Every meal we enjoy results from multiple complex processes and interactions, both among businesses and between companies and consumers. Environmental variability may have unintended repercussions that are difficult to anticipate.
These surprises and spillovers may arise due to various sources, including Government policies or global markets. They can generally be divided into six general types of risk:
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1. Credit Risk
Credit risk refers to the possibility that a borrower won’t repay its debts according to the agreement, leaving food and beverage manufacturers vulnerable when suppliers or customers can no longer meet payment obligations. Food and beverage manufacturers face this threat when their suppliers or customers become unwilling or unable to cover payments as agreed.
Creditors always consider credit risk when issuing loans and other financial instruments. Lenders use information about borrowers’ credit histories, repayment capacities and other characteristics to mitigate losses while simultaneously diversifying their lending exposure and thus decreasing concentration risks.
Machine learning (ML) models can effectively forecast credit risks; however, their use requires large datasets with accurate input data (Zhu et al. 2019). As a result, their efficiency within Agriculture 4.0 remains limited.
2. Market Risk
Many risks can impact food supply chain functionality and create dynamic feedback effects within its network. Examples include price volatility, resource shortages, and labor strike risks.
These environmental risks can have serious repercussions for food companies, just as they impact logistics service providers and retailers. They may cause disruptions in production or quality issues due to labor shortages or machine breakdowns.
Businesses that source food and ingredients from multiple vendors can reduce risks by employing a risk-ranking methodology to identify those most at-risk vendors and then allocate resources towards preventative measures and optimizing sourcing strategies.
3. Liquidity Risk
Liquidity risk in the global food supply chain is particularly prevalent. Many countries that heavily rely on imports have limited reserves and purchasing power that leaves them exposed to sudden price hikes.
An abrupt disruption in global crop production would likely have severe financial and other repercussions, including rising commodity prices, food riots, and shifts in stock market values – not to mention impacting insurance business lines and investments (Lloyd’s 2015).
Accurate and timely supplier rating data allows buyers to make informed credit decisions that prevent costly supply chain disruptions. Automated reviews and an overview of the financial health of suppliers enable faster and more effective decision-making processes.
4. Currency Risk
Currency prices’ fluctuations can have a tremendous effect on businesses operating internationally, known as “foreign exchange risk”, “FX risk”, or “exchange-rate risk”.
Transaction exposure occurs when accounts payable and receivable are denominated in different currencies when exchange rate fluctuations between negotiation and settlement result in losses for the company.
Translation risk arises when translating financial statements of multinational firms with subsidiaries worldwide into their local currencies, an issue more prevalent among international firms with multiple subsidiary operations.
5. Environmental Risk
Environmental risk is a multifaceted concern that involves many variables influencing food supply chains’ ability to respond quickly to shocks. These include entry points for environmental variability along supply chains, evidence of propagation or attenuation by economic conditions and infrastructure quality factors, the type of shock involved, and its dietary implications.
Food companies are under increasing pressure to source responsibly and sustainably; indeed, our survey revealed that 84% of respondents listed ESG criteria as one of their selection criteria when looking for suppliers. Global trade policies can either aid or inhibit private sector efforts at adapting to environmental variability.
6. Supply Chain Disruption
Weather-induced labor issues or ethical concerns (e.g., sourcing from companies using slave labor or deforestation), disruptions can wreak havoc with supply chains – from economic effects, such as supplier bankruptcy and recession, environmental hazards like flooding or earthquake, to the political impacts such as countries implementing steep tariffs on imports.