"Then there will be nothing left to eat"
This is an English translation of an interview with Peter Brabeck-Letmathe in the leading Swiss newspaper, NZZ am Sonntag. Interview by Charlotte Jacquemart, Daniel Hug.
Nestlé chief Peter Brabeck warns against meeting the rising demand for fuel with bioethanol. The prices of agricultural commodities are climbing anyway – because of financial investors and demand from Asia.
NZZ am Sonntag: Nestlé has just revised its forecast for the current year and announced sales growth of 7.4%, although the prices of commodities are constantly rising. How do you manage to pass on the higher prices to consumers while maintaining the same level of demand?
Peter Brabeck: By improving the products. We increase their value and constantly renew them. Therefore we can increase prices. On average we reinvent, as it were, at least 20% of our existing products every year.
Do you also change the recipes at Nestlé? Do you replace raw materials that have become more expensive with cheaper ones?
Of course. This plays an important role in developing countries. A traditional wheat-based milk powder product is unaffordable for many people in Africa today, given the high prices being demanded for wheat. If we replace wheat with a local commodity, such as rice, we can keep the price steady. But the secret lies in the right combination. For example, today we have a series of products in which we have replaced the milk to some extent with other products, thereby obtaining a more nutritional milk powder. We replace high-price commodities with cheaper ones, while at the same time renewing our products. The result is acceptance of our higher prices.
It is unacceptable to pay enormous subsidies to make biofuels out of foodstuffs.
Peter Brabeck-Letmathe, Nestlé Chairman and CEO
What direction does this product innovation take?
Internally, we are guided by the formula 60/40 plus. We continually review all our products to establish whether they are preferred to competitor products by 60% of our buyers. That is the yardstick. The plus means the products have to be of greater nutritional value than those of other suppliers. Products that do not achieve this are placed on the medium-term hit list. We have detached ourselves, for example, from the pasta and tomato business.
How are the financial markets influencing the prices of agricultural commodities today?
Enormously, and that is a huge problem. The hedge funds are shifting increasingly from financials to commodities. Before, we could estimate approximately how the harvests would turn out – and could adjust prices accordingly. That’s a thing of the past. Today what is more important than the harvest is whether Calpers, the Californian pension fund, decides to enter the commodities market with USD 750 million – because then all the other pension funds in the world will do the same and invest USD 5 billion in the agricultural market at a stroke. It has all become very speculative.
Do you have to study the behaviour of pension fund managers now?
In a way. With various commodities we are already seeing the signs of a bubble, for example with coffee and cocoa – prices are a lot higher than they should be. But wheat will remain expensive.
How does Nestlé react to this? With longer supply agreements?
Three years ago we predicted commodity prices would rise – which no one believed at the time, because we had not seen any increases for 15 years. This is why we were better prepared than others for the rocketing commodity prices.
There are chocolate producers who practically have their own farmers in the producing countries. Does Nestlé also do this?
We buy the bulk of our milk direct from the milk producers. Altogether, we have 600,000 farmers worldwide who work directly for us, and 100,000 of them supply cocoa and coffee beans. This can help to reduce the speculation. But if you go to a coffee farmer in Costa Rica or San Salvador today, then he will be sitting high up on the hill in a hut, where he will show you on his computer exactly where the price of coffee stands in New York. The farmers today are happy, and that’s also good for us, because behind every farmer are around six family members who are in turn our consumers.
Do the massive commodity price increases not concern you then?
From a global point of view it certainly worries me. The population will grow to at least 9 billion people. Yet we are already having difficulty producing enough food for today’s 6.5 billion. This is due to new eating habits and the production of biofuels.
Why is a change in eating habits a problem?
People on higher incomes eat more meat. If 600 million of 1.3 billion Chinese switch from a rice-only diet to rice with chicken or pork, basic nutritional needs are multiplied as a result. To produce one calorie of meat, we need about eight times more grain than for the manufacture of a vegetarian calorie – and ten times more water. Hundreds of millions of people have recently emerged from poverty into a more pleasant lifestyle and suddenly have access to industrial products. And we are happy about that. What makes me unhappy is the boom in biofuels.
