A recent study by global risk advisory and insurance broking firm Aon found that economics, demographics and geopolitics were converging to create a challenging new reality for organisations. In its survey of 1,800 businesses globally, participants from the food-processing, agribusiness and drinks sectors identified commodity price risk as the greatest risk to their businesses. Surprisingly, almost half (49%) of those had suffered a loss because of it.

Ciara Jackson, head of food and agribusiness with Aon, says that it is well known that prices of commodities such as dairy and oil have been particularly volatile of late, with huge price fluctuations.

“This is a complex risk, with volatility driven by a variety of factors,” according to Jackson. The lifting of EU milk quotas has contributed to this coupled with an increase in supply. Many businesses leverage financial tools including hedging, forward purchasing, and contract pricing to try to mitigate this risk. She said weather has also played a part but it is possible for businesses to buy weather risk insurance.

The second most important risk identified by companies was damage to their reputation or brand. Jackson says that companies invest heavily to develop and grow their brand over a long period of time. “Many people believe there is a strong correlation between the strength of corporate brand and reputation, and financial performance,” she says.

She says we live in a world where events are played out in real time on social media, where both response and judgement are instant. However, even though it is identified as the second most important risk, only 6% of companies surveyed suffered a loss as a result. Events such as the Fonterra botulism scare, or the Volkswagen emissions scandal, bring the severity of impact into sharp focus for both the customer and the consumer.

Exchange rate fluctuation was also identified as a significant risk to businesses where 51% of those surveyed have suffered a loss. “This has become even more important since the UK decision to leave the EU where the euro-pound exchange rate has fluctuated significantly over the past 18 months,” according to Jackson. She says this is indicative of the uncertainty that prevails and that it “is particularly critical for lower margin businesses, as extreme currency movements can very quickly turn a profit into a loss”.

She says many businesses use hedging strategies to minimise their foreign currency exposures, such as forward contracts and options. Market diversification is a strategy being used by many of Ireland’s forward-thinking agribusinesses.

For businesses that trade internationally, particularly in new and emerging markets, where regulation is still developing, and there are significant levels of geo-political uncertainty, the ability to convert and repatriate currency is extremely important.

Businesses can take out political risk cover to insure against the perils of currency inconvertibility and repatriation.

One point Jackson highlights is that 91% of companies with a turnover greater than $1bn have a formal risk management in place while more than half (55%) of those companies with less than $1bn in turnover do not.

Increasing competition

Interesting things are happening in the competitive space. She says the increasingly competitive marketplace accentuates the need to develop key points of differentiation in order to maintain and develop market share. “Ireland is a small nation on the fringes of Europe, competing on a global playing field,” says Jackson.

She adds that post-Brexit, Irish competitiveness may be challenged hugely: “Scale, efficiency, good business and a robust risk management strategy are fundamental requirements to succeed in the game.”

She says that insurance costs are often a significant business expense, and robust peer benchmarking can help businesses keep insurance costs competitive. Jackson believes that sustainability has a big part to play and offers a strong basis for differentiation internationally.

Product recall is also identified as a significant risk where 30% of the respondents have suffered losses.

“Considerable costs can be incurred in recalling a product, including replacing or destroying the product itself, and in rebuilding brand confidence,” according to Jackson. She says more companies should consider buying this type of insurance.

She says the solution for agribusiness is to think about what keeps them awake at night and if you were to have a scare how you would respond. She says this is not about complex documents, but about being very practical.

She concludes that there is no doubt that these are exciting times for the Irish agri-food sector, as it operates in a global marketplace.

“The Irish food and agri sector is perfectly poised to take advantage of this global growth opportunity,” according to Jackson. She adds the reputation of the sector has its foundation in high standards of regulation and food safety, and in the country’s natural green environment and grass-based production system.

She says companies need to consider ‘when’ rather than ‘if’ an event occurs, and think about the contingency plans a business has in place to deal with such an event. She adds that excitement around the opportunities must be tempered, but with that, opportunity comes the ever-growing challenges in terms of risk management. It is against this backdrop that this survey helps on knowing, understanding, measuring and managing the associated risks.

Ciara Jackson points to directors who sit on boards and suggest companies should look at taking out directors and officers (D&O) insurance for their farmer directors. D&O insurance is bought by a company for the benefit of the individuals who manage the company.

Claim

When a claim is made against an individual for a wrongful act (or an alleged wrongful act) in their management of the company, a D&O policy responds to pay for that persons legal defence costs, awards of damages, investigation and inquiry costs and other costs such as fines and penalties. She says that even if after retiring from a board, directors can still exposed to D&O risk.