlapping with food supply chains, consumer behaviours and diets are food environments, which refer to the physical, economic, sociocultural and policy conditions that shape access, affordability, safety and food preferences.35 The arrows flowing in and out of agrifood systems demonstrate how their activities depend on – as well as affect – natural, human, social and produced capitals. These form the foundation of human well-being, economic success and environmental sustainability, and are defined as:6

  • natural capital: the stock of renewable and non-renewable natural resources that combine to yield a flow of benefits to people;
  • human capital: the knowledge, skills, competencies and attributes embodied in individuals that contribute to improved performance and well-being;
  • social capital: the networks, together with shared norms, values and understanding, that facilitate cooperation within and among groups; and
  • produced capital: the human-made goods and financial assets that are used to produce goods and services consumed by society.

The activities of agrifood systems cause changes (impacts) in the capitals through inward and outward flows. The large arrows represent those impacts and dependencies, with colours corresponding to the respective capital. The capital flows of agrifood systems can be akin to symbiotic relationships in many contexts. For example, natural capital contributes biomass growth and freshwater to agrifood systems (the green arrow pointing up to “agrifood systems”). In return, agrifood systems can negatively affect natural capital with greenhouse gas (GHG) emissions and pollution (the yellow arrow pointing down to “natural capital”). In contrast, if regenerative agriculture is used, production practices can contribute to ecosystem restoration. Human capital sends in labour and skills and agrifood systems return wages and decent working conditions. Social capital can contribute to agrifood systems through cultural knowledge and shape customs of access to resources such as land, while agrifood systems produce food security and nutrition (or food insecurity and malnutrition) in return, depending on their efficiency, resilience and inclusiveness. Produced capital contributes research and development, among other things, and agrifood systems generate income, profits, rent and taxes in return. While these flows seem intuitive, little has been done to measure them and manage their impacts, with the exception of produced capital.

At the top of the figure, the red rectangles showcase the available tools, or levers, for influencing agrifood systems actors, activities and impacts. These levers are not new and are currently used by decision-makers, including governments and other stakeholders, who determine or influence which, when, where and how they are engaged. The following paragraphs describe the main categories of levers, which can be quite numerous and diverse. However, the section does not aim to be exhaustive and other potential levers may exist.

Many, but not all, levers are enacted and administered by governments and local authorities to influence agrifood systems actors and steer them towards objectives considered important by policymakers. They include trade and market interventions, subsidies, laws and regulations, general services support, and behavioural policies.7

Governments generate price incentives or disincentives through trade and market interventions. These generally consist of border measures (such as import tariffs or quotas, export bans or subsidies) and/or market price regulations (such as domestic price fixation policies). These interventions create a gap between the domestic and international prices of targeted products and/or help to curb demand for targeted foods.

Subsidies granted to individual producers or consumers can aim to correct issues such as limited availability of credit or to induce a behaviour considered desirable by policymakers. In the case of producers, these can be “coupled” (that is, tied to the level of production or to the use of inputs or other factors of production) or “uncoupled” (that is, not linked to production decisions). When coupled, subsidies can greatly influence which commodities are produced and marketed and which inputs are used and how. As for consumers, these can take the form of food subsidies, cash transfers, in-kind food transfers or school feeding programmes as a way of improving access to food.7

Such public policies are enacted and shaped by laws and regulations. These mandatory frameworks are used to set standards and targets, which directly affect the decisions of agrifood actors. Examples include when governments restrict imports of certain commodities or products by imposing non-tariff barriers or when they ban the use of a specific agricultural input that has proved harmful to human health or the environment.

To improve the performance of agrifood systems, governments provide general services support. The specific support depends on the context, but can include investments in agricultural research and development, including monitoring systems and the production of relevant data; knowledge transfer services (such as training, technical assistance and other extension services); inspection and control with regard to agricultural product safety, pests and diseases to ensure that food products conform to regulations and product safety norms; infrastructure development and maintenance; public stockholding, including maintaining and managing reserves through market purchase intervention; and food and agricultural marketing services and promotion.7 Such investments create an enabling environment for agrifood systems transformation.