What is bad about that?
If the USA uses 138 million tons of sweet corn just for biofuel this year, this sweet corn will not be available for food production and will intensify the struggle for land. This leads to a situation where not only the price of sweet corn rises, but also that of soya and wheat. Arable land is becoming a scarce resource. The same is true of water, which is threatening to peter out on us. To produce 1 litre of bioethanol, you need 4000 litres of water! Water is a greater problem than CO2 emissions. Today, we are already tapping not only renewable water supplies, but also the fossil water reserves. These fossil reserves were created millions of years ago, like oil. That is not a problem for Switzerland with its rain-based agriculture. But the big producers today are irrigating almost all their fields artificially.
Where do the fossil water reserves lie?
In the south-west of the USA, India and China. There are also large subterranean reserves in the Sahara. For this reason, Ghadhafi has built a gigantic pipeline to pump this water to the north of Libya and irrigate the fields there. The Mandara lakes in the middle of the desert are visibly draining away. In India and China, water levels today are already falling by 1.5 metres a year. In the Indian Punjab, you already have to drill 100 metres down to find any water.
What are the consequences?
These countries no longer export wheat, but have to import grain because they are running out of water. The week before last, Saudi Arabia announced it would no longer be exporting wheat. Kazakhstan, a traditional “bread basket” country, and Argentina want to restrict their wheat exports. On the back of these announcements, the price of wheat rocketed 24% in a single day.
Is the wheat trade a kind of virtual water trade?
That’s right. This is why it is irresponsible and morally unacceptable to pay enormous subsidies to make biofuels out of foodstuffs. To meet 20% of the rising demand for oil through biofuels, as planned, will leave us with nothing to eat. That is political madness.
Europe vehemently rejects gene technology – why?
Europe is not dependent on it because there is enough water in many places. But we must not view the world only from our Alpine viewpoint. We can feed the few million Swiss and Austrian people for a long time to come. But not the remaining 9 billion. What is astonishing, however, is that gene technology was developed in Switzerland. It could have become one of the big economic pillars of the country. Today, the technology is in the hands of the Americans and Chinese.
Bill Gates propagates organic farming in Africa instead of gene technology. Does Gates not understand it?
I have never spoken to him about it. I’m a great organic food fan myself, and I buy organic bacon and schnaps. But the fact is we cannot feed the world with organic products. But for farmers in Switzerland, organic products are the right strategy, because they can charge higher prices for them.
Nestlé is one of the world’s largest sellers of water. Will you not profit when water becomes scarce?
We are global leaders in the water business, but we only use 0.0009% of all the water that is consumed. If you want to save water, you should drink more water and less coke, beer or wine, because it takes 1.5 litres of water to bottle 1 litre of water. You need 3 to 4 litres to produce 1 litre of a carbonated drink, or as much as 6 to 7 litres for one litre of beer.
What should we do about it?
Water needs a price. It is only because it costs nothing that people today use 4000 litres of water to produce 1 litre of biodiesel.
Is water not a human right?
Definitely – the 5 litres I need to live and the 20 litres for hygiene is. But water is not a human right if I use it to fill the swimming pool. South Africa provides every family with 6000 litres per person every month free of charge; anything over and above that is paid for. But a Spanish farmer or golf green operator pays only 2% of the effective water costs, and they are correspondingly carefree in their use of water.
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40 years in the service of Nestlé
Austrian Peter Brabeck-Letmathe has worked for Nestlé since 1968 – and is its Chairman and CEO. The company, with headquarters in Vevey, achieved sales of CHF 108 billion and a profit of CHF 10.7 billion in 2007. Brabeck, 63, will hand over to Belgian Paul Bulcke as CEO on 10 April, while retaining his position as Chairman.
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