Jeremy's Blog 25th September 2020: International Risk

This article by Jeremy Moody first appeared in the CAAV e-Briefing of 24th September 2020

Agriculture is remarkable as a sector of small businesses exposed directly to international economic markets. We are used to the influence of exchange rates on farm earnings, as so many produce commodities for what have become global markets. The £/€ rate for produce and subsidies has explained much of the movement in farming incomes. The oil price and dollar movements are revealed in fuel and other bills. It also flows the other way: the 2010 wheat price spike and associated trade restrictions drove the Arab spring.

While the UK wheat price is reacting to the exchange rate and risks at the end of this year, we may now be looking at both longer term and deeper changes in global trading influencing our markets.

The Covid-19 pandemic has shown the globalisation of disease. Food and farm supply chains have been resilient but are now more likely to diversify for security. We face other diseases from those like Xylella that beset trees to African Swine Fever, spreading among Europe’s pigs. ASF has been devastating in China which has lost 100 million pigs with effects on the pork price. Its pork stocks are said to be down to 100,000 tonnes when it eats 50mt a year with imports having wider consequences in meat and feed markets.

Globally, finance is another factor reflecting the growing concern over climate change. Investor pressure on fossil fuel firms over carbon is now spreading to other sectors, including food production in emerging markets. With the impact on production of climate change, changing public tastes and sensitivities to risks with soil quality, biodiversity and water, there are reports of investors becoming more cautious or withdrawing. Those investors, wanting to understand risk, will seek more disclosure and assurance from companies, as through the Task Force on Climate-related Disclosure, so drawing more attention to these issues.

Credit risks increase not only for emerging market producers of meat and dairy, but international produce brokers whose access to finance and so operations may be limited by banking regulations.

Such a re-appreciation of risk may make it clearer where the carbon cost or impact of meat production is highest and assurance is least. For the UK, less directly affected by climate change than much of the world, an emphasis on production and environmental standards is needed for a high cost country to hold and win markets at home and abroad.