Food Security Strategy for Global Food & Beverage Companies

Introduction: Food Security as a Business Imperative

Food security is a critical issue for any food and beverage company. It is self-evident that food is the business for such a company, so any macro-level issue regarding food is inherently important. However, there are specific considerations that drive the relevance of food security to corporate strategy and survival.

First, food security reflects on the long-run sustainability of the business. Food companies need food to survive—they must grow it, process it, package it, and sell it. At the supply chain level, threats to food security must be taken seriously. The world is increasingly becoming a zero-sum game with respect to many resources, with food being one of the most critical. If the world needs to produce significantly more food than in the past, yet as much as a quarter of agricultural land is already compromised and much more threatened by water constraints and climate change, the challenges are clear. For a food company, global food security issues will affect its ability to obtain the materials needed to produce food profitably. It is not difficult to imagine a future where governments target large food companies, as food security needs will ultimately outweigh perceived corporate rights to control the food supply.

However, there is also tremendous opportunity. Where food companies can provide benefit, they gain in status and market position. If there is growing demand for food, any company that can meet that demand will increase its profits. While the UN's 70% production increase figure may be debatable, there is little doubt that a greater imbalance will emerge between current production and future needs. The degree to which a food company can close that gap will largely determine its success in a future where food security becomes a much larger policy issue.

Corporate Response and Regional Monitoring

Companies in the food business must take several different steps to address food security. However, the future is difficult to predict. It could resemble a science fiction scenario where food companies monopolize production and markets, or governments could dismantle large food companies and nationalize food production and distribution to increase security and reduce waste. An executive must consider strategies ranging from increased vertical integration to positioning the company as a food security solutions provider to reducing waste dramatically. But before that can happen, the company must monitor the situation. Threats and opportunities are not evenly distributed around the world.

Many international food companies operate with geographic organizational structures or matrix structures for companies with several billion-dollar brands. These structures allow local divisions to gather information about food security. Although this information is not always collected even by local government officials, food companies are typically well-connected with local food production conditions. This information is usually combined with data about water availability and demographic trends to determine a region's food security. In many cases where a region lacks food security, food companies are already involved in addressing the gap. Thus, food companies have the means—should they dedicate internal resources—to determine regional food security levels and understand the business and political implications.

One of the biggest challenges for food companies is balancing short-term and long-term interests in food security. In some areas, agriculture appears sustainable in the short run, but reliance on groundwater or predicted climate change effects will compromise long-term food security. Public food corporations are oriented toward quarterly earnings releases and struggle to think more than a year or two ahead. This creates a genuine concern for long-run sustainability, since managers lack incentives to think long term. A manager could make a decision today with negative long-term effects but will not be alive to experience the full consequences—creating little incentive for long-term thinking, which explains much of our difficulty addressing climate change. In the past, managers could exploit new markets if an old market declined, but today's largest companies have exhausted new market opportunities. They must now think more carefully about long-run sustainability, starting with data collection and using available resources and models to understand future regional needs.

The food and beverage industry is motivated by short-run returns, as executives face no genuine long-run consequences for their decisions. It is difficult to incentivize long-term thinking. Someone in their sixties has little reason beyond altruism to care what the world will look like in the latter half of the 21st century—they may pay lip service to this concern, but their actions suggest otherwise.

Policies, Mechanisms, and Corporate Incentives

Basic economic theory tells us that where market-based incentives do not exist to prevent negative externalities—market failures—such incentives must be imposed by government. Government is the only entity with the formal authority to introduce and enforce such incentives and is the only entity with a lifespan as long as a corporation. Therefore, the mechanisms needed are taxes or levies on behavior that creates long-run negative externalities. This is not an exact science—basing today's restrictions on potential future outcomes—but government can guide policy in specific areas. Historically, government support of infant industries eventually made them viable, providing evidence that foresightful government has enabled progressive policy decisions whose positive effects took many years to materialize. In some cases, we know what the right policies are today—such as California's unsustainable agricultural water use. In other instances, punitive policies remain speculative.

Companies can themselves act more responsibly and sustainably. This requires vision and possibly some sacrifice, but effective vision selling is possible. If a company lacks vision, as many big automakers did, others like Tesla will offer a compelling alternative. For food companies, there may be no economic incentive today to think about long-run food security and sustainability, but this does not mean such thinking should not exist. A strategy should be developed using available data and key issues, because companies best positioned and ready when crisis arrives will succeed through the 21st century. A company that fails to think long term risks becoming the food equivalent of Kodak, completely shut out of an evolved market.

