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1.1 Tomra

THEMATIC RESEARCH REPORT

Food Tech

5th April 2019

Published by CityU Student Research & Investment Club

Talha Muhammad

Ho Chi Wang Cyrus

Harsharan Singh

Copyright © CityU Student Research & Investment Club 2

THE FINAL PAGE OF THIS REPORT CONTAINS A DETAILED DISCLAIMER

The content and opinions in this report are written by university students from the CityU Student Research & Investment Club, and thus are for reference only. CityU Student Research & Investment Club is not responsible for any direct or indirect loss resulting from decisions made based on this report. The opinions in this report constitute the opinion of the CityU Student Research & Investment Club and do not constitute the opinion of the City University of Hong Kong nor any governing or student body or department under the University.


INTRODUCTION The food sorting technology is often combined with handling and packaging machinery on production lines; it is placed under the food processing sector. This sector provides solutions and equipment to produce, process, and distribute food to billions of people globally. According to McKinsey, increasing world population and changing dietary preferences have increased the importance of this sector. These factors along with higher incomes and a shift to value-added products have boosted demand for equipment and solutions to manage the food supply chain. The food processing equipment market is valued at $98 billion USD, including 3 main sectors: processing ($45 billion), services ($37 billion), and packaging ($16 million) (see figure 1).

Figure 1 Source: Mckinsey

In 2016, the food processing sector was valued at approximately $45 billion of revenue. This sub-sector comprises of machinery for processing, sorting, grading etc.

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Market Segmentation by Services

Processing Services Packaging


Table of Contents INDUSTRY OVERVIEW .......................................................................................................................................... 5 KEY PLAYERS ........................................................................................................................................................ 6

Tomra ....................................................................................................................................................... 6

Key Technology ........................................................................................................................................ 6

Buhler ....................................................................................................................................................... 6

GROWING FOOD DEMAND ................................................................................................................................... 7 CLIMATE CHANGE AND OTHER CHALLENGES ...................................................................................................... 11 SHORTAGE OF FOOD .......................................................................................................................................... 12 SOLUTION: SORTING TECHNOLOGY .................................................................................................................... 13

Traditional sorting .................................................................................................................................. 13

Digital sorting ......................................................................................................................................... 14

WORKING MECHANISM OF SORTING TECHNOLOGY ........................................................................................... 14 FUTURE PROSPECT ............................................................................................................................................. 15 INNOVATIONS .................................................................................................................................................... 15


INDUSTRY OVERVIEW Harmful contaminants are often found within the raw material or food batches on production lines. This combined with increasing demand for quality food has made processing companies increasingly concerned about the quality and safety of their food. Therefore, one of the main targets of food processing equipment is to identify healthy and quality raw material. According to Technavio’s market research, the need to enhance food safety is one of the main growth factors for the food sorting machines market. There are other types of contamination as well; like the taste and flavor get mixed up. To prevent contamination and enhance the quality of food products, industries are using different types of food sorting machines.

Food sorting technology providers are increasingly engaging in mergers and acquisitions to increase their competitive advantage, improve customer base and geographical presence, and increase the product portfolio. Larger firms acquire smaller firms to increase market presence and reduce their competition. For smaller companies, these acquisitions strengthen their offerings and increase their global presence along with increasing the product portfolio. The increased engagement of food sorting technology providers in mergers and acquisitions is identified by Technavio to be one of the key factors in establishing a positive outlook for the food sorting manufacturing industry.

There are two main product types in the market which include automated food sorting machines and mechanical food sorting machines. According to Technavio, automated food sorting constitutes over 93% of the market share. According to future market insights, automatic food sorting is a new technology for developing countries like India, but in the developed regions it has been in use for years. Currently, the main markets for sorting technology are the Americas, APAC and EMEA. According to Technavio, 44 % of the market share came from EMEA as of 2016 and they estimate that the market will grow at a CAGR of more than 7% by 2021.

Association of Advancing Automation, states that there was a 26% rise in investment in the first half of 2017 compared to the previous year, and they expect the trend to continue as more companies across the sector realize the advantages of using automation in their businesses.


