Vulnerabilities in the Food Supply Chain, the New Hidden Systemic Risk
With the world’s population skyrocketing to 8.5 billion over the next decade, and global food demand expected to increase by 70% through 2050, there is growing pressure on the agriculture sector to keep pace. Add to this mix the growing number of complex risks and extreme weather events that have become our new normal and one key concern comes to mind – how can we future-proof our food supply? This was certainly the common theme at the South East Asia U.S. Agricultural Cooperator Conference held this August in Malaysia. While farmers look at how they can maximize their crop yields and increase efficiencies, the focus on risk mitigation strategies appears to be lagging. A global and industry wide paradigm shift is needed to ensure farmers have access to the necessary tools and resources to enable them to build a resilient food supply chain.
Industries the world over have had to adjust to the shifting risk landscape. No longer are the traditional crop insurance programs or historical flood maps and actuarial tables of insurance underwriters enough to adequately protect farmers. Extreme weather events have increased significantly over the past few years, generating more powerful storms, more extreme draughts and heavier rains with catastrophic consequences. These events devastate crops, disrupt supply chains, lead to food spoilage in storage facilities, and more. Even fortress nations like the U.S. are susceptible.
In 2017 the U.S. experienced 16 separate billion-dollar events and climate disasters over a 10-month period. The damage suffered as a result was nowhere more evident than in Puerto Rico, where in a matter of hours, 80 percent of the territory’s (or island’s) crops were wiped out. Totaling nearly $800 million in crop yields and a sizeable portion of the island’s economy, it will take the Puerto Rico years to recover its once abundant agricultural sector.
Regardless of the causality of climate change, the reality is extreme weather is the new normal. In the last 50 years till the year 2000, there were an average 39 disasters declared in the US. In the years after 2000 that number has ballooned to 124 – a 270% increase. These disasters not only destroy crops, but they significantly limit production volume. The lower production volume, the greater likelihood of food shortages occurring, which will result in price distortions due to scarcity. In emerging markets, where there is less access to insurance or other risk transfer tools, this limited production not only impacts regional economies, but also can lead to greater poverty, deaths and overall societal instability. In 2017, the total global losses due to natural disasters was $353 billion, with only 38% covered by insurance. This statistic showcases the underutilization of a basic tool such as insurance, and a failure on the insurance markets for the lack of innovation and urgency in bridging the protection gap in agriculture.
Another growing concern in the agriculture sector is cyber risk. Agriculture has adopted a wide array of technological solutions to increase operational efficiencies, maximize crop yields, and leverage automation to reduce operating costs. This may have helped advance farming, but it has also created a wide range of vulnerabilities and access points for cyber criminals to exploit.
This is such a large threat that the U.S. Department of Homeland Security recently declared the food and agriculture industry as one of the 16 areas of critical infrastructure – meaning it is at higher risk for an attack. Adding to this concern, a recent U.S. Farm Bureau Survey found that 87% of farmers were unprepared on what to do if they suffered a cyberattack. Farmers may think that data breaches are not of great concern, however theft of intellectual property and data by competitors or foreign adversaries has been on the rise. More nefarious agroterrorism attacks looking to release chemicals and other contaminants into our food sources as well as disrupt food supplies and logistics are also a top concern. Currently the response plans for these types of attacks is underwhelming, and farmers do not have the needed resources or expertise to do so on their own.
A whole host of additional threats are targeting agriculture, such as vector-borne diseases, to shifting government regulations, and societal issues. Facing threats on multiple fronts, thinking of ways to combat them seems like a daunting, unfeasible task. Solutions do exist however. What can often be the blockade is market access and lack of innovation.
A few key players are already leading the charge for how technology and insurance can build a more resilient food supply. Companies like AcreFrica in Kenya are using parametric insurance to increase access to drought insurance. By embedding a mobile activated code in every bag of seeds they sell, farmers get immediate coverage against drought. If insufficient rainfall occurs, measured via satellites and sensors, funds are sent to the farmer. Burgeoning technologies like blockchain are establishing greater market inclusion, increasing safety and transparency in agriculture, particularly on supply chain provenance. India is establishing a blockchain agriculture infrastructure to help distribute its fertilizer subsidies to farmers and track soil quality. Walmart has also been experimenting with the food safety and tracking capabilities of blockchain. It recently carried out a food contamination tracking exercise in one of its stores. A process that would normally take weeks was reduced to seconds with the use of blockchain.
These types of applications and uses have tremendous implications. In Walmart’s case, it is not just about consumer safety, but also reducing food waste. Being able to track contaminated food to its original source with precise accuracy means that entire containers or pallets of food no longer need to be destroyed, rather just the affected produce. This type of innovative thinking and collaboration is needed across the public and private sector, particularly the insurance markets, to help create a more resilient global food supply chain. A recent City Risk Index study carried out by Lloyds and Cambridge University determined that a 1% rise in insurance penetration translates to a 22% reduction in uninsured losses, and a 2% rise in national GDP. This alone can have transformation impact across the emerging markets.
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