The need to face endemic risk
Extreme weather, labor shortages and rising cyber threats have dominated the agribusiness industry the last two years. But in 2022, technology and a fresh risk management approach will help the industry manage these challenges.
In 2022, better preparation will help agribusinesses better cope with the immense level of endemic risks in the industry.
Labor shortages have affected multiple points of the supply chain from the field to warehouses to logistics
If there's one word that can describe agribusiness, it would be “unpredictable.”
The whims of Mother Nature and the pricing volatility created by abrupt shifts in supply and demand are constant in the industry. But in 2021, farms and food manufacturers also had to contend with record weather-related catastrophes, chronic labor shortages and growth in cyberattacks — none of which were entirely foreseeable.
Labor shortages have affected multiple points of the supply chain from the field to warehouses to logistics. As the COVID-19 pandemic continues to pressure the labor market, some businesses have offered incentives for vaccinated employees. The labor shortage in agribusiness — like in most industries — is pushing the industry towards automation.
Underwriting guidelines have tightened and insurers have been reluctant to negotiate more favorable renewal terms. Among other developments, the number of underwriting questions has substantially increased, requiring additional lead time for agribusinesses to secure coverage.
The mantra for the industry: plan and prepare, plan and prepare. Whether it's a family farm or a major food manufacturer, industry players and their partners will need to lean on all of their experience to cope with risks.
Here’s what to expect in agribusiness in 2022:
Weather conditions worldwide slammed farms and food manufacturers in 2021
The specter of catastrophic weather will make risk management measures critical for securing coverage
1. Risk management will ramp up to cope with weather events
Predicting the exact timing and location of extreme weather events is a fool's errand.
But it's no stretch to say that droughts, floods and hurricanes will strike again, with profound effects on agribusiness — and through catastrophe (CAT) modeling, it's possible to assess a farm's overall vulnerability to extreme weather, if not the exact time and date.
Weather conditions worldwide slammed farms and food manufacturers in 2021, including fires and drought reducing yields in the northern U.S. and southern Canada, frost damaging Brazil's arabica coffee crop and floods in China affecting livestock and meat processing.1
These continuing weather conditions make risk management measures critical. This includes securing adequate insurance coverage through government programs or private markets; farmers may have to consider parametric coverage for crops that are otherwise uninsurable.
Working with brokers to develop catastrophe (CAT) modeling capabilities can help secure insurance, helping show underwriters just how vulnerable a farm is to extreme weather.
For food processors, it's incumbent upon them to secure adequate supplies in the face of weather catastrophes, requiring stronger supply chains, alternate materials sourcing and proper insurance to guard against shortages.
1 Bloomberg, “World’s Food Supplies Get Slammed by Drought, Floods and Frost,” July 21, 2021.
Water conservation efforts will grow based on scarcity related to extreme weather
2. Conservation measures — especially for water — will continue to affect operations at all levels
The drought in the western U.S. has highlighted the need for water conservation.
The record-setting drought in the 11 western U.S. states resulted in 89% of the American West having drought conditions in mid-July 2021.2 The drought has had major implications for farmers and ranchers in the region, with crops going unplanted or unharvested.3
And, for the first time ever, the Colorado River, the nation’s largest reservoir, which supplies farmers with water in the West, had mandated cuts.4
Drought has always been a concern in agribusiness. But the focus on water conservation will likely grow in the coming years based on recent scarcity related to ongoing weather extremes.
There’s also a push for energy conservation. Attention to costs and addressing climate change will lead agribusiness to minimize its use of fossil fuels.
2 National Oceanic and Atmospheric Association, “Western Drought Status Update,” July 15, 2021.
3 U.S. Drought Monitor, National Drought Summary, July 20, 2021.
4 AP News, “First water cuts in US West supply to hammer Arizona farmers,” August 21, 2021.
2022 US Agribusiness Insurance Market and Rate Report
Understand what to expect in advance of your next renewal.
In 2020, nearly half of FDA and USDA food recalls were due to undeclared allergens
3. Food safety and recalls on allergens will pack a punch
To say that food allergens remain a problem is to understate the issue: Mid-2021 marked the 16th consecutive quarter that undeclared allergens in processed foods was the top reason for recalls in the U.S. food industry.
That's more than five years running. In 2020 alone, undeclared allergens accounted for nearly half (48%) of 363 FDA and USDA food recalls.5
Proper risk management means more than ensuring food to be free of contaminants, but also that it is accurately labeled. Also, manufacturing equipment must have no trace of allergens.
Doing so entails thorough, reliable, and consistent cleaning. This is especially critical when the same manufacturing machinery is exposed to foods with and without allergens, which include milk, eggs, crustacean shellfish, tree nuts, peanuts, wheat, and soybeans. (Also, remember that sesame will be added as a new allergen in 2023.)
The issue is not just one of product safety but also reputational risk. Food manufacturers will order more voluntary recalls as a precaution to guard against reputational damage. Among the key protective measures are product recall insurance and product liability coverage. These can protect food manufacturers from multimillion-dollar costs related to product recalls and liabilities.
5 TraceGains, “Our 2020 Recall Review,” June 16, 2021.
The industry’s reliance on technology makes agribusiness a bigger target for cybercriminals
4. Tech and automation will be a dual-edged sword
Like every other industry, agribusiness is increasing its reliance on tech and automation, particularly in light of labor shortages stemming from the COVID-19 pandemic.
And like every other industry, the increased reliance on technology means cybercriminals will make agribusiness a target.
Take the June 2021 cyberattack on meat packing firm JBS Foods: It paid the equivalent of $11 million in ransom following a cyberattack that disrupted its North American and Australian operations. JBS had to halt cattle slaughtering at all of its U.S. plants for a day.6
JBS produces one-quarter of all beef in the United States. A longer shutdown would have led to disruptions in food supply chains and added to rising food prices.
Generally, automation (particularly in food manufacturing) has been a godsend; it improves efficiency and quality control, with less reliance on human subjectivity.
However, greater dependence on automation also increases the need for cyber security, which includes taking thorough measures to attempt to prevent potential cyberattacks. It also means securing proper insurance coverage in the event of a ransomware attack.
Because of the increase in cybercrime, cyber insurance in agribusiness is expected to increase 20% or more in 2022. Worse, insurers are often not renewing or underwriting policies.
With that in mind, agribusinesses need to focus on prevention and deterrence. Third-party audits, multi-factor authentication and employee training are essential. Remember that complacency practically invites cybercriminals into an IT system.
6 Reuters, “Meatpacker JBS says it paid equivalent of $11 mln in ransomware attack,” June 10, 2021.
Moving forward in 2022
With uncertain weather, supply chains depleted by labor shortages and cybercrime on the rise, it's never been more important to mitigate risk. CAT modeling, increased cybersecurity and even adding benefits to lower-paying agribusiness jobs can help the industry get its arms around uncertainty. Consult with your broker to prepare for 2022.