Say Goodbye to Chocolate: Climate Change Is Destabilizing the Food Supply Chain

Climate change and volatile weather events are turning once-arable land into inhospitable environments for a number of crops.
By: | September 28, 2018 • 10 min read

Some foods and flavors are such a ubiquitous part of our culture that it’s difficult to envision life without them. Just try to imagine the ice cream aisle at your supermarket without vanilla or chocolate.

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For you ice cream lovers, that’s an unnerving thought. But for ice cream manufacturers — and for all of the companies that make the tens of thousands of products that include natural vanilla or chocolate flavoring — that’s a nightmare.

It’s one brand of risk management to prepare your company for a sudden, temporary shortage of key materials caused by a natural disaster. It’s quite another to consider a long-term or even permanent absence of an essential ingredient or part.

Climate change is increasing that risk for a variety of agricultural products. Changing temperature and precipitation patterns and volatile weather event exposures are turning once-arable land into inhospitable environments for certain tender crops. The list of those under known threat includes such core staples as coffee, avocados, wine grapes, chickpeas, peanuts and — sadly — chocolate and vanilla.

The Not-So-Sweet Tale of Vanilla

The current plight of vanilla beans illustrates what food manufacturers are facing. At least 18,000 products globally contain vanilla flavor. But only 1 percent of the total global market for vanilla flavor is actually sourced from vanilla beans.

That 1 percent is highly coveted, and Madagascar holds 80 percent of the global supply.

In 2017, tropical cyclone Enawo, the strongest to strike Madagascar in 13 years, left 22,000 people homeless and devastated the region. The region’s output of vanilla beans plummeted to 1,100 metric tons, barely two-thirds the normal harvest.

In perspective, the dairy industry typically uses half of the total imported vanilla to North America. Ice cream manufacturers generally use pure vanilla to avoid having to use “vanilla flavored” or “artificial vanilla” on their labels.

Synthetic vanilla flavoring — vanillin — is widely available and has been for decades. But at least 85 percent of the 18,000 metric tons of vanillin produced annually is derived from a petroleum byproduct, making it less desirable as customer demand for all-natural products grows.

Say goodbye to chocolate: Climate change and volatile weather events are turning once-arable land into inhospitable environments for a number of crops.

That’s exactly why Enawo’s timing couldn’t have been worse. Nestlé, Unilever and General Foods just announced that they would eliminate artificial ingredients — including artificial vanilla — from their products.

The confluence of rising demand and diminished supply impacted prices drastically. A kilogram of vanilla beans, valued at about $40 in 2011, currently tops $600, making it the second most expensive spice in the world after saffron.

Some are working to fill the gap. International Flavors and Fragrances is working with a company called Evolva to develop and market a yeast-based fermentation route to both vanillin and other vanilla flavor components.

But even with successful attempts at developing alternative sources of vanillin, food makers face reformulation challenges, complicated labeling laws, and difficult questions about what is “natural.”

Volatility and Agriculture Don’t Mix

While crop yields could indeed rebound, the risks of future crop damage are high as climate patterns shift. Madagascar has the highest risk from cyclones in Africa. In the past 20 years, the country has been struck by 35 cyclones, eight floods and five periods of severe drought.

Cacao crops are similarly endangered. They can only grow within a narrow strip of rainforest around 20 degrees north and south of the equator, where temperature, rain and humidity stay relatively constant year-round. More than half of the world’s chocolate comes from Côte d’Ivoire and Ghana. But by 2050, those areas won’t be suitable for growing cacao. Rising temperatures will push today’s chocolate-growing regions more than 1,000 feet uphill into mountainous terrain that is currently preserved for wildlife.

Greg Lowe, global head of resilience and sustainability, Aon

The coffee industry faces similar challenges, with farmers having to work at higher elevation due to changing temperature and precipitation. But as farms move up mountain, the costs for managing those farm goes up.

