A chain also has a weakest link

In recent years, the globalization of the food chain has been further perfected. Far-reaching agreements on volume, quality, price, logistics and financing mean that the agricultural sector has been able to grow at an unprecedented rate. And has developed into an indispensable link in the global food supply.

The farmer is the beginning and the consumer the end of chain thinking. Both, incidentally, participate the least in this chain idea, but simply form the start and end link that trade, processing, retailer and catering simply need to maintain their revenue model.

If you look at it from the point of view of risk management, then the so much vaunted chain thinking is mainly a kind of relay race. The baton is always passed on and the risk is transferred to the next step in the chain. Everything is managed, all information is shared and part of the margin remains everywhere.

Chain comes to a standstill
Until.... something happens that no one had anticipated. A war is waged on a certain continent and a strike takes place in a port in a country. There are always escape options or alternative routes to keep the chain functioning. An alternative route or sales channel leaves the chain intact, but this global corona crisis results in the chain as a whole coming to a standstill.

Take the European potato sector, for example, which has grown into a major global player in 10 years. In 2010, approximately 4 million tons of potatoes were processed into chips in Europe, now this has grown to more than 10 million tons. Or look at the animal feed industry, where several major players are active on entire continents. And we can cite a few more examples. They have one thing in common: they trust the chain and the system. They have become dependent on logistics partners, on global fast food chains or on financing in the chain by shifting payment terms.

Long-term testing
When the corona crisis continues, these chains will be tested for their mutual trust and their longevity. It is already clear that these food and feed chains will never be the same again. All parties in the chain will look more closely at who is taking over which risks from whom. And whether their chain partners are financially and operationally reliable enough. But what I mainly think is that they will no longer bet on 1 horse. But again looking for more local players who are more flexible and less dependent on 1 party, country, continent or distributor. 

I also hope that this will enable the start of the chain to position itself more strongly and not to transfer all the risks to them. Or is it more sensible to chain the chain and let the starting link (the farmer) trade directly with the final link (the consumer)? One thing is certain. After this virus, the chains are again examined.

* this column was previously posted in the Magazine for Agricultural Law from the IAR.

Keith Maas

Kees Maas is director of the DCA Group. He has more than 25 years of experience in commodities trading, both on the stock exchanges and in the physical market. Maas is a specialist in price risk management and a much sought-after sparring partner for food companies for their sales and purchasing strategy.

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