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Emerging Risks of a “Farm to Fork” Global Food System Rick Shanks, ARM, National Managing Director Food System Agribusiness and Beverage Group Aon Risk Solutions May 20, 2015

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Today’s topics:

o Food Defense and Security Risk

o Food System vs Chain

o Industry Risk Change Drivers

o Regulatory Challenges and Concerns

o Reputation Risk is #1

o Preparing for the Unexpected – What Food Companies are doing.

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Homeland Security Presidential Directive (HSPD) 7

Establishes policy for the Federal Government to: Identify, prioritize and coordinate critical infrastructures and key resources and protect them from terrorist attacks.

Homeland Security Presidential Directive (HSPD) 9

Establishes policy to defend the agriculture and food system against terrorist attacks, major disasters, and other emergencies.

Food Defense and Security Risk

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How do we look at food system risk?

Inputs to production agriculture

Type

of c

ompa

nies

Seed companies Crop breeders Agrochemical

companies Equipment

manufacturers Animal feed Financial services

Farmers Co-ops Ranchers Growers Dairies Animal production

operations Renewable energy

Refiners Millers Meat packers Beverage mfg Dairy Processing

Processed food manufacturers

Meat processors Dairy processors Beverage

manufacturers

Importers / exporters Wholesalers Supermarkets Restaurants Cold storage

Raw commodity

production & distribution

Primary food processing

Secondary food

processing

Distribution retail &

wholesale

Aon’s Food, Agribusiness & Beverage Practice (USA)

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1. Heightened consumer concern & awareness

2. Globalization & increased supply system complexity

3. Global regulatory challenges

4. Increasing product recalls and rising cost

5. Intensified media attention

6. Sustainability/corporate conscience

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1. Consumers are concerned

2014 Food & Health Survey International Food Information Council

82% Foodborne Illness Chemicals Pesticide Residues Unfamiliar Ingredients

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Reported 25 Chinese Mfg firms

Xuzhou Anying Biologic Technology Development Co., China

Customs Broker, Kansas City, MO

ChemNutra, Las Vegas, NV

April 3

Diversified Ingredients, St. Louis, MO

Menu Foods, Emporia, KS March 16,24; April 5,10,17,24;

May 2, 22 Scoular Co., Omaha,

NE (HQ) Menu Foods

Canada April 10

Nestle Purina PetCare

March 16,30 Hill’s Pet Nutrition

March 17,30

Del Monte Pet Products

March 31; April 6

Westaqua Commodity Group, Canada

More than 100 brands of pet

foods (Canada/US)

Proctor & Gamble

March 16

Skretting, Canada May10

Bio-Oregon Canada and

US 22 brands of

pet foods

30 chicken farms, Indiana Human food supply

At least 200 fish farms, Canada and US

Suzhou Textiles Silk Light Industrial Products Arts and Crafts Import and Export Col, China

Sunshine Mills

April 5

2. Globalization increases supply system complexity

Case Study: Melamine and EMA

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10% of all imports to the U.S. are for FDA regulated products

2012 estimated number of shipments – 24 Million

80% of seafood comes from outside the U.S.

Nearly 2/3rds of fruits & vegetables come from outside the U.S.

This year the FDA is tasked to inspect 600 foreign food facilities

2a. Imported products - food safety and defense challenge

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3. Regulatory Challenges

FSMA: Recall authority, Reason to believe Registration, Recordkeeping (24

hours) Food imports Track and trace Hazard analysis plan Food defense plan and foreseeable

risk Whistleblower protection

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3a. How many ingredients are there in a cheeseburger?

Tomato Grown in Puerto Rico

Bun WHEAT grown in Kansas, milled in Missouri, baked in the state where purchased

Mayonnaise Blended in Ohio from EGGS produced in Virginia, VEGETABLE OIL produced in Illinois from CORN grown in Iowa, LEMON JUICE produced in Florida, SALT mined in Utah, and SPICES from the Caribbean

Ketchup Blended in California from TOMATOES grown in California, VINEGAR from the Philippines, and SPICES from all over the world

Sesame Seeds Grown in New Mexico and packaged in Arizona

Lettuce Grown in Arizona

Cheese Made in California from MILK produced in Oregon

Onion Grown in Utah

Beef CATTLE born in Mexico, raised in Texas, transported to feedlot in Kansas and slaughtered in Nebraska, mixed with trim from Argentina, Canada

Bacon PIGS from Canada, shipped to Iowa, slaughtered in Missouri

Pickle Grown in Arkansas, pickled in Mississippi with SPICES from around the world

Mustard Blended in New York from MUSTARD SEED grown in Canada, SPICES from around the globe, and VINEGAR from Virginia

Illustration of vast diversity in food supply chain. Sources shown are only one possibility of origination point.