KEY PLAYERS Tomra

TOMRA Sorting Solutions offers a variety of sensor-based food sorting machines available for products ranging from fresh whole products to processed food, and for industries ranging from farming to tobacco. Also, it has offered food peeling solutions for over 40 years, which included designing and supplying potato and root vegetables peeling machines. About 85% of the world’s french fries are processed by its peeling machines. It has a competitive edge over the other main competitors typically in root vegetables, such as carrots, potatoes, peppers and chillies. The yearly revenue is about $970.6 million with about 3400 employees. The operating revenues increased about $822 NOK million to $7432.1 while operating income decreased $72.2 NOK million. However, the EBITA and net profit increased considerably from $701 NOK million to $1015 NOK million and $412 NOK million to $ 648 NOK million from 2013 to 2015 respectively.

Key Technology

Key Technology was founded more than 70 years ago. Its food processing solutions and machines can be divided into three lines of business: Conveying, Processing and Sorting. They offer food sorting solutions to a wide range of industries such as for potatoes, vegetables, seeds, meat, snacks and pharmaceuticals. The company size is relatively smaller than the other two main competitors with around 500 employees and $143 million annual revenue with about 17% increase in 2017 compared to 2016. The 2017 net earnings improved from a net loss of $0.7 million (fiscal 2016) to $4 million. The gross profit increased from $11.2 million to $47.2 million; with a 3.7% to 33.7% increase in its gross profit margin in 2017.

Buhler

Buhler has a more diverse food processing business ranging from optical food sorting and food safety to drying, from dehulling to roasting & DE bacterizing as well as refining. It has unique food processing technologies in the area of mechanical and thermal process engineering. It manufactures numerous optical sorting and packing equipment for agricultural seeds, beans, grain, oil, tea and snacks. It is a larger company in terms of its revenue and the number of employees. It has a strong market position in producing chocolate and pasta as well as the grain re-processing into flour. It has more than 13000 employees with a turnover of around $ 3.27 billion CHF million which increased by 22% in 2018. The EBIT is 231 CHF million with a 13% increase. The net profit has increased consecutively from $143 CHF Million to $188 CHF million for three years. Buhler can be perceived as the market leader in food processing and packaging with over 150 years of history.


GROWING FOOD DEMAND Global population is expected to grow to 11 billion by 2100, with most of the growth occurring in the developing nations as per the data collected by the United Nations Population Division. The fastest growth is expected in sub-Saharan Africa, followed by Southeast Asia.

Total population as of 1 July (thousands). Median prediction interval

Figure 2 Source: United Nations Population Division 2017

(a) More developed regions comprise Europe, Northern America, Australia/New Zealand and Japan (b) Less developed regions consist of all regions of Africa, Asia (except Japan), Latin America, Caribbean, Melanesia, Micronesia and Polynesia. (c) The category of least developed countries is defined by the United Nations General Assembly in its resolutions (59/209, 59/210, 60/33, 62/97, 64/L.55, 67/L.43, 64/295 and 68/18) and it includes 47 countries: 33 in Africa, 9 in Asia, 4 in Oceania and one in Latin America and the Caribbean.

The population is expected to remain almost constant in the developed countries, with the global world population growth pattern largely depending on the rapid population growth in the less

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developed regions. This pattern is evident in the graph. In this graph, the more developed regions category comprises of Europe, Northern America, Australia, New Zealand and Japan. The less developed regions consist of all regions of Africa, Asia (excluding Japan), Latin America, Caribbean, Melanesia, Micronesia and Polynesia. The category of least developed regions includes 33 countries from Africa, 9 from Asia, 4 from Oceania and one from Latin America and the Caribbean.

According to FAO urbanization is expected to continue to grow at an accelerating pace, with 70 percent of the population living in urban areas by 2050. The Global economy is projected is to grow by 2.9 percent annually. This will result in a significant reduction in poverty in the developing world. These trends show that the food market demand would continue to grow, with most of the increase in demand occurring in developing countries as the highest population growth is expected in these regions. FAO estimates that food production would need to double in developing countries to meet this growing demand. Considering that these regions are not very well equipped to deal with the rapid growth in food demand, there is a potentially large market for sorting technology in these regions of the world. According to FAO, developed regions produce 900 kg of food per capita in a year compared to just 460 kg per capita in the developing regions. Out of this already low food production in the developing regions, 40 % of the produce is lost post-harvest at the processing level. Whereas the developed regions cut these losses at the processing level by using advanced machinery and most of their losses occur at retail and consumer levels.

