Risk management helps navigate climate change’s impact on food productionRisk management helps navigate climate change’s impact on food production

Learn how climate change is affecting food and beverage businesses, as well as the steps to attenuate climate-driven risk.

Rachel French, Contributing writer

October 16, 2024

3 Min Read
risk management

At a Glance

  • Climate change negatively impacts food production, affecting crop yields, water availability and the overall supply chain.
  • Agriculture contributes to climate change through soil tillage, which releases carbon dioxide and accelerates global warming.
  • Risk management strategies are essential for food and beverage companies to proactively mitigate climate-related risks.

Climate change and food production — two peas in a pod, and in more ways than one.

Many conventional methods of food agriculture and production have been charged with accelerating climate change. For instance, soil tillage as part of traditional intensive farming practices releases carbon dioxide from the soil, which is considered a significant driver of global warming.

On the flip side, the effects of climate change are negatively impacting food production throughout the supply chain, from “agriculture production to the end consumer and corporate practices,” Eric Kroll, principal at Baker Tilly and head of the firm's food, beverage and agribusiness practice, said.

In agriculture, changing weather patterns can impact the availability of water and the viability of growing seasons. “Anytime weather patterns are erratic or extreme, it could cause disruption within the farming cycle,” Kroll explained. “The ultimate result of this is how it impacts crop yields.”

Fluctuations in crop yields — especially staple crops that are used in numerous food and beverage products like wheat, rice and corn — directly affect products traceable to those crops by creating volatility in prices and raw material availability.

“There’s also a secondary impact in that many of these crops are also a significant component of cost for animal feed,” he added. “So not only does it impact the direct products, but also meats and other food products throughout the supply chain.”

Related:Bites of Brilliance: Pigeon Cove Ferments on how to perfect fermented F&B products

A risk management strategy is key to help food and beverage manufacturers mitigate climate change-driven price fluctuations of commodities.

Risk management = ‘good governance practice’

The goal of an effective risk management strategy is to make sure a company’s risks are “identified and managed proactively rather than reactively,” Kroll said, “which enables long-term sustainability and success of the organization.”

The strategy, a “comprehensive framework,” requires a company to identify, assess, manage and monitor risk across all aspects of its operations. That includes climate-related risk.

ESG

“Having a strong risk management strategy that would cover not only climate change risk, but all risk, is critical for organizations as they evaluate their business, and just a good governance practice in general,” Kroll explained.

He named three key steps in creating an effective risk management strategy:

  1. Identifying risk. Potential risks span a range of categories, including operational risk, financial risk, regulatory risk and reputational risk.

  2. Assessing and prioritizing risk. After risks are identified, the next step is to determine the likelihood and potential impact of each risk. What’s the probability of occurrence? How severe would the impact be? Is there a potential financial impact or operational impact of the risk?

  3. Responding to risk. Finally, determine which practices are best suited to mitigate or monitor each potential risk. Risk avoidance, risk reduction and risk transfer are some practices that can be employed in response to risk.

Related:Close calls: What industry can learn from Southern California’s firestorm

A closer look at climate

In food and beverage, Kroll said an example of risk transfer could include a “hedging strategy”: to hedge or mitigate the risk of high price volatility that climate could have on raw material costs.

Other practices Kroll noted that can help food and beverage companies manage climate-related risk include:

  • Diversifying suppliers in certain areas that are riskier.

  • Reducing financial losses by mitigating cost increases. For example, “a more energy-efficient process, a water-saving technology or insurance optimization would fall into that in terms of financial losses.”

  • Adapting to regulatory changes.

In addition, food and beverage manufacturers with plants face additional risk if they are in climate-sensitive areas. For instance, in a location that has a water deficit, a company could reduce climate-related risk by modernizing its facilities to make them more efficient, Kroll explained. His company has helped food and beverage businesses navigate energy credits and incentives as part of the Inflation Reduction Act to redesign and upgrade facilities.

Related:Business Bites: US egg prices continue to soar, unlike culled chickens

Sometimes, part of business is simply accepting the risk. “All businesses have risk that they’re dealing with, and at times, risk is just part of doing business,” Kroll said.

About the Author

Rachel French

Contributing writer

Rachel French joined Informa’s Health & Nutrition Network in 2013. Her career in the natural products industry started with a food and beverage focus before transitioning into her role as managing editor of SupplySide Supplement Journal (formerly known as Natural Products Insider), where she covered the dietary supplement industry. French left Informa Markets in 2019, but continues to freelance for both SupplySide Food & Beverage Journal and SupplySide Supplement Journal.

Subscribe for the latest consumer trends, trade news, nutrition science and regulatory updates in the food & beverage industry!
Join 30,000+ members. Yes, it's completely free.

You May Also Like