Environmental Challenges for the Food and Beverage Industry

A drought-affected rice field in India. Photo credit: IRRI Images/flickr

Climate change and water scarcity will have a big impact on the food and beverage industry in Asia, due mainly to the changes in growing conditions for key agricultural inputs. That’s the primary finding of WRI’s forthcoming report: Weeding Risk, due out in October.

The current drought in India could be a harbinger of things to come. A 2 month long drought has afflicted almost half the country during this summer’s rainy (monsoon) season. The monsoon rains that are critical for crops such as rice, soybeans, and sugarcane, are 85% below normal. As a result, India’s sugar crop in 2008 was 45% lower than the previous year, and this year’s crop is expected to be the same or worse.

Overall food prices in India have risen 10%, owing largely to the drought. And global sugar prices have reached a 28-year high, in part because of lower production in India (India is the 2nd-largest sugar producer, in part because of growing demand for ethanol. Climate change’s impact on precipitation patterns is predicted to make droughts such as this year’s more common and prolonged than in the past.

What does this mean for investors in the food and beverage industry? WRI’s forthcoming Weeding Risk report attempts to answer those questions by examining the impact that climate change and water scarcity would have on key sub sectors, including aquaculture, dairy, poultry, tea, sugar, starch and confectionery and edible oils.

The report’s main findings are that climate change and water scarcity can have the following impacts on the sector:

• Raise agricultural commodity prices and increase price volatility by decreasing yields.
• Increase processing costs through operational disruptions and treatment costs.
• Create food safety challenges and conflicts with local communities over resource use

Leading F&B companies will find ways to build corporate and supply chain resilience to potential risks. Companies that understand the risks they are facing, and are actively building their resilience to the impacts, are better long term investments.

The forthcoming Weeding Risk report is being produced in partnership between WRI, the International Finance Corporation (IFC), and HSBC Bank.