Therefore, the less developed regions are not self-sufficient in food production and have a higher percentage of food wasted at the processing level. In contrast to these regions being ill-equipped, these regions are driving the global world population growth and consequently will have the greatest increase in food demand. According to figure 3 below, the growth pattern of the world is the same as the growth pattern of these less developed regions. These regions will need to adopt advanced food sorting technology to deal with this growing demand.


Total population as of 1 July (thousands). Median prediction interval

Figure 3 Source: United Nations Population Division 2017

(b) Less developed regions consist of all regions of Africa, Asia (except Japan), Latin America, Caribbean, Melanesia, Micronesia and Polynesia.

According to FAO, demand for cereals is projected to reach 3 billion tons by 2050. Feeding the world population of 9.7 billion in 2050 will require 70 % more food than what was produced in 2007. Overall, an increase of 200 million tons in meat production is required to meet the projected demand of population in 2050.

To picture the current food production rate, the annual change in ratios of cereal stocks to utilization can be seen in figure 3 below.

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Figure 4. Shows changes in cereal utilization.

Source: Food and Agriculture Organization of the United Nations

The population growth rate is not reciprocated in the increase in the annual cereal production. This trend can be seen in figure 4 below.

*January-February average

Figure 5. Shows changes in cereal production and price indices.

Source: Food and Agriculture Organization of the United Nations

Although it is estimated that chronic nourishment in developing countries would fall to 4.8 percent in 2050, this would still mean that some 370 million persons would be undernourished in 2050. The FAO predicts that crop yields would continue to increase but at a relatively lower rate. To cope with this growing demand, the food industry needs to be much more efficient. Other than increasing the agricultural output, the food industry needs to explore the avenue of food processing. One way to do this is to move to digital sorting technology. Digital sorting technology makes the sorting process more affordable, accurate and faster.

2014/15 2015/16 2016/17 2017/18 2018/19 Average (2013/14-2017/18)

Wheat 30.6 32.2 34.5 37.1 35.0 32.4Coarse grains 24.9 24.8 25.5 25.8 22.6 24.4Rice 34.2 33.5 33.4 33.9 34.4 33.8Total cereals 28.3 28.6 29.6 30.5 28.3 28.5

Ratio of major grain exporters' supplies to market requirments 124.3 124 123.2 122.6 116.1 123.4

Wheat 18.4 18.0 19.9 20.8 17.2 18.6Coarse grains 14.3 12.6 14.0 15.2 13.4 13.4Rice 24.6 19.7 18.8 18.0 19.4 22.0Total cereals 19.1 16.8 17.6 18.0 16.7 18.0

Ratio of major exporters' stocks to their total disappearance(%)

Ratio of World stocks to utilization (%)

2014 2015 2016 2017 2018Annual trend growth rate

2008-2017Changes in world cereal production (%) 1.8 -1.2 2.8 1.7 -1.9 1.6

2016 2017 2018 2019* Change 2019* over 2018*

Wheat 125.2 133.4 148.5 154.2 12.0%Maize 151.0 146.3 155.9 158.9 5.0%Rice 193.5 206.4 224.4 223.2 -1.1%

Change from previous year

Cereal price indices


CLIMATE CHANGE AND OTHER CHALLENGES Rural population will increase in the next decade but will continue to decline after that as more and more people migrate to urban areas. Thus, there will be less workforce to grow the crops and more people to feed. Furthermore, arable land would increase by less than 5 percent; 120 million ha of expansion is estimated in developing countries and a 50 million ha decline in developed countries. Furthermore, according to the article “The Changing Climate” published in the journal “Scientific American (261 pg. 29)”, coastal flooding will reduce the available agricultural area.

Climate change can have negative effects on crop yields, especially in developing regions such as sub-Saharan Africa. Increasing global temperatures are a cause for concern. The Intergovernmental Panel on Climate Change (IPCC) mention in their report that a 2°C increase in global temperatures can have an adverse impact on crop yields. According to a 2011 National Academy of Sciences report, global crop production can decrease from 5 to 15 percent for one degree Celsius increase in global temperature. The changing temperatures and climate are affecting the global rainfall patterns as well. Around eighty percent of the world crops are rainfed and climate change is causing a change in the rainfall patterns, according to Renee Cho of the World Institute of Columbia University. Increased temperatures would also promote insect population growth which would increase crop losses. According to a paper published in the Journal of Agricultural and Environmental Ethics (5, pg. 113-146), with the current global warming trend, there would be a 25 to 100 percent increase in losses in crops due to insects in the United States alone.