Said the director of supply chain for a Fortune 1000 food manufacturer, “There are things that we know: weather patterns are shifting, places are getting hotter, it rains where it shouldn’t and doesn’t rain where it should. We know all of that, there are these external weather events that even for us [are impossible to foresee]. Global warming may still be a very controversial topic, but we see on a day-to-day basis how it’s affecting us.”

Faced with levels of long-term supply uncertainty on this scale — including the real risk of some crops becoming extinct or too rare to be viable commodities — what’s a food manufacturer to do?

Catastrophe-related crop damage is insurable, but the creeping devastation of climate change, not so much.

“You’re talking about permanent loss of potential yield, as in this is just not coming back — that’s something that an insurance market wouldn’t be particularly good at dealing with it,” said Greg Lowe, global head of Resilience and Sustainability at Aon.

“Maybe the closest analogy from a natural peril perspective would be sea-level rise. You’re not talking about a temporal event like a flood or an earthquake, you’re talking about a change in the permanent state of the coastline.

“If we were to see some kind of mechanism that would lead to particular crops not being viable in parts of the world, that’s an exit from the world commodity markets. You’re not going to have an insurance solution to back that up.”

Agricultural shifts related to climate change present more of a risk management challenge than an insurance one, and there are numerous approaches procurement and risk management teams can take to maintain their supply chains.

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Stockpiling is certainly an option in some cases — buying up every ounce of the product you can get your hands on. That can at least buy some time while the company tries to gather more intelligence and plan next steps. But shelf life has to be factored in, as does the cost of keeping a high level of inventory. And in the end, of course, it’s just a stop-gap measure.

All possibilities would have to be considered, said the supply chain director, including whether sufficient supply might be available from alternative suppliers or regions. In a market where supplies are scarce, however, it will be the companies with the most leverage that are able to secure the lion’s share of the sources, while small to mid-sized producers are left scrambling.

“The relationship is always predicated on the economics,” said Gary Lynch, founder of The Risk Project, a risk analytics based advisory firm.

“At the end of the day, you can be with a supplier for 20 years. But the reality is that if, from an economic standpoint it [ceases to be] beneficial to both parties, then it goes away.”

The problem of “citrus greening” in Florida’s orchards is a clear example, said Cracknell, partner and head of the consulting risk practice at JLT in the UK.

“You’re talking about permanent loss of potential yield, as in this is just not coming back — that’s something that an insurance market wouldn’t be particularly good at dealing with it,” — Greg Lowe, global head of Resilience and Sustainability, Aon

“If you’re a [smaller] local company producing orange juice or lemon juice and you suddenly find that the sources that you would ordinarily go to have got this disease and [supply has] shrunk, you end up on the commodities markets looking to buy orange juice from wherever you can get it. You may end up importing it, and there are much more significant costs attached to that. You either have to take the hits or increase your prices, which probably makes you uncompetitive — it could be a make or break.”

If supply is unsustainable, “it will really go down to what is viable,” said the supply chain director.

“[It might be using] a close substitute because when there’s a crisis, people don’t need a 100 percent match. If it’s close enough, they’re happy. We’ll try to maintain our supply even if it’s not exactly the same. It’s better than not having anything to sell.”

That said, substitutions have to be carefully considered because they carry risks of their own, said Caitlin McGrath, vice president, National Product Recall and Accidental Contamination Risk Consulting, Lockton.

“You’re changing what’s going on in your facility and its risk profile,” she said, citing an example of a company substituting fruit juice for honey as a sweetener.

“Companies need to think about, as you try to replace those products, how that’s going to affect your business and how you need to protect yourself, whether it’s a matter of risk transfer or just preparing your facility and making sure you have the right equipment, the right training, etc.”

In some cases, said the food manufacturing executive, manufacturers will take a more proactive approach to a failing supply chain, asking “Is this something we need to be part of?”

