Is ADM Ready to Feed a Warmer World?

It is no mystery that the agricultural sector is extremely sensitive to climate. Whether through droughts, heat waves, or blight, there is little farmers can do to protect their crops from extreme weather events [Figure 1]. With climate change poised to exacerbate weather fluctuations, is agribusiness giant Archer-Daniels-Midland (ADM) prepared to deal with a volatile future [Figure 2]?

 

ADM is one of the world’s largest agricultural product processing companies. They process wheat, oilseeds, corn, and other agricultural commodities into protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other food and feed ingredients. Substantially all of ADM’s raw materials are agricultural commodities. ADM also operates a global network of grain elevators and a fleet of barges, ocean-going vessels, trucks, trains, and containers. ADM connects crops to markets across 163 different countries^[3].

ADM is aware of the risks it bears. Taken from its 2016 annual report, ADM acknowledges: “The availability and prices of agricultural commodities are subject to wide fluctuations due to changes in weather conditions [and] crop disease”^[3]. In effect, these risks erode ADM’s margins as farmers take up a bigger portion of costs to combat yield decreases, and ADM increases working capital to move commodities across the world to capture cost efficiencies.

 

So how does ADM manage these risks? On one hand, it employs traders to find the best deals and by “entering into derivative and non-derivative contracts which reduce the Company’s overall short or long commodity position.”^[3]. On the other hand, ADM leverages its global footprint of grain procurement, storage, and transportation assets to take advantage of momentary price fluctuations across geographies^[3].

 

ADM has also made strategic investments, indicating how it thinks it can protect margins going forward. In 2016, it made significant investments in Harvest Innovations, a manufacturer of soy proteins, oils, and gluten-free ingredients; Amazon Flavors, a Brazilian manufacturer of natural extracts, emulsions and compounds; and Caterina Foods, a toll manufacturer of gluten-free and high-protein pastas^[3]. In making these investments, ADM sees an opportunity in serving a new generation of customers seeking healthier and more nutritious food options.

 

Crucially however, ADM’s short-, and medium-term strategies and investments fall short of addressing the major climate change risks its supply chain faces. How will ADM deal with multi-year crop shortages caused by longer-term weather anomalies? How is ADM maximizing returns on its working capital investments in raw material inventories?  How is ADM leveraging digital technologies and big data to improve its supply chain?

 

If ADM wants to thrive in a future marked by uncertainty, these are the kinds of questions it should be asking itself. There are three areas that ADM needs to focus on: 1) thinking about climate change adaptation vs. mitigation, 2) leveraging digital technologies, 3) and forming closer relationships with its crop suppliers.

 

ADM has made significant commitments to mitigate climate change. From reducing carbon emissions to making more efficient use of water, ADM has been a proponent of mitigation^[3]. However, mitigating the effects of global climate change is no longer enough; climate change is happening more quickly than anticipated and organizations need to formulate concrete adaptation strategies. Here, ADM can take a page out of the US Navy’s book, who also has significant assets throughout the world; an example of a strategy that ADM can adapt from the navy is to move freshwater-intensive operations away from drought-prone areas^[4]. Alternatively, ADM should invest in crops with longer shelf-lives to minimize losses due to spoilage. This will become increasingly important as long-term weather anomalies turn agricultural product exporters into importers, necessitating more movement of crops over long distances.

 

The agribusiness sector is the least digitized industry worldwide^[5]. Furthermore, big data and analytics were the number one priority in terms of strategic investments across all agtech clusters [Figure 3]. ADM must match its competitors’ investments in this space to retain its edge and to gain an edge on the increased complexity cause by climate change. For instance, satellite data and advanced weather pattern analyses can help predict crop yields, helping ADM secure favorable futures contracts. Supply chain analytics is another space that has seen tremendous development.

Another key strategic goal for ADM is to build closer relationships with its crop suppliers. While counter-intuitive for an industry used to thinking of its suppliers as providers of a commodity, the advent of big data and analytics allows analyses at far more granular levels than ever before – so granular as to reach the level of individual suppliers. In order to minimize one of supply chain’s most central issues, the bullwhip effect (seen here as price variability), ADM can form closer relationships with its grain suppliers in order to better understand how farmers are faring throughout a given year, and course-correct as weather anomalies come up.

 

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[1] Climate Impacts on Agriculture and Food Supply (n.d.) Retrieved from https://19january2017snapshot.epa.gov/climate-impacts/climate-impacts-agriculture-and-food-supply_.html

[2] IPCC, 2014: Climate Change (2014): Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.

[3] Archer-Daniels-Midland Corporation (2016) Annual Report 2016. Retrieved from https://s3-us-west-2.amazonaws.com/adms3/Investors/Shareholder-Reports/2016/2017-Letter-To-The-Shareholders.pdf

[4] F. Reinhart and M. Toffel (2017): Managing Climate Change: Lessons from the U.S. Navy. Retrieved from: https://hbr.org/2017/07/managing-climate-change

[5] R. Leclerc (2016): Agribusiness Innovation: A Q&A with Boston Consulting Group on Surprising Survey. Retrieved from: https://www.forbes.com/sites/robleclerc/2016/11/29/agribusiness-innovation-a-qa-with-boston-consulting-group-on-surprising-survey/#32fe78de723a

[6] D. Walker and T. Kurth (2016): Lessons from the Frontlines of the Agtech Revolution. Retrieved from: https://www.bcg.com/en-us/publications/2016/process-industries-building-materials-strategy-lessons-frontlines-agtech-revolution.aspx

Title Image: D. Bash, T. Barrett, A. Silverleib (2012): No Drought Aid for Farmers, Ranchers as Congress Breaks for Summer. Retrieved from: http://www.cnn.com/2012/08/02/politics/congress-drought-aid/index.html