Agribusiness Outlook 2023: Risk management can help dairy thrive in the face of global uncertainty
The dairy industry, like most agribusiness firms, must deal with risk perhaps more than any other. There’s little reason to expect smoother sailing or lower prices in 2023, as soaring input prices, record drought, staff shortages, and increasing cyber risks are pressuring profitability, vitality, and resiliency.
Dairy farms and processors will need to manage costs while remaining flexible enough to take advantage of trends. A best-in-class risk management and insurance strategy — and nimble HR — will be key for agribusinesses to thrive in 2023.
Invest in employees to help tame labor shortages
About 58% of food manufacturers report a labor shortage, up from 50% a year earlier. As workers have re-evaluated their priorities and goals in light of the COVID-19 pandemic, agribusiness, like many industries, has had difficulty in recruiting and retention. These shortages are likely to continue throughout 2023.
To lower turnover and the number of workplace injuries, emphasize worker training and onboarding, which will also help lower workers’ compensation insurance rates and medical costs long term. Agribusinesses are also re-evaluating their compensation and benefits packages. Dairy operators should re-examine cost-savings strategies in medical coverages and reallocate dollars to the benefits that are most important to employees.
Leveraging data to create personalized benefits may seem out of reach for many businesses, but it can create a quality employee experience that attracts and retains workers.
Protect against cybercrime and safety risks
Cyber risks will continue to be a critical security concern. Agribusiness has turned to automation to cope with labor shortages and improve quality. However, this shift has increased exposure to cyber risks, as bad actors can potentially hijack manufacturing equipment, farm machinery or computer networks.
Risks include reputational damage, the financial loss of a ransomware attack, and production downtime in the event of a manufacturing shutdown. Monitoring control systems, employee cybersecurity training, adoption of multi-factor password authentication, and cyber insurance are important strategies for managing cyber risk.
Food safety also becomes an issue with cyberattacks. Food recalls will remain a major risk for food manufacturers, driven by allergen issues. Of 146 food recalls in the second quarter of 2022, approximately 40% were due to allergens.
Assess and address your areas of greatest risk. Protect food and beverage systems from cyberattack, and be prepared for cyber coverage rate increases of 10% to 20% from 2022. Product recall insurance and product liability coverage can protect food manufacturers from costs related to product recalls and liabilities, which can run into the millions of dollars.
Manage input costs, risk to drive profitability
Russia’s invasion of Ukraine in February 2022 and China’s zero-COVID policy exacerbated global supply chain disruption with sharp reductions in fertilizer, seed, and fuel production. Food prices jumped nearly 11% in July 2022, the highest year-over-year increase since 1979.
Staying profitable in this environment demands flexibility. Farmers in hundreds of Midwestern counties growing soybeans and sorghum are double cropping, which the U.S. Department of Agriculture is promoting through relaxed rule changes in response to the wheat shortage.
Vertical integration and commodity futures are time-tested ways to help tame input costs and improve efficiency. But many threats to profitability in 2023 will be largely out of producers’ control, requiring strong risk management, insurance, and financial strategies to remain profitable.
Manage catastrophes, COVID, consolidation and control systems
Severe weather is occurring with greater frequency and impact, and 2023 will continue that trend. Nearly three-quarters of American farmers say crop yields have fallen due to drought.
Climate change-related storms, heatwaves, droughts, and wildfires remain a challenge for agribusiness and food production. The risk of COVID-19 hasn’t fully disappeared either. Tightening credit markets are likely to strain an agribusiness’ finances, which may lead to business closures and industry consolidation.
In addition, underwriters are inspecting industrial control systems before offering coverage. Without such controls set properly, dairy farms and processors can face substantial damage to the manufacturing line.
Given this environment in 2023, staying resilient is directly tied to proper risk management. The cost of crop insurance will increase, as premiums are directly related to commodity prices. Farms need to determine the level of risk they’re willing to tolerate in an era of more catastrophic weather events. For agribusinesses as a whole, rates will rise across the board, with particular pressure on excess liability coverage, property, and cyber liability coverage.
Make a plan
Develop a tailored strategy today to protect next year’s bottom line, support your workforce, and build resiliency for 2023. Here are some initial considerations:
Protect employees — Employees expect you to support their health, safety and well-being. Give them the ability to personalize their benefits without increasing costs.
Emphasize onboarding and training — With many employers hiring less-experienced workers, it’s more important than ever to focus on onboarding and training to set the right expectations and avoid costly accidents and injuries.
Understand your loss trends — Understand the root cause of your large losses and explain to insurance carriers what you’re doing to prevent future losses.
Close claims quickly at the lowest possible cost — Claims that take months or years to resolve affect long-term loss experience. Work closely with your broker to close claims quickly and with best possible outcome.
Editor’s Note: Josh Smart is the North American Practice Leader and Chief Sales Officer for Agribusiness, Food and Cannabis with HUB International and is responsible for leading the strategic initiatives around growing and supporting the Agribusiness segment.
February 3, 2023