In recent years, the emissions of CFCs (chlorofluorocarbons) resulted in the depletion of the ozone layer. According to the book “Coping with Climate Change” published by the Climate Institute Washington Dc, one percent reduction in the ozone layer can increase the amount of ultraviolet radiation by two percent. It further mentions that in a recent study consisting of 300 species, two-thirds are damaged to some extent by increased UV radiations. According to this study, the soya bean yields can reduce by 20 percent if the ozone layer depletes by 25 percent. The paper “Effects of Enhanced UV-B Radiation on Yield, and Disease Incidence and Severity for Wheat Under Field Conditions," part of the NATO ASI book series, states that other plants which are more resistant to UV radiations can develop diseases under increased UV radiation like “Red Hard” infection rates in wheat increased from 9 to 20 percent when UV radiation levels were increased from 8 to 16 percent. Similarly, under increased UV exposure, disease rates in rice increase as well.

In 2018, FAO reported that the number of undernourished people has continued to increase between 2016 and 2017. Other nutritional targets are being missed as well. Changes in climate are threatening to reverse all previous gains made. Health challenges are increasing, and climate change is increasing food and nutritional inequalities.


SHORTAGE OF FOOD Today one out of three children in South Asia and Sub-Saharan Africa suffer from stunted growth due to poor nutrition. One in ten citizens suffer from hunger and 30% of the population has experienced a food-borne illness. Food waste is at its highest ever. According to the World Resources institute around one-fourth of the world’s food calories are lost between the producers and the consumers. Food gap can be closed by 20 percent by 2050 if we reduce the rate of food wastage by half.

The graph below shows that we can increase availability by 1400 trillion calories if we reduce food loss by 50%.

*Including all crops including used for human consumption, animal feed, industrial uses, seeds and biofuels.

Figure 6. Source: World Resources Institute

It is essential to look for ways to boost production and cut down food waste. One way to cut food waste is to move to digital sorting technology. Digital sorting can not only cut down food waste but also cut down food-borne infections by identifying healthy and quality raw materials.

According to Technavio, a market research company, the need to improve food safety is one of the main reasons for the growth of the sorting equipment market.

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SOLUTION: SORTING TECHNOLOGY Traditional sorting

Most mechanical sorters classify products based on the size of the materials as mentioned in the book ‘Food Process Engineering Operations’. According to the article “A real-time grading method of apples based on features extracted from defects” from the Journal of Food Engineering, most automated industrial graders can only classify products based on their size and colour. Classification based on defects is not efficient. It is further mentioned that manual labour is expensive, repetitive and not reliable.

According to future market insights, the traditional sorting methods including manual labour are very inefficient because the sorting criteria are based on sight and touch of an individual, which is both subjective and inconsistent. Key technology, one of the digital sorting equipment manufacturing company emphasizes that more food is wasted by traditional sorting methods; to check the quality of the fruits/products a sample of suitable size is taken off the production line and cut open (invasive methods are used) to check the quality. They claim that finding a skilled workforce for sorting industry is much more difficult. Workers do not have the skill and efficiency required by the companies. Furthermore, using manual labour instead of automated production lines is much more expensive as proven by a study published by RNA automation in 2018.

In the case study, the company was using 4 production operators with 2 shifts per day. Each production operator cost the company around £25,000 per year. The total annual cost of using 4 operators with 2 shifts per day was £200,000 without including costs incurred on training, taxes and other expenses. The proposed automation system cost £164,000 and required two operators per shift. Thus, the total cost of the operators amounted to £100,000 per year. The depreciation amount of the system at a rate of 10 percent (expected life of ten years) was calculated to be £16,400. Therefore, the total expenses of the company in the first year were £164,000 plus £100,000 plus £16,400, totalling £280,400. The ROI in the first year was -£80,400 (£200,000 labour – £164,000 system - £100,000 operators – £16,400 depreciation). The ROI in the second year was £83,600 (£200,000 labour – £100,000 operators – £16,400 depreciation). The total expense in the two years was £396,800. Without automation technology, the company would have spent £400,000. So, the company saved £3,200 in two years, and £86,800 in three years.