“Sometimes it will trigger a discussion around are we going to acquire something, are we going to invest in something, is it important enough that we really need to find a way to participate in the downstream supply chain? … How much more influence can we have on encouraging supply?”

A Florida food manufacturing client of Tim Cracknell’s applied that strategy to citrus greening, which posed an existential threat to its business. The company didn’t just switch sourcing to Brazil, it purchased its own orchards there across a wide region to minimize the risk of the impact of greening arising to their entire crop.

“So they’ve got an absolute guarantee that whatever those orchards produce [belongs to them]. That’s where some companies go that one step further,” said Cracknell, partner and head of the consulting risk practice at JLT in the UK.

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An increasing number of manufacturers are thinking proactively, engaging with the supply chain at different levels to help support smallholder farms and ensure the ongoing viability of the crops they depend on to sustain their brands.

Numerous global food manufacturers, for instance, are working with orchid growers in Madagascar to ensure the future of sustainable, high-quality vanilla production.

Nestlé’s Nespresso provides a prime example of that strategy in action, said the supply chain director. The company found itself unable to source enough of the premium grade of coffee it had built its brand on — demand outstripped its ability to source.

“They decide to go there, work with the farmers, and work with [non-governmental organizations] to see how to encourage them to grow those premium beans,” she said. “It’s becoming a fairly common strategy food companies use to secure future supply.”

Other forward-looking efforts to secure supply are trending toward high-tech. Chocolate-maker Mars is working with UC Berkeley to develop cacao plants that don’t wilt or rot at their current elevations, eliminating the need to relocate farms.

The project is being overseen by Jennifer Doudna, the geneticist who invented the gene-editing tool CRISPR. If successful, the project holds a great deal of promise for other crops that currently only thrive within narrow growing parameters.

Elevate the Conversation

With the nature of food manufacturing supply chain risk changing rapidly, it’s important to break down silos, said experts. Risk management hasn’t traditionally been a part of the decision-making process for sourcing or product development for many companies, but it’s time for that to change, for the food industry as well as for all manufacturing sectors.

“My sense is that risk managers aren’t probably involved as much as they should be,” said Lowe. “[This is] systemic, [this is] longer-term.”

Phil Renaud, executive director, Risk Institute, Ohio State University Fisher College of Business

Using risk management principles can help companies adopt a market mindset as opposed to an operational mindset, said Gary Lynch, CEO of The Risk Project.

“That really starts to engage leaders in helping to understand [the challenges and opportunities] in the market.”

That means opening discussions around whether the problem can be engineered around, whether the product line might need to sunset, whether to invest in securing future capacity by acquiring some of the sources, said Lynch, “or, like Nestlé did, sending people out to Madagascar to basically recreate the supply chain to make it more stable and prepare for the future.”

Those are enterprise-level discussions, agreed experts, which should include all functions from risk management to procurement to finance to sustainability all the way to R&D.

“I would definitely suggest the risk manager needs to be part of the R&D process for the next-generation products,” said JLT’s Cracknell. Particularly as manufacturers more deeply engage and influence the supply chain, it only makes sense to engage the risk management perspective on potential loss exposures and whether adequate coverage is in place for non-traditional ventures such as genetic editing of plants.

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“From that perspective, you’re creating a new, exciting world. But it’s also a world that looks very different from the traditional types of challenges that risk managers have faced,” said Lowe.

“Our food chain, our supply chain our just-in-time manufacturing approach doesn’t lead us to allow a lot of room for error,” said Phil Renaud, Executive Director at the Risk Institute at the Ohio State University Fisher College of Business.

“So, if you don’t have the resilience approach to business then you will lose most likely market share. [Customers] will go elsewhere and it won’t take very long for that to happen.”

“Risk management needs to be everyone’s responsibility in an organization,” he said.

“It isn’t just that team of one, two or 22, depending upon the size of the business. It needs to be everyone thinking about risk. Everyone needs to have a vested interest.” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]