FEATURE
El Niño plan ahead and manage the risk by Daniel Fairweather, Willis – Email: dan.fairweather@willis.com WILLIS’ DIVISION HUGHES-GIBB IS THE CENTRE OF EXCELLENCE FOR BLOODSTOCK, LIVESTOCK, AQUACULTURE, CROP AND FORESTRY INSURANCE. THE DIVISION WAS FOUNDED IN 1959 AS THE FIRST BROKER IN LONDON EXCLUSIVELY DEDICATED TO BLOODSTOCK RISKS. IN RECENT YEARS IT HAS EXPANDED TO OFFER A FULL SERVICE ACROSS OTHER SECTORS, INCLUDING LIVESTOCK, AQUACULTURE, CROP AND FORESTRY INSURANCE. “WE ARE THE ONLY TRULY GLOBAL INSURANCE BROKING DIVISION TO ENCOMPASS ALL OF THE ABOVE AREAS OF SPECIALISATION. “THROUGH WILLIS OFFICES AROUND THE WORLD, WE CAN PROVIDE QUOTES AND COVERAGE FOR THE WHOLE SPECTRUM OF INSURANCE PRODUCTS IN THE BLOODSTOCK, LIVESTOCK, AQUACULTURE, CROP AND FORESTRY SECTORS NO MATTER WHERE OR THE RISK IS LOCATED,” SAYS THE COMPANY.
T
he El Niño Southern Oscillation (ENSO) is a climate event, where the adverse warming of sea surface temperatures in the Pacific Ocean leads to extreme weather conditions affecting weather systems and countries globally. Climatic impact varies from extreme rainfall and flooding in some areas, to extreme droughts and high temperature in others. From a food and feed perspective these changes can have devastating effects on industry, with farmers, fishermen and local industry and finance having to contend with extreme weather events leading to crop failure, rapid soil erosion, damage to industry and suboptimal conditions leading to outbreaks of disease. In the last severe El Niño in 1998, rainfall in Peru reached 40 times the average. El Niño events occur roughly once every five to seven years and although they are relatively short in duration they can have far reaching and long lasting impacts on industries involved in animal and crop production. The chances of an El Niño event occurring this summer (2014) are currently estimated at 70 percent. What affect does this have on industry?
Fisheries
A clear impact of El Niño events can be seen in Peru and the impact on the Peruvian
anchovy fisheries sector, producing the bulk of the world’s fishmeal. El Niño reduces anchovy spawning and leads to a change in migration patterns, typically causing huge disruption in the fisheries sector. In each year where El Niño occurred (1972, 1982 and 1997) huge reductions in anchovy catches resulted, and near collapse of the industry was experienced. As well as water temperatures affecting the migration and spawning of the Peruvian anchovy population, many Peruvian fishermen are at the mercy of the weather. These conditions often cause huge disruption to the fishing effort, increasing the costs of fishing and the ultimately the ability of the fishermen to repay loans. With the increased costs of catching, coupled with reduced catches, the result is huge increases in fishmeal prices.
Terrestrial farmers
With the development of more and more plant based feeds for aquaculture, the effects of El Niño put pressure on some of the key grain and soy producing regions of the world. With ever increasing competition for land to supply feed for humans, biofuels and fodder crops any disruption to supply can have marked effects on raw material pricing. The 1997-98 El Niño severely affected the Southeast Asia and Oceania regions, leading to wide scale crops failures and huge increases in food prices which, in turn, resulted in sustained hardship for many across the region. Grain production in eastern Australia and the Philippines reduced dramatically, and the same is anticipated during the next El Niño event.
Feed manufacturers
Modern aquaculture feeds are increasingly dependent on ingredients coming from a number of suppliers, usually globally sourced, and typically using both terrestrial (grains or soybean) and marine (fishmeal) suppliers. Consequently, aquaculture feed producers 16 | INTERNATIONAL AQUAFEED | July-August 2014
are affected by most of the major effects of El Niño events. Increased raw material prices might be offset by passing these costs on to feed buyers, but by how much and for how long?
Fish farmers
Fish farmers, as the end user in terms of aquaculture feeds, bear the brunt of increase in raw material price rises. Unless they have managed to secure long term contracts with feed suppliers, or avoided fixed price supply deals with fish markets, they are heavily exposed to feed price fluctuations. Feed prices make up a significant portion of the costs of fish production, and will erode profit margins unless prices are passed on to the consumer. This can sometimes be difficult to do when competing against wild fish supplies or substitute proteins. If alternative feeds are available, then these might be a short term option, however, this tactic may result in sub-optimal nutrition leading to reduced growth rates and ultimately an inferior product. What measures can be taken to mitigate against the effects of El Niño?
Identify risks
In all cases, irrespective of position within the supply chain, companies should take a proactive approach to risk management. Risks should be identified, assessed and monitored. Once the impact of these risks is analysed, strategies for reducing or managing these risks can be developed. Management steps can be as simple as substituting feed, to hedging the effects of El Niño events by purchasing specialist insurance. What is crucial in all cases is to plan ahead. Many of the effects of El Niño will be felt throughout the market and will be affecting many stakeholders at the same time, so impacts will be significant throughout supply chains. Unless companies plan ahead they will have no option but to react as events unfold,