Top Risks Facing Food, Agribusiness and Beverage Organizations

The food, agribusiness and beverage industry is facing many challenges, from rising commodity prices to digitalization and climate change to shifting geopolitics and consumer habits. These risks are complex and interconnected, with the disruptive effects of climate change and extreme weather events contributing to losses in key growing regions. Projected U.S. wheat exports for the 2022–23 season are, for example, at a 52-year low, while end stocks are at the second-lowest level since the 2013–14 season.

Geopolitical conflicts have amplified these issues. For example, Ukraine is historically one of the world’s largest grain exporters, but its exports were down almost a third in 2022–23 compared to the previous year and fell further in 2023–24. This, along with Russia’s withdrawal from the Black Sea grain deal, is putting pressure on grain prices and other agricultural commodities such as rapeseed and sugar — all of which is contributing to rising food prices. Furthermore, the industry is concerned about the impact of the Israel-Hamas conflict on the global supply and prices of fertilizer and other commodities and on the global trade agreement environment.

Operating costs also continue to rise amid economic uncertainty, persistent people turnover and the competition for talent.

Meanwhile, the volume of regulation and disclosure requirements is growing, which in turn is driving transparency around pay equity; diversity, equity and inclusion (DEI); food safety; climate risk; environmental, social and governance policies (ESG); cyber security; deforestation; and much more. Organizations are facing tremendous pressure to accelerate and de-risk their climate transition and create positive social impact while addressing concerns related to yield volatility, working conditions, mass population migration and the impact of natural disasters.

Current Risks

Food, agribusiness and beverage industry respondents to our 2023 survey noted the industry’s growing vulnerability to business interruption (ranked number three). A key evolving driver of disruption stems from climate change effects, adding climate change and weather and natural disasters to the industry’s top 10 current risk list at numbers five and six, respectively. And climate change ties directly to the industry’s top-ranked risk, commodity price risk or scarcity of materials, highlighting how some companies see yield or production volatility because of climate change while others face volume reductions following extreme weather events. Indeed, climate-change-driven increases in the proliferation of pests and diseases threaten plant, animal and marine populations and put at risk huge numbers of people in developed and developing economies.

Top 10 Current Risks

1. Commodity Price Risk or Scarcity of Materials
2. Supply Chain or Distribution Failure
3. Business Interruption
4. Cyber Attack or Data Breach
5. Climate Change
6. Weather and Natural Disasters
7. Damage to Brand or Reputation
8. Regulatory or Legislative Changes
9. Failure to Attract or Retain Top Talent
10. Product Liability or Recall

The second-ranked challenge, supply chain or distribution failure, is a perennial issue for the industry. The food supply system is very complex and involves multiple stakeholders, processors, brokers and transportation methods, making it vulnerable to turbulence and instability. Even before the pandemic and the conflict in Ukraine created additional hardships, the food industry faced supply chain challenges. Food is global, and even the smallest food processor uses ingredients, packaging and equipment from around the world. So political unrest, trade disputes, natural disasters, workforce shortages, digitalization and climate change will continue to cause disruptions.

The industry also faces business interruption from cyber attacks and data breaches, ranked number four in 2023, slightly higher than in 2021. Companies in the food value chain are prime targets for hackers, particularly ransomware strikes and data-extortion threats. Thanks to ongoing geopolitical conflicts, threats from highly sophisticated hackers affiliated with nation-states whose intentions are purely destructive, rather than motivated by financial gain, could escalate. And food production, including planting and harvesting crops, raising livestock, processing, packaging and logistics, has become more technologically sophisticated. Farmers and ranchers use distributed networks, remote sensors and computing to increase automation and efficiency on their farms, monitor the health of crops and livestock, and tell when their equipment needs maintenance. The system is increasingly connected, creating a large potential attack surface.