Governments and other stakeholders can use policies based on insights from behavioural sociology and psychology studies to address the underlying causes of certain behaviours, such as the consumption of unhealthy processed foods.8 These insights are referred to in this report as behavioural policies and they differ from other policies, such as taxes and subsidies, in that they do not reduce people’s freedom of choice or impose any significant costs on them to induce a change in behaviour. Instead, they operate by changing the contexts or environments in which decisions are made. In the context of food consumption dominated by unhealthy processed foods, for instance, behavioural policies may focus in establishing or promoting a conducive environment that promotes the supply and the consumption of nutritious foods (see Glossary). They can provide insights to governments on regulating the food environment to achieve certain objectives, such as promoting the consumption of healthy diets that are also environmentally friendly. For example, behavioural policies can try to nudge consumers towards better food choices, such as placing nutritious food options in locations around school cafeterias that make them easier to reach.9 They can also regulate the behaviours of food businesses (such as supermarkets) to better promote healthy eating.

Some levers can also be administered by private and civil society agrifood actors, as well as donors and international organizations. For example, private capital from businesses, financial institutions and even consumers is one of the most significant levers in agrifood systems, amounting to as much as USD 9 trillion yearly.10 Different studies have concluded that private capital plays a successful role in improving agricultural production techniques and technologies.11 Another lever is voluntary standards, which are non-mandatory rules, guidelines or characteristics about a product or a process developed by private-sector actors, representatives of civil society, or public-sector agencies. Voluntary standards are a means for producers, processors and retailers to share information with consumers, enabling them to influence production processes, methods and practices with their consumption choices.12 While private capital and voluntary standards are not enacted by policymakers, governments still play an important role in shaping their functioning and impact by providing the enabling environment and oversight.

Lastly, Figure 1 shows how folding a holistic assessment of agrifood systems into the process of decision-making is critical to achieving many, if not all, of the Sustainable Development Goals (SDGs). The bottom section, entitled “Contributions to well-being”, connects agrifood systems impacts with the 2030 Agenda for Sustainable Development, a plan of action for people, planet and prosperity. Of particular relevance is the impact this can have on SDG 1 (No Poverty), SDG 2 (Zero Hunger) and SDG 3 (Good Health and Well-being) as a result of the relevance of agrifood systems to agricultural productivity, rural livelihoods, health, food security and nutrition. The transition to sustainable agrifood systems arising from better decision-making also implies progress on SDG 6 (Clean Water and Sanitation), SDG 7 (Affordable and Clean Energy), SDG 12 (Responsible Production and Consumption) and SDGs 13, 14 and 15 on Climate Action, Life below Water and Life on Land. This transition will rely on new technologies that can function as a catalyst for progress towards SDG 9 (Industry, Innovation and Infrastructure). By assessing how human capital is formed and treated, it can also improve workers’ access to education (SDG 4), reduce gender inequality (SDG 5) and contribute to decent work and economic growth (SDG 8).

Levers can steer systems in the right direction, but better accounting of agrifood systems is needed

When decision-makers lack a full assessment of the capital stocks and flows, the resulting knowledge gap can hinder progress towards more sustainable and resilient agrifood systems. For instance, it is estimated that, on average, governments spent almost USD 630 billion per year over 2013–2018 on food and agricultural support, of which 70 percent targeted individual producers through price incentives and subsidies. However, a significant proportion of this support distorts market prices and is unsustainable.7 Box 1 provides an overview of the state of public support for food and agriculture and its impact on agrifood systems.

Box 1Public support for food and agriculture is still highly distortive

Governments support the multifaceted objectives of agrifood systems in the economic, social and health realms by shaping production and consumption choices, as well as by affecting food supply-chain dynamics and food environments. However, evidence shows that most of the support used is highly distortive and can lead to undesirable outcomes, such as negative environmental consequences or health problems.7

The figure shows how food and agriculture support as a share of production value is divided by income group and type of support (average 2013–2018). In absolute terms, high-income countries and upper-middle-income countries accounted for the bulk of support, averaging USD 313 billion and USD 311 billion, respectively, compared with USD 11 billion in lower-middle-income countries and USD −6 billion in low-income countries (the negative value means the group is penalized overall). As a share of production value, price incentives and subsidies to producers were the most important form of support in high-income countries (22 percent) and upper-middle-income countries (16 percent). In both income groups, but especially in upper-middle-income countries, the majority of subsidies were linked to production, input use or other factors of production (in other words, they were coupled). This strong reliance on coupled subsidies has the potential to distort prices and discourage the production of nutritious foods that do not receive the same level of support. Similarly, evidence shows that in these countries, commodities with the largest carbon footprint, such as beef, milk and rice, were among those most supported by price incentives.7

