What levers should be used for a better EU agriculture system?

Food security - considering all ESG aspects - demands a new climate of innovation that supports effective plant protection products in the EU.

In brief

• Amid economic and political pressure, e.g., Green Deal, the EU needs productive, sustainable agriculture to meet food security and affordability challenges.
• The toolkit of plant protection products - synthetic, biocontrol and new tech are at different levels of maturity owing to innovation, investment levels and opportunity costs.
• EY study on return-on-investment shows the need for favorable innovation environment to better support the aim of food security in the EU.

As the world population grows, so too does pressure on our food system¹. The situation is compounded by unpredictability in global supply chains as well as the continual reduction in the amount of arable land accessible to farmers².

To ensure a safe and consistent food supply – in terms of both yield (for volume) and quality (to maintain nutritional value over a longer storage period) – all participants in the agricultural ecosystem must collaborate.

Farmers require inputs such as water, land, seed, equipment, finance, crop protection and crop nutrition to safeguard their yield, achieve profitability and contribute sustainably to the food supply system. This means they need at their disposal a toolkit of products, techniques and technologies that support these aims. 

A definition of plant protection products

Plant protection products (PPP) are solutions that farmers use at the right time to control any pest or diseases on their crop. Historically, synthetic products have been utilized to enable better control of the crops, however, innovative exploration in digital and biocontrol spaces are being explored as additional – and sometimes complementary – toolkit options. 

With many practical challenges to overcome regarding novel PPP approaches, regulators across the world should continue to build on their mission to ensure that when used appropriately, all PPP are safe for all stakeholders, including farmers.

In this article, EY (we) focus on the regulatory environment for PPP in the European Union (EU), providing insights based on our industry research. We have also put forward our proposal for the EU’s legislative framework for sustainable food systems.

Complication - Regulatory pressure

In the agricultural industry, there is a tendency toward more stringent regulations for agricultural input in developed nations than in developing nations3. In the EU in particular, complexity of regulatory frameworks for PPPs are higher than other geographies4. The EU is keen on promoting non-chemical alternatives for pest control and integrated pest management (IPM) systems, especially focusing on biological pesticides, known as biocontrols5. This is in line with the overall trend toward increasing regulatory requirements for PPP in the EU, including the recent Chemicals Strategy for Sustainability (CSS) to achieve more biodiversity and mitigate climate change.

For instance, by 2030 the European Commission has committed to reducing by 50% the usage and risk of chemical pesticides and reducing by 50% the use of more hazardous pesticides via the Farm to Fork (F2F), European Green Deal (GD), and Biodiversity strategies. This is in addition to a 50% decrease in the number of approved active substances in pesticides over the last 25 years, according to the European Commission, the European Food Safety Authority (EFSA) and EU member states.

While choices for plant protection are decreasing, the volume of plant protection product sales within the EU has remained relatively consistent since 2016, demonstrating farmers’ need for these products as a toolkit to protect their crops. Given the stable volume, a range of products is essential to enable rotation. Otherwise, there’s an increased risk of pest, weed & disease resistance building up – and efficacy decreasing.

The outcomes that the European Commission wants to achieve with the GD and F2F are well understood and acknowledged by various stakeholders. The question is how to get there. The current focus on restricting PPP – without opening new options for innovation – does not seem conducive to finding a long-term solution.

EY analysis: the economics of first approval

EY examined the economic aspects of having a typical synthetic and biocontrol PPPs approved for the first time in order to better understand the attractiveness of developing the required new active substances for the EU market specifically. In order to assess the return-on-investment (ROI), we developed Net Present Value (NPV) estimates for synthetic and biocontrol PPP based on publicly available data and assumptions from expert interviews with key stakeholders in the PPP business, assuming averages based on typical active substances for a broad (e.g., wheat, corn crop) market. The NPV calculation considered the expected research, development and registration timelines and costs, the expected product sales projections with the related relevant operating costs and cost of capital to translate the future cash flows to the current value.

Study note

Our approach is intended to demonstrate the interplay of relevant relationships and cost mechanisms; the actual value of individual crop protection products will vary. Our findings are intended to serve as a basis for discussion on the interdependencies and effects of new regulations on the innovation activity level of PPP suppliers and the historic adequacy of such regulations to achieve the envisaged results. 

