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Emerging Risks of a Global Food System Changes, Challenges and Trends

Rick Shanks, ARM, National Managing Director

Food System, Agribusiness & Beverage Group Aon Risk Solutions

August 6, 2014

© 2014 Aon Corporation Australia Limited ABN 58 004 756 772

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Discussion topics:

Six Industry Risk Profile Change Drivers

Global Regulatory Challenges

Food Safety and Defense and Foreseeable Risks

Reputation Risk, Brand Protection and Crisis Management

Preparing for the unexpected

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What is driving risk change for the industry?

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Globally 1. Heightened consumer awareness and concern

2. Globalization increases supply system complexity

3. Regulatory challenges

4. Increasing product recall costs

5. Intensified media attention

6. Sustainability/corporate conscience 5

1. Australia’s consumers are concerned

Food Safety Information Council

• 57% seek food safety • 5.4 million food poisoning • 1.2 million visits to the doctor • 120 deaths • 300,000 prescriptions • 2.1 million lost work days

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1a. Contamination/Recall trends (FSANZ) 580

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1b. Contamination/Recalls by food category

(FSANZ)

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2. Globalization increases food system complexity

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Odds of eating product from China: • Tilapia 77.8% • Apple juice 70.0% • Cod 50.0% • Mushrooms (p) 42.7% • Garlic 22.8% • Spinach 21.5% • Cauliflower (f) 14.6%

2a. Global sourcing increases supply system risk

Source: food&waterwatch 2009

24 million

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3. Regulatory challenges • Microbial contamination • Foreign matter • Labeling • Chemical contaminant • Other • Biotoxin • Tampering

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Pesticide contaminated grain $87 million Caustic detergent washing bottles $10 million E. coli contamination $250 million Product tampering for cookie manufacturer $100 million Green onions/Hepatitis A $30 million Tomatoes Salmonella Food dist filed for BK Natural organic juice contamination $100 million Finger in the chili Stores sales off 20-50% Benzene contamination – beverage $30 million 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+ mil Peanut butter paste – Salmonella $ 1.5 billion

4. Increasing product recall costs

5. Intensified media attention

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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 (BAU)

6. There will be greater pressure for sustainability 50% 100% 70% 2050

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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!

6a. Sustainable water productivity is a critical issue

Source: National Geographic

1,799

576

1,008

689

600

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660

53

880

468

880

3,170

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Global Regulatory Challenges

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• Track and trace • Labeling • Economically motivated adulteration

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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

Product tracing takes on a new meaning

lettuce

dehydrated onions

Source: DHS/National Center for Food Protection and Defense

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Labeling - Cereal or illegal drug?

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Labeling - Say what?

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Economically motivated adulteration (EMA) and imports

• 2004 - Soy sauce made from human hair • 2008 - Contaminated baby food – 6/294k/51k • 2009 - Goat urine duck meat as lamb • 2012 - 11,000 children in Germany - Norovirus • 2013 - rat, fox, mink = lamb • 2013 - 15k dead pigs • 2013 - Recycled out-of-date food

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Food Safety and Defense, Foreseeable Risk and the Government Role

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2011 Food & Health Survey International Food Information Council

Who is responsible for food safety and defense?

• Government 71%

• Food manufacturers 67%

• Farmers/producers 58%

• Retailers/foodservice 47%

• Consumers/individuals 39%

• Consumer advocacy groups 25%

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Food safety and defense - whose responsibility?

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Day: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 30

Day 5 Disease First Detected Potential Impact: If a National “Stop Movement” of all susceptible animals is ordered on Day 8, by the time the disease is eradicated the Nation would still lose 23.6 million animals!

States Infected: 5 12 15 19 23 27 30 33 35 38 40

Preparing for the unexpected (case study)

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QSR Fresh Vegetable Distribution System

Attack of the killer tomatoes (case study)

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Reputation Risk, Brand Protection and Crisis Management

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It is all about……….

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It won’t happen to us

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Financial impact on shareholder value

Winners

Losers

Source: Oxford Metrica Reputation Review 2012

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Maple Leaf Foods (case study)

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Deep-water Horizon (case study)

11/17 2.7 - 4.9 Dominant Problem? 87 days

Halliburton fitted concrete cap

Oilwell owned by BP 65%, Anadarko 25%, Mitsui 10%

Cameron International provided the blowout preventer

The rig is owned and operated by Transocean

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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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Crisis leadership was learned in kindergarten

1. Clean up your mess

2. Share

3. Tell the truth

4. Apologize

5. Keep your hands to yourself

Source: Comments by Douglas E. Besman, Esq Nestle

I’d like my life back!

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Preparing for the Unexpected. What are Food Companies Doing?

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

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Evaluating food safety & defense processes

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Pre-Incident

Planning Crisis Event Response Recovery

Crisis Management

Post-Incident

Analysis

Communications

Developing effective crisis management plans

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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

Stress test and gap analysis

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Consumer Safety

Brand Protection

Financial Recovery

Food Supply Chain:

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

Industry specific solutions & resources

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Aon Benfield - AB eSolutions – AES Enterprise Risk Management - ERM Aon Crisis Management – ACM Aon Global Risk Consulting – AGRC Aon Global Client Network - AGCN Aon Environmental – AE

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Emerging Risks of a Global Food System

Changes, Challenges and Trends

Rick Shanks, ARM, National Managing Director

Food System, Agribusiness & Beverage Group Aon Risk Solutions

August 6, 2014