In a world of plenty and scarcity, we currently have around 1 billion hungry and 1.5 billion overweight people. The environment is on its knees: loss of biodiversity, soil degradation, increase in greenhouse gases and water pollution are the result of sub-optimal agricultural, food processing and nutrition practices.

Recent volatility in food prices and financial markets has had short-term impacts but also made the long-term food-related challenges more obvious. In the report “The Global Food Equation”, Deutsche Bank Research examines these challenges and the development of their driving forces in a broader context. The author, Dr. Claire Schaffnit-Chatterjee, paints the following picture.

Demand for food is growing. Population and income growth will increase food demand. Demand is also changing in nature. "The growing middle-class in developing countries is increasingly adopting Western diets," comments Prof. Dr. Norbert Walter, Chief Economist of Deutsche Bank Group and Head of Deutsche Bank Research, just back from his trip to Asia. Income growth, globalisation and urbanisation all contribute to increased consumption of resource-intensive food, such as animal proteins. This increases the pressure on natural resources.

Food production in the coming decades will be characterised by increasing scarcity. Scarcity of water and energy will be exacerbated by climate change. Land will be in increasingly high demand, because of land degradation, urbanisation, land use for biofuel crops and carbon sinks.

The food equation is highly complex for several reasons. First, the challenges are inter-related: food production is both part of the problem and part of the solution when it comes to environmental degradation, climate change and energy. Water availability also requires energy, thus contributes to climate change, which in turn affects water availability. “Additionally, feedback loops and mitigation efforts will affect both sides of the equation,” says Claire Schaffnit-Chatterjee. All in all, the magnitude of the potential shortage is nearly impossible to forecast.

Feeding the growing population (nine billion in 2050) can still be achieved. Eradicating hunger is possible as long as the right choices are made. It requires sustained productivity growth in the agricultural sector in a way which is sustainable for the environment and society.

The world’s systems for producing, distributing and consuming food will need to change. While it is critical to boost food production, systems have to better cope with shocks and stresses, make more considerate use of resources and ensure more equitable access to food.

The transition from subsistence to commercial farming is an important key. 1.5 billion people live in households depending on small farms. Smallholder farmers need better access to the basics: education, knowledge, assets, credit, markets and risk management.

Business-as-usual is not an option. A holistic approach is required, involving all players: politicians, business and households.

Innovation through a cross-sectoral approach is essential. ICT and biotechnology are promising fields. “Ecologically-integrated approaches also show great potential: working with whole systems rather than individual crops, they are both environmentally and socially sustainable,” adds Claire Schaffnit-Chatterjee. These approaches distribute knowledge, power and autonomy to the farmers.

Reforms are crucial. Agricultural liberalisation is essential, towards better targeted support, food aid in cash rather than in food, and reviewed support regimes for biomass. “Trade needs to be further liberalised, with security of food supply integrated into trade rules, in order to avoid a damaging lapse into protectionism,” says Norbert Walter. The possibility of better global governance mechanisms for food security should be examined. Intellectual property rights need to be adjusted so that farmers have access to seeds.

Consumers must also do their part. “Watching what we eat and what we waste is an important aspect of the equation.” says Claire Schaffnit-Chatterjee. Adopting a less resource-intensive diet can go a long way in easing the pressure on natural resources.

The financial industry has a role to play in investing at various stages of the food supply chain, particularly for closing the production gap. Lending to small farmers is also an area with untapped potential.