Last year, soft commodity supply chains were severely hampered, with the war in Ukraine posing a second shock to global trade flows as the effects of the pandemic continued to play out. With geopolitical tensions enduring, a global recession likely and one-in-100-year weather events consistently belying their name, Jenny Messenger explores the most pressing risks facing supply chains in 2023.
The year ahead looks set to be another challenging one for global supply chains. In its November 2022 goods trade barometer, the World Trade Organization (WTO) forecasted slower trade growth in 2023, citing war in Ukraine, high energy prices, inflation and monetary tightening as contributing factors. A month earlier, the WTO predicted that world merchandise trade volume growth would drop from an expected 3.5% in 2022 to 1% in 2023.
Geopolitical tension builds
For businesses in soft commodity supply chains, geopolitical risks and war continue to be highly disruptive. The Russian blockade of Ukrainian ports, physical damage to land and equipment caused by the war, and sanctions on Russian exports have significantly impacted agricultural supply chains. Fertiliser production is also under pressure due to hikes in oil and gas prices, prompting a knock-on effect for nitrogen fertiliser – which requires a significant amount of energy in its production – and leaving fertiliser prices up 60% year on year in August 2022, according to World Bank data.
Vlada Magaletska, former deputy minister of food and agriculture for Ukraine, says that last summer “was the first time it was possible for our government to calculate the total damage of the war, which was more than US$2.5bn for the agricultural sector in the summer months alone”, a figure that will no doubt continue to rise.
“This includes the partial or full destruction of machinery, equipment, storage facilities, livestock, crop storage, as well as most inputs and outputs – all of which significantly affected the agricultural sector,” Magaletska, who is now senior advisor at cognitive computing company Enterra Solutions, tells GTR.
The creation of the Black Sea Grain Initiative between the United Nations, Ukraine, Russia and Turkey opened up trade when it was signed back in July 2022, allowing millions of tonnes of grain trapped in Ukrainian siloes to be safely transported out of the country. Its renewal last November was welcomed, but further supply chain upheaval is inevitable as the war continues.
Climate crisis worsens
The climate crisis dominated headlines in November 2022, as the Cop27 climate summit garnered a mixed bag of commitments to keep warming to 1.5°C and phase out fossil fuels. Soft commodity supply chains of all kinds will continue to face climate change-related turmoil this year, with the most obvious risks being extreme weather events like heatwaves, fires, flooding and drought, all of which cause low yields or crop failure.
According to WTW’s Cotton 2040 report, all cotton-growing regions will feel the impact of climate change, and by 2040, “half of the world’s cotton growing regions will face severe impacts from high temperatures, changes in water availability, and extreme weather events”. As with most crops, the climate balance is crucial: cotton plants are relatively drought resistant, as they draw up water from the soil through deep, fast-growing taproots, but too much and too little water can be lethal. At certain points in their life cycle – such as in the early stages of their formation of bolls, the rounded seed pod that opens to reveal fluffy white balls – heavy rainfall can damage the cotton fibre, leading to lower yields.
Higher temperatures also mean a larger influx of pests, while extreme weather of all kinds can cause logistical challenges. Last summer, for example, drought in Europe caused such low river levels on the Rhine that vessels were forced to carry limited loads.
Yet while climate change is detrimental to most soft commodity supply chains, they also contribute to it: agriculture, forestry and land use change – a process by which human activities transform the natural landscape – are responsible for about 25% of greenhouse gas emissions.
Discussing the decarbonisation of supply chains, Gianpiero Nacci, director in sustainable business and infrastructure at the European Bank for Reconstruction and Development, tells GTR: “It’s not only about the implications of weather-related disruptions, in terms of farming and trade, but is also very much about how we set up the whole system to produce the inputs which are needed for the agricultural sector.”
“Greening the supply chain is a complex transformation,” he adds.
The ‘S’ in ESG
Hand in hand with environmental considerations are the social impacts on global supply chains, many of which are exacerbated by climate change.
The International Labour Organization (ILO) reported in September last year that there were an estimated 27.6 million people in situations of forced labour on any given day.
