26 April 2022
Agricultural and food supply chains under unprecedented pressure
A combination of long-term demand growth and short-term disruptions is creating significant challenges for agricultural commodities and food supply chains.
Global agricultural supply chains: a perfect storm
The global food supply chain is under extraordinary pressure. Already buffeted by pandemic-related supply chain disruptions, the price of key inputs, such as fertilizers and fuel oil, as well as shipping costs, has been rising steadily over the last year or so. Long-term demand is increasing with global population, and as incomes rise in emerging economies. At the end of 2021, the FAO Food Price Index hit levels not seen in over a decade. This has echoes of the soft commodities price rise crisis seen in 2007-2008, during which time price increases were so significant in some regions that these were the spark that lit the tinder box; a contributing factor to widespread unrest and public protest, and consequent revolution, coup d’etat and civil war in a number of emerging markets.
The start of 2022 saw the pressure on prices ratchet up. Ukraine and Russia supplied more than a third of global cereal exports, and led supplies of rapeseed and sunflower oils. The outbreak of hostilities and subsequent sanctioning of the Russian economy has all but removed those supplies from the global food supply chains, driving food prices up, and adding to supply chain disruption.
How quickly Ukrainian and Russian exports will recover is also uncertain, despite the recent Russia-Ukraine grain deal. Ukrainian infrastructure has suffered extensive damage. Ukrainian farmers have been displaced from their land, and those that have continued to farm are facing serious fuel shortages, which will limit their ability to plant and harvest. Last year, the country shipped about 23.3 million tonnes of wheat; from March to June of this year, shipments are expected to be just 200,000 t.
Russia is also a primary exporter of fertilizer, with Belarus also a key supplier – together, they account for around 40% of globally traded volumes. With sanctions in place hindering the trade of ammonia, the conflict has exacerbated concerns over the rising cost of global crop production. This risks further constraining of global supply due to lower crop yields and quality.
Adding to global supply chain pressures, China’s increased imports of wheat, on account of exceptionally wet conditions last year which delayed the planting of a large section of its normal wheat acreage, further adds to pricing jitters. This follows soaring corn imports last year, on the back of high domestic prices and low inventories, and the decimation of its pig heard by African swine fever before that, which sent pork prices to record highs.
Food security is now a major focus for the Beijing government, particularly in the face of climate change. The government has committed to improving domestic food supply, including better regulation of its huge pig farming sector. But the sheer size of Chinese food demand and its reliance on imports when crops domestically suffer poor harvests, means it is exposed to global supply chain challenges resulting from geopolitical volatility.
Agricultural cargoes: the insurance perspective
Growing capacity in cargo insurance market
While cargo risks have become more complex in recent years, the positive news is that the cargo insurance market has stabilized - following years of hard conditions. New insurers are entering the sector, and existing players are strengthening and expanding their offering. As a result, the cargo insurance market has seen an increase in capacity and rates are much steadier, offering greater pricing certainty to clients at renewal.
But risks persist
Value accumulation: One of the major impacts of price rises is simply that shipments of agricultural commodities are now worth more. Delays and disruption to supply chains have the potential to exacerbate this, as cargoes are left in transit for longer periods. It’s therefore important that shippers check that the liability limits in their policies cover the higher accumulated value of their stock, or if they need to find increased capacity.
Interesting times in geopolitics: Shippers through the Black Sea are seeing insurance companies tack on high war-risk premiums, while some insurers are leaving the market entirely. Elsewhere, geopolitical tensions bubble away in the background, such as ongoing issues around Brexit and the Northern Ireland Protocol, and US-China trade disputes.
Cybersecurity: As in most industries, supply chains are increasingly relying on digital technologies to improve performance – from the digitalization of marine transport facilities to the use of internet-based services onboard ships, and even the development of autonomous ships. As a result, the risk of cyberattack is ever present and rising, and is a growing concern for insurers.
NatCat: Climate change is resulting in an increasing number of extreme weather events, while these events also become more severe. This not only adds risk to cargoes in transit, but also of damage to infrastructure that may disrupt supply chains. Assessing NatCat risk is always a challenge as these events are by nature difficult to predict and protect against; this situation is only likely to worsen however as these events become more common and more destructive.
Damage and loss: Whether shipping grains or food oils in bulk carriers or food products via cold chains, agricultural shipments are often both time sensitive and at risk of spoilage. This places them at particular risk from supply chain delays and damage/losses due to problems during transit, e.g., water leakage into bulk holds or the malfunction of temperature-control equipment. These risks are exacerbated by more severe weather conditions and the rise in accumulated value of cargoes.
There are specific challenges when it comes to dry bulk carriers. Safe loading practices are critical to followed to vessel ensure stability in rough waters. Water-tightness (or the lack thereof) of cargo hatches can also result in damage to cargoes.
Cargo insurance: food for thought
Growing global demand for agricultural commodities and foodstuffs represents both a challenge, and an opportunity for producers Cargo insurance helps manage the evolving challenges. The experienced cargo team at Gallagher is well-placed to help clients select the right coverage for their needs, enabling them to continue to do business with confidence.
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