Resilience has a cost, and right now farmers are paying it
Senior food executives have written anonymously to their investors about climate risk. Their warning about what "resilience" has come to mean deserves attention well beyond the investment community.
This summer's heatwaves gave most food businesses a live test of their supply chains, and with El Niño on the way the next test won't be long coming. So it matters that some of the people who run those supply chains have now said, in writing, that the pressure is already here.
On 1st October Inside Track published a memo from a confidential group of between 10 and 30 senior food executives. Most have spent 20 years or more at the country's largest retailers, producers and manufacturers. The memo is addressed to institutional investors, and its central claim is that climate change, biodiversity loss and soil degradation "are generating material reductions in crop yield, quality and reliability of supply." Profits haven't taken the hit yet. The insiders expect margins to follow as supply chains get more complex, yields drop and waste rises.
What resilience has come to mean
One of the most useful part of the memo, for us, is its account of how the word resilience gets used inside businesses. It increasingly describes a set of quick moves: swap an ingredient, change a sourcing region, find another supplier before the gap shows on shelf. Those moves work in the moment, which is why they get rewarded. The insiders' point is that they do nothing about the causes and they push risk further down the chain. A farmer who has borrowed against a crop and then loses the buyer, or misses a specification after a bad season, may not be able to repay. Enough of those failures and the supply base everyone depends on starts to thin out.
We heard a version of this at our Farmer-Led Working Group in September, after a summer of drought. Some regenerative supply contracts ask farmers to commit at the start of the season to the practice levels they'll hit, with a higher price for doing more. When the weather goes off plan, that commitment becomes the constraint. One farmer's maize crop failed and had to be grazed, and the feed bought in to cover the gap counted against the contract.
A governance problem as much as a climate one
The memo is also direct about boards. It says they aren't examining long-term risk closely enough and are relying on poor-quality insight, training and advice. Incentives favour decisions that pay off within the year. Nobody in that system has to be acting in bad faith for the result to be poor for investors, farmers and shoppers, and that's why the insiders are asking investors to step in. We think that request is right, and also incomplete. Investors can ask sharper questions, and the memo gives them a set to start with. The answers, though, depend on things that sit inside food businesses: how sourcing contracts are written, how long commitments to farmers last, and how capital gets allocated to work that won't pay back within a reporting cycle. Those are questions of commercial design, and they need finance, procurement and sustainability teams working on them together rather than in turn.
It's part of the conversation we're having at our Expert Event on 6th October, Unlocking investment, new commercial models and innovation, with speakers from The First Thirty, Bidfood, Samworth Brothers and True.
About Inside Track: a philanthropically funded non-profit that convenes confidential groups of senior industry insiders and channels their collective insight to the people with the power to drive change. It takes no government or corporate money.