Key notes on methodology followed

• We have considered a typical product research and development cycle for synthetic and biocontrol PPP
• We have built our model based on data from multinational PPP manufacturers who develop both synthetic and biocontrol PPPs while operating globally and have a significant presence within the EU. During interviews, relevant insights for this study on investment schemes, financial projections and risk evaluations have been received. 
• We have benchmarked our inputs to the model based on expert interviews with leading industry experts and EY experts to derive the ROI for synthetic and biocontrol PPPs
• We have done literature and market report analysis to further validate inputs received from expert interviews

Through our model, we derive a ROI rate for synthetic PPP in the EU that is lower than the global figure by nearly 40%. The value does not account for the risk of failure or investment in an active substance which does not ultimately make it to market and does not generate any return. Indeed, R&D for the EU market specifically is riskier, as the chances for successful EU registration are lower and there is no opportunity for geographical diversification. Longer registration timelines, smaller market potential and high R&D costs are factors explaining the lower ROI in the EU. Smaller market segments within the EU (e.g. specific nut crops) have an even higher disadvantage with similar R&D costs lowering the return.

The economics of biocontrol PPP vary considerably from those of synthetic products. Typically, their mode of action is narrower, resulting in a smaller potential market segment. It is important to note here that, the EU is building on biocontrol for its GD and F2F strategy.

Through our model, we derive a ROI rate for biocontrol PPP in EU that is lower than the global figure by nearly 30%. Against this background, it remains financially challenging to justify investments in biocontrol R&D given the present cost structures and opportunity costs.

High potential cost of disinvestment

Disinvestment in R&D activities will have the highest impact on small market segments (e.g. several nut crops). Large EU market sectors (e.g., wheat crop) are still lucrative enough to justify an EU-focused R&D approach, despite high development and maintenance costs and a significant degree of uncertainty about successful registration. This impacts several important crops for EU agriculture and consumers, including fruits and vegetables. As a consequence, there will likely be fewer solutions available to control diseases and pests.

EY’s sample ROI calculation underlines the threat to private research investment in synthetic and biocontrol PPP for the EU. The current lack of private R&D investment presently is contradicting the intention of the European PPP market, since missing innovation is likely to restrict European farmers’ choices for plant protection and might restrict future solutions to currently existing portfolios. A shrinking pool of available products will also accelerate resistance to marketed products, adding additional pressure to the product situation.

Outlook – incentivizing innovation

If PPP manufacturers choose to focus on the larger, non-EU market and avoid the high opportunity costs and risks in the EU, the research pipeline for the EU market would diverge even further from the global research pipeline.

Developing active substances for the European market solely, with no plans to market them overseas, significantly increases the relative cost of such research, reduces sales expectations and makes investments less feasible. On the one hand this is due to the regulatory situation, and on the other hand due to low ROI and high financial risk. This is reflected in the 6:1 ratio of synthetic active substances under development in the global vs. EU pipeline.

Bringing a new PPP to market takes 10 years or more6– comparable to pharmaceuticals7 – so any decisions today incentivizing EU-specific research might take 10 years to materialize. So, the EU needs to think long-term if they want EU-specific research. Failure to innovate might impact the EU plan to implement GD and F2F strategies, food security and affordability, biodiversity, and food prices in the future, though this needs to be confirmed by further research and data validation.

Solution

We believe that the legislative framework for sustainable food systems – which the EU Commission plans to unveil in 2023 – should open the path for more innovation in the EU to support delivery of the goals of strategies such as the European Green Deal. There needs to be an economic incentive through legislation that supports companies investing in new research and development for the EU. Finding the right path will be essential if the all-important goal of food security is to be achieved.

To ensure the long-term availability of suitable PPPs, this new framework might incorporate the following five key elements:

1. Develop a framework for data requirements that facilitates regulatory approvals
2. Create dedicated legislation for biocontrols segment
3. Define regulatory timescales (maximum of two years) for submission to approval of products at member state level
4. Consider a shift from hazard-based decisions to risk-based registration
5. Scale up support systems for breakthrough innovations in the precision agriculture and biocontrol segments