Food, Agribusiness and Beverage
Key Issues for the Industry Currently Reflected in the Risk Selection
The U.N. predicts that world population will reach 10 billion by 2050, a level of growth that puts unprecedented pressure on the food, agribusiness and beverage (FAB) industry to ensure it has the capacity to feed the world. Meanwhile, the industry is increasingly feeling the disruptive effects of climate change and extreme weather events, including yield losses for commodities. The coronavirus (COVID-19) pandemic introduced new levels of supply chain volatility. These concerns likely explain why FAB respondents ranked commodity price risk and scarcity of materials, business interruption, and distribution or supply chain failure as their top three risks.
Cyber attacks often manifest as business disruption. The industry is under attack from cyber criminals, with an almost 400 percent increase in ransomware attacks over the past two years.
Food safety risk and the related risk of damage to brand and reputation risk are significant and ongoing. Earning consumer trust requires companies to demonstrate transparency in how they source, produce, market and deliver their products. Any crisis — whether in food safety, the supply chain, weather, governance or regulation — erodes trust and could have a devastating financial impact.
Surprises in the Top 10 Risks Selected
Several risks did not rise to the top 10 in the industry despite their severity. First, even before the COVID-19 pandemic, the industry — heavily reliant on in-person, manual workers — faced challenges with attracting, retaining and developing talent. The meat and horticulture segments in particular are struggling to recruit workers; shortages also are being felt in transportation and logistics. Meanwhile, FAB companies are in a period of rapid digitalization with unprecedented investment in technology. While some argue this will eliminate jobs, best-in-class employers will invest in developing their workforces to fill higher-paying, higher-skilled positions.
Second, as climate change creates more frequent and severe extreme weather events, operations may be unable to sustain these companies.
Third, rising costs and shrinking margins place pressure on the industry to minimize waste and employ resources efficiently — goals that go hand in hand with improving environmental sustainability credentials. Despite wide recognition within the industry of the importance of climate change and environmental, social and governance (ESG) issues, the survey results show they are not key strategic risk priorities.
Most Underrated Risks
Companies are increasingly concerned about intangible asset risks, including cyber risk. Recent high-profile cyber attacks — for example, those at JBS, Campari and Lion — highlight the industry’s susceptibility. Furthermore, businesses are realizing cyber risk extends beyond data breaches and can significantly disrupt day-to-day operations. The industry is shifting from viewing cyber risk purely as an IT issue to understanding that it involves people, processes and technology. Companies that perceive cyber as a relatively new risk may still be investing less than is required to mitigate it.
Catastrophic weather events resulted in thousands of dollars of unexpected losses for primary producers of commodities such as coffee, sugarcane and corn. Heavy frosts and long periods of drought drastically reduced harvest forecasts for these producers, directly impacting the entire food chain. Commodity price volatility for inputs and packaging will continue, perhaps indefinitely. In this environment, FAB companies face increased pressure from stakeholders to define their approaches to climate change and to integrate climate risk into decision-making processes. Transitioning to more sustainable businesses will necessitate identifying new, emerging risks and assessing their impact on the balance sheet, which will be greater than ever.
Challenges the Industry Will Face in the Next 3 Years and What Organizations Can Do to Address Them
Survey respondents seem to underrate evolving environmental and climate change risks, given their broad implications and severity. As climate change worsens, access to capital and insurance may be limited or cost substantially more. Regulations are tightening, and ESG expectations are rising in many regions. Against this backdrop, companies need to define ESG strategies, set realistic targets for reducing their climate impact and transparently report their results.
Additionally, companies, often operating on tight margins, are investing in technology to bolster resilience, productivity and efficiency, but digitalization and automation also increase their cyber exposures. Companies are seeing double-digit price increases for cyber insurance renewals, but continue to increase the limits of cover they buy. A robust, fact-based cyber impact analysis can inform decision making in risk financing strategies.
Finally, striving for a diverse workforce makes practical business sense given the substantial challenges companies face in attracting, retaining and developing talent. Having a mixture of perspectives, experience and capabilities at all levels in an organization is proven to improve business results. Best-in-class organizations build a diverse workforce where all employees are valued and have their wellbeing protected.
How New Challenges Will Require Companies to Change Their Approaches to Risk Management and Mitigation
To navigate today’s interconnected and often uninsurable risks, FAB businesses are sharpening their focus on enterprise risk management (ERM) strategies to achieve goals such as transferring risk, accessing insurance capital at favorable rates, and preparing crisis response plans to avoid business interruption.
Meanwhile, companies need to ensure their ERM framework encompasses an appropriate ESG strategy that can withstand scrutiny from stakeholders, including shareholders, customers and the broader community. Specific ESG goals may include reducing carbon emissions and meeting animal-welfare standards.
More closely integrating risk, control and compliance functions is imperative to achieving long-term success. According to this year’s survey, nearly 40 percent of companies said the pandemic would accelerate their review of ERM processes, yet only 19 percent said they were willing to increase capital expenditures to improve their ERM capabilities. Moreover, only 27 percent of companies have their risks mapped, and only 31 percent have a defined risk management plan. This suggests that companies need to continue to develop an enterprise risk mindset focused on understanding and managing their corporate risks in order to increase their resilience.
Current Top 10 Risks
Predicted Future Risks