On the consumer side, the trade-off between calories and nutrition will become increasingly important. Calories are relatively easy to produce, while nutrition is harder and requires individual attention. In a world with growing population, focusing on calories at nutrition's expense carries minimal costs for food companies, since even shortened lifespans mean consumers are replaced by new ones.

Climate Change, Water Systems, and Global Overlap

Food security overlaps with everything discussed so far. Climate change is a key overlap factor, as it affects the amount of agricultural land available for cultivation. This in turn overlaps with the nation-state concept, because climate change will increase agricultural potential in some areas while decreasing it in others. While nations cannot control their population size, and migration flows are limited by national boundaries and food supply by nature, some areas will undoubtedly face food crisis much faster than others. Consider Canada, sparsely populated and likely to gain agricultural land as temperatures rise and growing seasons extend. Canada will prosper, but sub-Saharan Africa will suffer greatly. With limited migration and possible trade difficulties, gains made in Canada cannot offset declines in sub-Saharan Africa. Climate change combined with other factors will not only affect agricultural production but will substantially determine the intensity of outcomes in the global food system.

For a food company, available data provides a means of understanding the intersection of climate change and food security. This is where opportunities lie—determining which areas to incorporate into the supply chain and which will see increasing demand. The food company becomes the intermediary through which food from post-climate change production centers is distributed to areas where production has declined.

Water is also central to this issue. The world's hydrological system is changing due to climate change. Most water exists in geologically recent sources. While a handful of ancient lakes and some areas rely heavily on underground water—nonrenewable sources that have existed millions of years—surface water systems will change with climate. Some areas will receive more rain, others less, affecting agricultural production. For a food company, understanding both today's and tomorrow's hydrological systems is essential to survival, particularly for identifying and quantifying opportunities and threats in the global food system.

Many food companies view water as an opportunity. Nestle, in particular, wants to commoditize water, understanding that commoditization gives companies control over a resource with very low price elasticity of demand. There is clearly interest and high-level knowledge from food companies, but this interest is far from altruistic. Again, the question becomes whether we can actually support 9 billion people on this planet. Mounting evidence suggests we cannot, and if water resources genuinely strain food production, greater attention will focus on finding the most efficient allocation of water resources.

The role of the corporation is interesting. A corporation like Nestle possesses substantial institutional knowledge about agricultural and hydrological systems, as these are integral to the business. Thus, large food companies have an opportunity to become important stakeholders in food security and water security. However, the intersection of business interests and sustainability science is problematic. While science can inform corporate decisions about resource deployment, corporations are also oriented toward profit—a form of inefficiency in resource allocation. Even in introductory economics, students learn that perfectly efficient markets yield no profit. So one must ask where the profit of food companies originates. Does it come from making people obese? Does it come from exploiting low price elasticities of demand for items essential to survival?

Sustainability Science and Multidisciplinary Solutions

Two narrative threads emerge here. The first holds that corporations, when properly oriented toward long-term results, can control and utilize substantial resources and deploy them toward technological innovation that resolves supply and demand issues. This has occurred historically, but we have not faced the same constraints we face now. This narrative argues that a properly motivated corporation can be an ally in food security.

However, sustainability science, in seeking optimal outcomes, must recognize that only inefficient markets produce profit. The optimal solution, given current constraints, is a perfectly efficient market where the global food system can sustainably produce and distribute just enough nutrition for all people to survive. Water research ties directly to this intersection of sustainability science and food security, since water is essential to food security, and we need both to survive.

Sustainability is a multidisciplinary approach that provides capability to address food security. Addressing food security requires solutions that are corporate, governmental, economic, agricultural, and scientific. This means many different stakeholders are involved. There are no theoretical limitations to a multidisciplinary approach to a multidisciplinary problem. In reality, however, there may be practical constraints. As a species, we face certain limitations, such as our ability to work with each other and our incomplete adaptability.

The biggest challenge with a multidisciplinary approach like sustainability science is coordination between different interests and stakeholders. No single person can be expert in every discipline, so knowledge and complex relationships between knowledge areas are difficult for anyone to master. While sustainability science theoretically contains all knowledge and answers, these are divided among hundreds or thousands of subject matter experts and theorists. Assembling it all together is incredibly challenging. However, sustainability science offers a basic pathway to understand the complex relationships governing our world.