Digital sorting

KTech claims that advanced sorting systems are being manufactured which incorporate digital sorting technology with advanced material handling technology resulting in fully automated efficient sorting systems. They use a wide array of sensor technologies including multi-spectral lasers, color and infrared cameras, and hyperspectral technology. Highly intelligent optical inspection is possible. Furthermore, vibratory conveying systems and advanced processing systems are available. It is possible to test 100% of products, without taking them offline, thus, saving time and resources which are otherwise wasted in lab testing. Since it is inline testing, immediate action is possible.

According to KTech optical sorters can detect internal defects easily allowing companies to provide increased value to customers. Smaller and subtle defects are detected, which were not possible previously. These machines are easy to maintain and repair.

WORKING MECHANISM OF SORTING TECHNOLOGY The ideal sorter for any given application combines the lights, cameras, lasers, and image processing software that most effectively differentiates a good product from foreign material and defective products. To maximise that differentiation, it is important to identify the wavelengths that produce unique “signatures” for each object of interest. The sorter manufacturer might use a spectrophotometer on the food processor’s products, foreign material, and defects to see how these objects respond to different wavelengths.

Regardless of configuration, most sorters contain similar basic elements. The upstream material handling component presents a single layer of product to the sorter for optimal viewing and can perform some preliminary mechanical sorting based on a product attribute, such as the size. The sorter’s sensors capture data, which is analysed by the sorter’s image-processing system. Foreign materials and defective products are ejected by either mechanical paddles or air jets.

In short, businesses are shifting their operations to automated sorting machines from manual sorting because it costs less compared to their legacy systems, It cuts their operational costs, enables them to maintain a consistent working process, enables collaboration in large and decentralized teams, save the time needed for setup and training, facilitates access to data, it will become easier to connect applications with each other, and will keep them in line with trends.


FUTURE PROSPECT By considering the rising population, the increasing level of urbanization, and the economic growth, it is estimated that the food demand will grow. Most of the growth will be in emerging markets, according to Mckinsey. These factors and improved living standards will give rise to the value-added diet. With more disposable income, consumers will tend to have higher quality and processed food. These foods require high-end processing and distinct quality control, which means that specialized machinery will be required for processing, packaging, and serving.

According to a market analysis by Mckinsey, the innovation in the food processing industry is driven by the trend in diet; like the increase in demand for organic food will lead to more strict control on food sorting, which means that there will be a new market and demand for organic food sorting and screening systems and machinery. On the other hand, the idea of reducing food waste is rising all over the world as is the global trend of using fewer resources. Mckinsey also estimates that the demand for convenience food will increase. The automation food processing would help to portion, sort, and produce the on-the-go food in an efficient way. In summary, customers dependence on advanced equipment will increase to reduce costs, increase yields and make their businesses more profitable. This derives the demand for fully-automated food processing solutions in the food processing industry.

INNOVATIONS According to KTech, many new innovations in the sorting industry are expected within the next five years.

Development is expected of hyperspeed/ multispectral cameras, use of laser frequencies, and a different spectrum of EM-like x-rays and microwaves to detect faulty products more efficiently. This is expected to get better and better and has good growth potential. With high-speed camera development, inspection capacity can be increased to 7m/s with resolutions as low as 0.9mm. In the next five years, chemometric testing will be possible i.e. detecting sugar, oil levels in food without using any invasive techniques. 100% detection of FM (foreign materials) and critical defects will be possible. Entire processing lines are being automated for managing the entire production process like SCADA (higher-level factory automation systems) and MES (line management execution systems).

Advanced software development is expected to result in user-friendly machines which can control specifications about rejection. This has many applications. E.g. multiple streams can be managed, with one for minor imperfections which can contain grade B products. Another stream containing bruised products which can be used for other projects like making juice. Ultimately, this results in


higher yields, both in terms of products and profits, and also reduces waste. Self-learning and suitable adjustment of the settings based on the data collected by the computers are the future of sorting. Over the next 5 years, sophisticated algorithms will help understand and process the data better. This will help discover errors in the sensors if any develops. Powerful computers will help identify and communicate trends to other parts of the production line. This will help improve performance in other parts of the assembly line. With better information analyzing technologies, additional information collected by sorters can be used to increase productivity, efficiency and unlocking business intelligence. Trends such as changes in quality with seasons can be detected, as well as changes in trends with different suppliers. This can enable companies to select suitable season or supplier to procure their raw material. Advanced information collection can be used to improve other aspects of the line.


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final report (food tech)(1).edited 2 · Title: Microsoft Word - final report (food tech)(1).edited 2.docx Created Date: 4/4/2019 5:30:24 PM

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