These numbers had increased in the previous five years, the ILO said, representing a further 2.7 million people entering forced labour between 2016 and 2021, triggered in part by the effects of the pandemic, where income interruption led to an increase in workers driven into debt bondage.
Soft commodity firms remain at risk of having child labour or forced labour somewhere in their supply chains. In its 2020-2021 annual report, the confectionery company Tony’s Chocolonely – whose stated mission is to remove slavery from its supply chain – nonetheless found 1,701 child labour cases in seven of the co-operatives it uses to source cocoa.
According to risk intelligence company Verisk Maplecroft’s Modern Slavery Index, published in October last year, countries that are more sensitive to climate change are at the highest risk of modern slavery. Growing numbers of climate refugees are likely to affect supply chains, too, as “climate-driven migration swells the number of undocumented workers within the domestic labour force” in countries like the US, Turkey, South Africa and China, the report says.
“This, combined with the expansion of the regulatory landscape governing forced labour, presents a growing dilemma for companies that had traditionally relied on sourcing low-cost labour abroad,” the report says.
Verisk Maplecroft’s director of human rights, James Sinclair, explains that “the problem is getting worse, not better, meaning that organisations need to work harder to keep goods tainted by forced labour out of their supply chain”.
Sinclair adds that companies “that take the time to identify risks and implement best-practice sourcing standards will be best placed to manage these growing threats”.
Deforestation has also been a big catalyst for human rights abuses. In addition to depleting vital oxygen-producing tropical forests to make way for beef, soy, palm oil, pulp and paper production, deforestation displaces indigenous communities and has links to the use of child labour and forced labour. As environmental, social and governance (ESG) factors become embedded in how businesses operate, the pressure is on for companies to ensure that their supply chains are free of human rights violations.
Deglobalisation gains ground
As food stocks decrease, several countries turned to banning food exports in 2022, putting further stress on supply chain resilience and reinforcing the return to regionalisation prompted by the pandemic.
In May 2022, India announced it was banning wheat exports until the end of the year. According to data collected by the International Food Policy Research Institute, which began tracking food export restrictions in March 2020, similar wheat export bans were in place in Afghanistan, Algeria and Georgia, while Pakistan and Bangladesh banned the export of sugar and rice, respectively. Other countries placed restrictions on exports from cooking oil to fruits and vegetables.
Speaking at the GTR Nordics conference in November last year, Anna Svensson, vice-president of finance and risk at trading house Elof Hansson, said that while deglobalisation was happening, the trend would likely reverse in future as logistics costs reduce and the focus switches back to production-related fees.
“Our head of logistics says that the ordering of vessels has never been higher, so the capacity coming to freight is increasing, and maybe the need is decreasing. For me it makes sense that logistics going forward will be cost efficient – then you’re back to production cost again,” she said.
“But then, of course, you have the geopolitical challenges, which I think are very cumbersome, and you have supply chain bottlenecks that you don’t want to risk again. It will be very interesting to see how globalisation or deglobalisation will play out: I think you will see a mix.”
Costs on the rise
Alongside these risks are surging interest rates and inflation, which have caused a cascade of higher prices throughout supply chains. While liquidity has been readily available in recent years, businesses are now finding that capital has far higher costs, driving companies to find new ways to make sure their supply chains are as resilient as possible.
Svensson explained that the full effects of higher interest rates, costs, inflation and potential sales stagnation had not yet been felt. “But you hear a lot of companies now saying they are going to reduce staff and coming out with cost savings programmes. I think we are in for quite a gloomy 2023,” she said.
Speaking on the same panel at GTR Nordics, Tobias Miarka, head of corporate banking at analytics company Coalition Greenwich, added that getting help with forecasting from banks was vital. “It’s not only about the traditional products that banks provide, but the data behind it and helping to forecast the seemingly unforecastable.”
Miarka also pointed out that more and more large corporates were considering vertical integration as a way of shoring up their supply chains. “They are basically saying that in order to stabilise some of their supply chains, they will buy part of it, because that’s the only way to get some crucial parts under control,” he said.
While dealing with soft commodity supply chain risks were challenging in 2022, Svensson added that “from a profit perspective, it’s been a very good year. So with challenge, comes opportunity.”