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Baking soda wheat gluten calcium propionate enzymes Bleached wheat flour mono- and diglycerides malted barley flour diacetyl tartaric acid esters thiamine ethanol riboflavin sorbitol Niacin polysorbate 20 folic acid potassium propionate reduced iron sodium stearoyl lactylate Water corn starch corn syrup ammonium chloride sesame seeds ammonium sulfate soybean oil calcium peroxide Yeast ascorbic acid Salt azodicarbonamide calcium sulfate calcium carbonate calcium silicate soy flour

USDA inspected beef

Milk milkfat Water cream sodium citrate salt sodium phosphate sorbic acid artificial color cheese culture acetic acid soy lecithin Enzymes starch Special Sauce Soybean oil pickles distilled vinegar water egg yolks HF corn syrup sugar onion powder corn syrup spice spice extractives salt xanthan gum mustard flour prop. glycol alginate sodium benzoate potassium sorbate mustard bran garlic powder hydrolyzed proteins caramel color paprika Turmeric calcium disodium EDTA

Cucumbers water Vinegar Salt calcium chloride Alum natural flavorings polysorbate 80 turmeric

Grill Seasoning Salt Pepper cottonseed oil soybean oil

3b. Product track and trace takes on a new meaning

lettuce

dehydrated onions

Source: DHS/National Center for Food Protection and Defense

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3c. Labeling - Cereal or illegal drug?

Logos removed

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3d. Global regulatory challenges

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4. Contamination events are likely

Hazards in food cause an estimated 48 million illnesses. Roughly translated this means 1 in 6 Americans will develop a food borne illness. 128,000 will go to hospitals and 3,000 die..

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(Years 2002-2011 CSPI Outbreak Alert 2014 Report)

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Pesticide contaminated grain >$87 million

Foul smelling yogurt >$25 million

E. coli contamination >$250 million

Product tampering for cookie manufacturer $100 million

Green onions/Hepatitis A >$30 million for restaurant

Tomatoes Salmonella >$11 million

Natural organic juice contamination $100 million

Odor in cereal boxes >$70 million

Cantaloupe tainted w/Listeria $150 million (estimated)

Hot dogs, lunch meat – Listeria $50 million

Lettuce – Taco Bell, E. Coli $20 mil lost operating profit

Peanut butter – Salmonella 2 year loss of brand $140 mil

Hamburger patties – (Topps) Company out of business

Meat contamination (Westland/Hallmark) USDA billed $60+ mi (Co. BK)

Peanut butter paste – Salmonella $ 1.5 billion

4a. Contamination events are costly

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5. Media coverage explosion

Logos removed

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6. Consumers are thinking about sustainability

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As developing countries grow their demand for food will increase dramatically and the result is emerging markets for food & agribusiness firms

– Rising Incomes = Demand for Convenient Packaged Foods & Meat

China has 20% of the Population, but Only 8% of Arable Land & 7% of fresh water

India has 17% of the Population, but Only 13% of Arable Land

China is the largest exporter - and the largest consumer of many agricultural products

There are more foreign firms registered to produce food for the U,S. than there are within our borders

Supply System Complexity/Dependence

6a. Changing dynamics of the food system – think global!

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Sustainability index Energy and Climate:

Reduce energy costs and greenhouse gas emissions

Material Efficiency: Reduce waste and enhance quality

Natural Resources: High quality, responsibly sourced raw materials

People and Community: Responsible & ethical production

Source: IFPRI

Water Productivity

50% 100% 70% 2050

6b. There will be greater pressure for sustainability

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Origin of Resource

Agricultural Production

Food Processing Packaging & Distribution

Preparation & Consumption

End of Life Disposal

Trends: Eat locally --Eat Less Meat --Eat Organic --Use Less Refrigeration -- Look for an ECO Label!

Source: National Geographic

1,799 576

1,008

689 600

18

660

53

880

468 880

3,170

6c. Sustainable water productivity concern

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CRISIS MANAGEMENT

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It won’t happen to us

Logos removed

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Financial impact on shareholder value

Winners

Losers

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Clean up your mess

Share

Tell the truth

Apologize

Keep your hands to yourself

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Crisis Planning - and what not to do!

BP 2009 Regional Oil Spill Response Plan – 582 pages

There are no walruses, sea otters, sea lions or seals living in the gulf

Peter Lutz, noted marine biologist listed as a consultant in the plan, died in 2005

Emergency response phone numbers were incorrect

Hyper link to Japanese shopping website

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Preparing for the Unexpected. Are you Ready? What are Food Companies Doing?

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Reputation risk, brand protection and crisis management

“The top priority – trumping everything else, including profits – is that all of us continue to zealously guard Berkshire’s reputation……We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.”

Warren Buffett Memo to Bershire Hathaway’s Managers and Directors

December 19, 2014

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Taking a new look at enterprise-wide risks (ERM)

www.aon.com

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Evaluating processes (internal and external)

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Stress test and gap analysis

Consumer Safety

Brand Protection

Financial Recovery

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Pre-Incident

Planning Crisis Event Response Recovery

Crisis Management

Post-Incident

Analysis

Communications

Developing effective crisis management plans

Invest in preparedness, not predictions - plan for impact!

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Food Supply System:

Sources of food waste

1. Agricultural production 2. Postharvest handling

& storage 3. Processing 4. Distribution 5. Consumption 6. End of life

Food Life Cycle:

Sources of environmental

impacts

1.6 billion tons $750 billion

28%

Reducing food waste from the system

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Farms Packer/Shipper Processors Distributors Grocers &Restaurants

• Supplier insolvency

• Failure of fuel/utility supply

• Communication system failure

• Port blockage & transport failure

• Crop failure or damage (weather)

• Political Risk

• Cyber risks, virus

• Delays caused by supplier’s supplier

• Denied access to supplier’s premises

Supply System Risk Concerns:

Assessing the risks of critical supply systems

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Emerging Risks of a “Farm to Fork” Global Food System Rick Shanks, ARM, National Managing Director Food System Agribusiness and Beverage Group Aon Risk Solutions May 20, 2015