Associated closely with cyber threats, the industry’s seventh-ranked current risk, damage to brand or reputation, is a significant and ongoing concern for business leaders in the food, agribusiness and beverage industry. Brand and reputation crises can arise on a variety of fronts — for example, food safety, supply chain, cyber, governance and corporate responsibility — and the resulting financial impacts can be devastating. Industry respondents gave the 10th spot in their current risk list to a risk that can heavily impact brand and reputation of an organization: product liability or recall. This risk is always top of mind in the industry, because consumer trust is critical to success. And consumers increasingly focused on ESG impacts, chiefly environmental, expect production efficiency and greater transparency related to how organizations source, produce, market and deliver their products.

Although the number nine risk, failure to attract or retain top talent, was new to the top 10 in 2023, workforce resilience is a perpetual issue in the industry. But as the industry continues to adopt new technology, it must reskill its existing workforce or attract workers who have or can develop the requisite skills. Recruiting challenges include the fact that many jobs are in rural areas where services, employment opportunities, leisure activities and other amenities are not as available as in urban and suburban areas.

Underrated Risks

Although economic slowdown or slow recovery has fallen out of the industry’s top 10 current risks (it was ranked number four in 2021), it continues to pose threats to the industry. Inflation and economic headwinds continue to erode buying power, particularly in the food and beverage industry, with consumers turning to store brands to save money. Premium and specialty brands are now beginning to feel the pressure of rising costs as consumers opt for lower-cost products.

And higher labor costs will likely persist, along with mounting regulatory pressure to reduce emissions throughout supply chains. As companies move to measure and meet their Scope 3 reduction commitments — which relate to emissions that occur in the upstream and downstream activities of an organization — they will incur additional costs. Food industry companies typically operate in a tight-margin environment. Therefore, increases in interest rates and inflation, combined with commodity price volatility, rising energy and packaging prices and ever-present pricing pressure from retailers, make cost management a key priority for organizations.

Geopolitical volatility and political risk — key macroeconomic challenges facing the food industry — do not appear on the top 10 list. The conflict in Ukraine and the Israel-Hamas conflict pose significant risks, causing humanitarian crises and giving rise to greater risk exposures in global capital flows, trade and commodity markets. And geopolitical conflicts elsewhere in the world are also affecting market stability as well as any expansion plans. Furthermore, global food insecurity has increased significantly since the outbreak of the conflict in Ukraine. Almost 238 million people — nearly one in five — across 48 countries face acute food insecurity, and recent indicators warn of further deterioration in 18 hunger hot spots. Food insecurity could lead to additional geopolitical conflict, jeopardize energy transition objectives, intensify food nationalism, disrupt supply chains and increase costs.

The pressure companies face from investors and regulators to define and disclose their climate transition, ESG and corporate social responsibility strategies will intensify as 2050 approaches. The transition to more sustainable practices and guidelines may increase yield volatility and the chances of further supply disruptions. And the risk of being accused of “greenwashing” is high as companies make public commitments about sustainability and meeting consumers’ ESG-related demands. Regulatory bodies could also inadvertently increase this risk by setting standards that are difficult or impossible to attain.

Future Risks

Many of the risks food industry respondents ranked in their future top 10 are either uninsurable or difficult to predict or quantify, and they have significant inherent volatility, with the potential to cause material, financial and reputational harm. Seven of them also appear on the industry’s current top 10.

Top 10 Future Risks

1. Commodity Price Risk or Scarcity of Materials
2. Cyber Attack or Data Breach
3. Climate Change
4. Economic Slowdown or Slow Recovery
5. Supply Chain or Distribution Failure
6. Weather and Natural Disasters
7. Business Interruption
8. Regulatory or Legislative Changes
9. Political Risk
10. Workforce Shortage

Three risks in the food industry’s future top 10 retain their current risk rankings: commodity price risk or scarcity of materials, weather and natural disasters and regulatory or legislative changes, ranked number one, six and eight, respectively. This highlights that respondents anticipate that the macroeconomic and climate-related conditions driving exposure to these risks will continue at similar levels. And while damage to brand or reputation, failure to attract or retain top talent and product liability or recall do not appear in the future top 10, their absence may reflect increased confidence in the industry’s ability to mitigate these risks, rather than an expectation that these three perennial risks will not be around in three years’ time. Similarly, while supply chain or distribution failure falls three spots to number five and business interruption falls four places to number seven in the future rankings, their continued inclusion in the top 10 reflects ongoing concerns over these two integral industry risks.

