The Effects of Climate Change on Cargill’s Supply Chain
As some of the physical effects of climate change worsen, particularly changes to weather and water patterns, the food and beverage industry is uniquely exposed to these risks.[1] Cargill Inc., one of the largest food and agricultural companies worldwide, has experienced these risks first hand in 2012 when droughts in the US caused its worst quarterly performance in twenty years. [2] As these physical effects continue to intensify, it is imperative that the management of Cargill Inc. be concerned with and work toward resolving the impact that climate change will have on its supply chain.
Climate change has led to several key issues that concern Cargill. First, Cargill’s agriculture commodity trading and processing business is largely dependent on agricultural raw materials, thus during droughts or other significant natural events, Cargill may face supply shortages.[3] Similarly, its’ meat business has suffered significantly because droughts and increased demand for corn in cattle production regions have led farmers to decrease their herd sizes; that, coupled with the increase demand for beef, has caused prices to rise.[4] These supply shortages lead to extreme price volatility, which forces the company to frequently mitigate risks across 7-plus commodities, which can be challenging and expensive.
While climate change puts Cargill’s supply chain at risk, the company is taking several steps in the short and medium term to position itself for sustained success. One of the most effective steps Cargill has taken is acquiring businesses like Joe White Maltings in Australia and Turyag, a Turkish fats and oils producer, to help increase the global footprint of its supply chain. Cargill is also diversifying its business by shifting toward industries that have the most promising growth and less risk tied to climate change. For instance, the company looked at projected growth for cocoa ingredients world-wide and noticed that the Asian Pacific region was the major force behind absolute volume growth. As a result, it has spent US$100 million on a new Indonesian plant, along with several other acquisitions, to improve the company’s position in serving growing demand.3 Cargill is also funding inventions and buying patents to explore ways to improve cell function in plants during exposure to environmental stress.[5] Lastly, Cargill partnered with the World Wildlife Fund, the Center for American Progress, Mars and others to use technology and “stress test the global food system in a simulation called Food Chain Reaction.” The simulation helped prove that, if corporations work together to make the world’s agriculture systems more resilient, it is possible to feed the growing population. Cargill has committed to continue to do its part in the medium to longer term by advocating for open trade, integrating sustainability measures into its operations and supply chains and applying innovation to strengthen the tools farmers need to make the most of their land. [6]
There are still several additional steps Cargill can take to combat the issues it is facing because of climate change. For instance, the company should focus more of its resources on lobbying for more mandatory sustainable growth practices world-wide; this will benefit not only the food and agricultural industry but also the citizens of the world. Similarly, the company should lobby both to GAAP and IFRS for international tax-credits for the development of additional innovative breakthroughs; this will encourage companies to fund research and create patents just like Cargill did to improve the cells of plants’ ability to survive under significant environmental stress. Additionally, the company should invest more aggressively to expand its operations into emerging markets; this will help mitigate the risk of limited supply in a given region while also contributing to more top-line growth.
After conducting this research, one of the biggest open questions I have is as consolidation in the food and agriculture industry continues to happen, what are the unintended consequences that may worsen the issues climate change has had on supply chains? If an oligopoly were to form, what laws could governments put in place to ensure that food is still affordable? Separately, are there more aggressive laws or generous incentives governments can implement to ensure more sustainable farming and distribution practices?
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[1] United Nations Environment Programme, “GEO-5 for Business: Impacts of a Channing Environment on the Corporate Sector” (PDF File), downloaded from https://reliefweb.int/report/world/geo-5-business-impacts-changing-environment-corporate-sector, accessed November 4, 2017.
[2] Engel, Hauke et al., “How companies can adapt to climate change,” McKinsey & Company Sustainability & Resource Productivity, July 2015, https://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/how-companies-can-adapt-to-climate-change, accessed November 4, 2017.
[3] Source: Cargill Inc. In Ingredients (World), Euromonitor International, accessed November 2017.
[4] Source: Issues and Insights: Red Meat, Mintel, accessed November 2017.
[5] Berger. Alvin et al., “Methods of Maintaining and Improving Biological Cell Function and Activity”, https://www.google.com/patents/US20150104868#classifications.
[6] David MacLennan, “Hunger Game: Lessons for Feeding 9 Billion People,” speech given at Harvard Club of New York City, February 17, 2016.
This was a great read! I really enjoyed reading how the domino effect of climate change affects the food and agribusiness. The concerns you raised towards the end of the article are quite interesting as well; one thing that I am curious to know is have we reached the tipping point of the climate change effect?
i.e. is there ever going to be a point of recovery in this industry? Let’s say we find a way to incentivize companies to be environmentally conscious and even find more tech-savvy ways to address the shortage of food and supplies – but the grave issue still pertains. We have still not addressed the root-cause (I think).
Would love to hear your comments on this!
Companies diversify among commodities to mitigate the risks associated with volatility among any individual component of their portfolio. Unfortunately climate change impacts every aspect of Cargill’s supply chain; this risk is strongly correlated among each of their commodities, and has placed an exceptional burden on their ongoing operations. Interestingly, this impact is variable based on where production comes from. For Cargill, diversification by geography may become a larger emphasis of their strategic planning.
Hi HBS Rules! Thanks for your article – really interesting! While reading your article, I had the impression that most of Cargill’s efforts were focusing on either diversifying their business (through acquisitions and new projects) or making it more efficient (R&D in stress testing) to reduce the impact of climate change on their supply chain and bottom line but that, despite a few partnerships with NGOs, little had been done to actually limit their own impact on climate change. After a bit of research, it seems Cargill is actually much more active than I thought! Back in 2015, they set new targets to themselves to “reduce greenhouse gas intensity, improve energy efficiency and increase renewables as a part of our portfolio” and it seems that they’re on track [1]. They were also lobbying to convince President Trump to stay in the Paris agreement and are still committed to reaching their goals despite the US exit.
Based on that and your last paragraph, the question I have is: would more incentives from governments actually help or are they already financially benefitting from these sustainability initiatives?
[1] Cargill, “Climate Change”, https://www.cargill.com/sustainability/priorities/climate-change, accessed on December 1, 2017
HBS Rules, thanks for the insight into this industry! Clearly, climate change has the potential to significantly impact Cargill’s core business. While I agree with your suggestion that Cargill must lobby for more sustainable practices world-wide, I wonder whether the Company is somewhat conflicted in this area. Animals themselves (particularly cows) are a significant contributor to climate change through the release of methane gas. As a trader of animal products, Cargill is incentivized to maintain good relationships with primary producers, and to encourage the consumption of meat. On the other hand, they must also consider the longer-term impact that climate change has on the rest of their agricultural business – particularly in relation to price volatility as you mentioned.
I wonder how human consumption patterns will weave into this. As mbergin mentioned, meat production, particularly beef, has a very high carbon footprint. For a given calorie, beef requires ~160x more land and produces ~11x more greenhouse gases than a calorie obtained from staples like potato, rice or wheat. The trends towards vegetarianism and veganism will help support a more environmentally friendly food consumption patterns. Perhaps Cargill, with its diversification across different food types, could play a role in pushing consumer demand towards low footprint diets.
Source: https://www.theguardian.com/environment/2014/jul/21/giving-up-beef-reduce-carbon-footprint-more-than-cars