Feed market & climate risk: A worrying landscape for investors

Climate change is causing financial issues for the agriculture sector, particularly when it comes to feed prices, says the FAIRR Initiative’s climate economist.

Simi Thambi

The financial impact of climate change is increasingly felt across a broad spectrum of sectors, but few more so than the livestock industry, given its substantial reliance on critical feed crops: wheat, maize and soy. This dependency increases the industry’s exposure to climate-induced risks. Recent findings from a climate risk tool designed by the FAIRR Initiative – an ESG investor network – affirm the adverse implications for livestock producers and also signal potential repercussions for investors in commodity markets.

According to research conducted using this tool, climate-related feed price increases could cost the livestock sector as much as $9 billion by 2030 through decreased EBIT margin. There is evidence that change is already upon us, with an emerging mega-drought in southwestern North America. In the fiscal year 2022, Tyson Foods reported that feed costs went up by $595 million.

Regional disparities

Different regions have unique dependencies on these feed crops. Europe predominantly uses wheat, while America leans heavily on maize. Wheat constitutes almost a third of the feed basket of a typical pork and poultry producer in Europe – much higher than in other parts of the world. In FAIRR’s ‘business-as-usual’ scenario where global temperatures surge on a course to 2C by 2100, wheat prices are projected to spike by 30 percent in Europe by 2030, nearly double the anticipated increase in North America. The primary reason is the impact of climate change on wheat yields, driven by factors such as temperature increases, shifts in rainfall patterns and escalating CO2 concentrations stemming from anthropogenic greenhouse gas emissions.

The implications of these climate-driven changes stretch beyond the livestock industry, to affect commodity producers and, subsequently, commodity investors. Escalating wheat prices in Europe, spurred by climate change impacts, could markedly influence the returns on investments tied to this commodity. Thus, any climate-induced disruption in the wheat supply chain carries significant potential to perturb commodity markets.

“Investors would be reassured by the disclosure of rigorous climate scenario analysis”

Investors increasingly recognize that a proactive approach to understanding and navigating climate risks is no longer an option for protein companies, but a necessity. Acknowledging the financial implications of climate change extends beyond mere risk management among portfolio companies; it opens up chances to engage with them on opportunities in a rapidly evolving market landscape. Only 11 of the 40 companies included in the research disclose how they plan to mitigate risks from rising feed costs through either data tracking, sourcing diversification or alternative feed ingredients. Just six of the 40 have published a climate scenario analysis, meaning they have actually analyzed the climate risks they will face in a warming world.

Companies should better understand that investors would be reassured by the disclosure of rigorous climate scenario analysis. Investors would also welcome disclosure of concrete plans from companies on how they seek to mitigate the impact of rising feed prices – be it through building resilience into supply chains by taking account of how climate may impact feed suppliers, or taking a novel approach to the composition of feed to remove exposure to at-risk commodities, such as wheat.

Guest comment by Simi Thambi