Two of the current top risks, cyber attack or data breach and climate change, jump two spots on the future top 10 list. As respondents anticipate a constant need to adopt new technologies and ways of working, they also expect cyber attack or data breach to escalate as the risk posture changes with the evolution of AI use. Related to this is the inclusion of political risk on the future list at number nine. As existing geopolitical conflicts continue (and potentially intensify) and new tensions potentially arise, bad actors may be more motivated to use cyber attacks to achieve ideological or political aims.

Climate change rises from number five to number three in the future rankings, reflecting in part the risks inherent in transitioning to more sustainable practices and operational models. For example, sourcing raw materials that have been produced using regenerative agricultural practices carries specific new risks — potentially including negatively affecting crop or milk yield. While adopting more sustainable practices may be a given, companies have yet to determine who will carry the cost of potential yield volatility, and this is a top consideration for partners throughout the value chain.

Workforce shortage is a risk also rising in importance for participants; labor and skills shortages are a major concern in the agri-food sector across many countries. This challenge is compounded by the relatively small, and declining, contribution of agriculture to a country’s economy, and the negative public perception of the sector having relatively low wages and limited career prospects. Access to migrant labor has been crucial for filling labor gaps in the food supply chain, but acquiring migrant labor has become increasingly challenging. While this is a key issue in the UK, many other countries face similar obstacles as they expand their search for labor beyond local regions to ensure a stable workforce for domestic food production.

How Can Food, Agribusiness and Beverage Organizations Mitigate These Risks Effectively?

To address the increasingly interrelated risks facing the food, agribusiness and beverage industry, organizations should leverage their risk management resources across enterprise risks and people risks alike. This could help them to optimize the efficiency of their capital by potentially diversifying risk and incubating emerging risk and accessing capacity. For example, the U.S. food industry has been hard hit by property insurance limitations and rate increases in the wake of several large claims related to extreme weather, inflation and supply chain issues. To offset some of these challenges in the traditional marketplace, businesses can reduce their limits, take advantage of captive insurers and increase their retentions — actions that many organizations in the U.S industry have already taken.

In the short to medium term, as food industry organizations put plans in place to mitigate direct climate risk as well as Scope 3 risks along their supply chains, senior leaders across the industry supply chain should engage in climate strategy discussions and conduct climate risk scenario planning and modeling to ascertain the likely impact climate risk will have on their business. They should also engage their supplier base — for example, dairy companies engaging with their farmer suppliers — to understand how they can help their suppliers mitigate climate risks at their level and transition to more sustainable practices.

Human capital risks, from workforce shortages to attracting and retaining employees with key skills, can be addressed during regular reviews of employee value propositions, ensuring that they are clear, address DEI and total rewards and are linked to key metrics. Obtaining regular feedback from employees is also vital to managing talent challenges. Employees’ demands and needs are shifting, and HR and people leaders need to engage their workforce to understand what they value in a job today. Using reliable and up-to-date information to inform decisions is imperative, as are understanding the implications of leading a multigenerational workforce while planning for the future and investing in employee resilience. Disclosure requirements can be leveraged to tell a positive story for all stakeholders, including creating social impact and developing economic inclusion and resilience strategies.

Resilience is also key in managing cybersecurity. Preparing to respond to and recover from a cyber event must include a comprehensive assessment and understanding of the potential business interruption and financial and reputational losses an attack is likely to cause. Businesses can begin by assessing potential risk and then quantifying the likely impact of an attack. They can then make an informed decision regarding transferring some or all their risk.

Finally, organizations should consider how the risks to their business are interconnected and ensure that relevant teams and functions — for example, risk, insurance, finance, treasury, ESG, HR and IT — are engaged in risk management planning. An enterprise-wide risk approach is critical, particularly as risks become more complex and connected.

General Disclaimer
This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent, or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss caused by reliance on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.