In lower-middle-income countries, and especially in low-income countries, policies commonly protect consumers rather than producers. Farmers face disincentives that keep domestic prices low, implicitly penalizing the farming sector, and this is shown by the negative values associated with price incentives in the figure. Low-income countries rarely grant fiscal subsidies to producers (they account for just 0.6 percent of the total value of production), while in lower-middle-income countries, some farmers receive support through input subsidies. Spending on general services is a small share of total support for food and agriculture, despite its potential to boost long-term productivity and lower food prices, including for nutritious foods.7 Despite these challenges, evidence from 13 sub-Saharan African countries over 2004–2018 indicates that, following recent reforms, some input subsidy programmes have been downsized, increasing the fiscal space to allocate more funds to general services and public goods, which generate more sustainable and broad-based impacts.13 Programmes supporting consumers also have the potential to increase the consumption of nutritious foods, especially when they target the most vulnerable. The same review on sub-Saharan Africa has shown that, as a result of recent reforms, subsidies to consumers in the form of cash transfers, in-kind transfers and school meal programmes have also increased.

FIGURE Support for food and agriculture as a share of production value, by income group and type of support, average 2013–2018

A stack bar chart plots the support for food and agriculture as a share of production value.
SOURCE: Adapted from FAO, IFAD, UNICEF, WFP & WHO. 2022. The State of Food Security and Nutrition in the World 2022. Repurposing food and agricultural policies to make healthy diets more affordable. Rome, FAO.

With more information on the impacts and dependencies of agrifood systems on the capitals, policymakers will be better able to use public support for food and agriculture as a transformative tool for directing agrifood systems towards sustainability, resilience and inclusiveness. The same principle applies to other stakeholders, including agricultural producers and businesses, whose levers can bring about greater system-wide change if they are equipped with more information on their impacts. Therefore, an important first step for stakeholders, including governments, businesses, farmers and citizens, is to gather available information on capital flows and impacts.

Data that are usually available and commonly included in economic assessments pertain to produced capital and, to some extent, human capital (for example, labour and wages). These capital flows and impacts are transacted and observed through market mechanisms, so are easily measured and quantified. Flows and impacts related to natural, social and (part of) human capital, in contrast, are not, so their inclusion in economic assessments is largely partial and not systematic. For example, while incomes and taxes are captured by GDP, the distribution of these outcomes across gender and social classes (and the consequences for food security and nutrition, that is, for social capital) are less visible. Similarly, while market-based inputs are directly reflected in the private production costs of producers, the inputs of ecosystem services (for example, pollination) are not, although they are fundamental for agricultural productivity. Not accounting for these services may hinder the capacity of ecosystems to deliver them in the future, an important measure of sustainability.14

However, quantifying capital flows and impacts can be complicated by a lack of data or by the flows being qualitative in nature. This can be seen in Figure 2, which provides a schematic representation of the four capitals and a selection of their flows along a spectrum of ease of quantification, from very high to very low. For example, quantifying the impact of agrifood systems on food security and nutrition is possible, but requires large amounts of data and significant capacities. For other social capital flows, such as social networks and cultural knowledge, this is even more challenging, if not impossible. Natural capital flows are generally easier to quantify than social capital flows, but in some cases, this can still be very challenging (for example, pollination and habitat loss). In reality, the ease of quantification for each capital flow will depend on resources and capacities, ranging from, among other things, mobilizing resources and developing valuation methods to designing surveys and collecting and analysing data. Advances in technology and evaluation approaches are increasingly expanding the options available and reducing the resources needed to store, communicate, validate and process information.15 And even where important flows are not quantified, they can still be considered in a qualitative manner.

FIGURE 2 Ease of quantification for selected capital flows along a spectrum

A chart lists the ease of quantification for selected capital flows along a spectrum.
SOURCE: Authors' own elaboration.

Decisions based exclusively on flows observed through markets tend to lead to the suboptimal allocation of resources, also known as “market failure”. Recognizing that markets cannot address problems of inequality and social justice, or of environmental sustainability, governments and other stakeholders establish policies and create institutions to address them. However, when they fail to do so or lack the capacity to intervene, a form of “institutional” or “policy failure” may also arise. The next section inspects these failures in more detail and acknowledges that an approach to assessing agrifood systems in a comprehensive and transparent manner is needed in order to address them. Such an approach is introduced later in the chapter.

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