Contributors
Subscribe to our newsletter
Agrifood companies are facing a number of emerging challenges that threaten access to a stable supply of affordable food and beverage ingredients. Changing climate patterns have increased the prevalence of costly climate shocks like flooding, hurricanes, droughts, wildfires, tornados, and heat waves.
In 2024, there were at least 24 confirmed climate events with losses exceeding $1 billion in the United States alone, vastly exceeding the annual average of 8.5 such events from 1980-2023. Globally, rainfall and drought become more extreme across key growing regions in 2024. Compared to a ten year baseline period from 1995 to 2005, months with record low precipitation were up 38%, and 24 hour rainfall extremes were 52% more frequent.
Agricultural yields are acutely vulnerable to these events, creating spikes in the prices of key commodities, and increasing costs for downstream businesses.
Climate shocks lowering yields and disrupting supply chains
Though 2024 yield data are still being processed, in 2023, climate shocks also caused major yield drags in many of the world’s key growing regions.
- Due to prolonged drought, Italy, which produces 50% of the rice in the EU, saw its lowest area sown in 23 years.
- Similarly, due to drought in the Midwestern U.S., wheat yields were down 37% compared to 2022.
- And in Northern Europe, heavy rains, which caused widespread flooding, prevented over 10% of potato fields from being harvested.
According to climate models, these yield losses are only expected to worsen over time. A report analyzing 11 models predicted that, compared to present conditions, yield loss risk could increase by 9%-12%, 5.6%-6.3%, 18.1-19.4%, and 15.1%-16.1% for wheat, maize, rice, and soybeans respectively by the end of the century (Figure 1).
With these risks coming more sharply into focus, companies must ensure their supply chains and larger businesses are resilient to climate shocks. But how?
From supply shifting to investing in current suppliers
When climate shocks have impacted yield in one sourcing region, procurement managers typically shift their sourcing to other regions. To make decisions on which regions to move into, they rely on data pertaining to crop prices, geopolitical considerations, and yield forecasts.
But there are a few issues with the supply shifting strategy. As a McKinsey analysis points out, expanding business operations to new locations comes with unknowns and potentially high transaction costs. These can include developing new, regionally appropriate supply chain optimization models and acquiring specialized expertise in local regulations and market restrictions that differ across regions.
Furthermore, shifting sourcing, which may be an appropriate short term strategy, is less viable in the longer term. It does not address the underlying problem causing the need to shift sourcing areas in the first place: extreme weather is more common, more severe, and creates new supply disruptions each year. In fact, shifting sourcing can simply pass the problem on to other companies.
An alternative strategy to shifting sourcing is incorporating regenerative agriculture practices into current supply regions. Regenerative agricultural practices have been shown to help reduce the risk of yield losses during climate shocks – a topic that will be covered in more detail momentarily. Additionally, a strategy that revolves around investing in current supply areas reduces the operational complexity, logistical hurdles, and associated transaction costs incurred with a supply shifting strategy.
However, procurement and finance leaders have historically lacked data that informs the yield-risk mitigation benefits of regenerative agriculture practices. This data, which includes up-to-date, regional rates of regenerative agriculture practice adoption and robust information on how historical yields on fields that were implementing regenerative practices responded during climate shocks, would enable procurement leaders to assess the relative costs and benefits of competing strategies, and finance leaders to appraise their supply chain risks and opportunities more precisely.
To fill this void, a growing body of academic research is validating the connection between adoption of regenerative practices and resilience against severe weather.
What the data says: How regenerative agriculture practices can protect yields during climate shocks
Farmers that adopt regenerative practices that are appropriate to their specific regions and crop types, such as planting cover crops, reducing tillage, and diversifying crop rotation, can meaningfully limit their yield loss during climate shocks. Below, we look at some of the evidence for a few of the more common regenerative practices.
Cover Crops
Cover crops are planted on farms to protect the soil during periods between when cash crops are grown. Planting cover crops has been shown to help prevent soil erosion, retain moisture, and build soil organic carbon content. Planting cover crops has also been shown to increase yields during climate shocks when compared to land that has not planted cover crops.
An analysis by Sustainable Agriculture Research and Education (SARE) found that during the widespread drought of 2012 in the Midwest, farmers who had sown cover crops reported an average yield increase of 9.6% for corn and 11.6% for soybeans relative to farmers who had not incorporated cover crops. Importantly, while farmers that reported sowing cover crops reported higher yields than those who did not across all years of the study (2012-2016), the difference between these yield deltas was much more pronounced in the drought year of 2012, where corn farmers incorporating cover crops saw 9.6% higher yields versus smaller gains of 3.1%, 2.1%, 1.9%, 1.3% in 2013 to 2016, respectively.
Conservation Tillage
Conservation tillage, an umbrella term referring to both reduced and no till practices, can also help protect yields during climate events. A 2021 study published in Nature analyzing the effects of conservation tillage on the cotton crop in the American Southeast – an area that produces 38% of the world’s exports of raw cotton and is known to be vulnerable to extreme weather events – found that farms with no till systems had yields 22% higher than conventional tillage systems during exceptionally wet climates.
This difference in yields, according to the authors of the study, is likely due to the higher soil organic carbon concentrations associated with no till agriculture, which is viewed as a proxy for that soil’s ability to hold water underground, as opposed to having the wet conditions lead to flooding. Similar yield benefits for conservation tillage practices have also been documented in corn and soy crops within the US Corn belt.
Diversified Crop Rotations
Crop rotations, which increase the natural biodiversity that is needed for soil fertility, are especially important in regions like the United States cornbelt that have planted predominantly oilseeds (corn and soy) for the last half-century. A long term study, published in 2020, definitively shows that diversified crop rotations (which have different regionally appropriate definitions) also help farmers mitigate yield loss during adverse growing conditions in North America. Notably, the study found that while diverse crop rotations increased crop yields under all growing conditions, the effect was particularly pronounced during drought years, where fields that practiced diverse crop rotations were able to reduce yield loss by 14% to 90% relative to fields without the diversified rotations.
How yield resilience creates a strong business case for regenerative agriculture investment
Many companies evaluate the costs and benefits of regenerative ag based on the impact of growing practices on carbon abatement. These analyses often include comparisons of regen ag program costs against an internal cost of carbon. While important, these analyses are incomplete because they exclude the value of regenerative ag as a hedge against future supply chain disruptions. To build these benefits into a more complete business case for investing in regenerative agriculture, procurement, finance, and sustainability leaders can take two steps:
- Estimate the financial impact of yield losses during climate shocks
- Estimate the benefits and costs of regenerative agriculture investments, including yield risk mitigation, carbon reductions, and potentially other benefits such as increases in water retention, marketing opportunities, and the financial value that transitioning to regenerative practices brings to farmers
One framework for tackling the first step was put forth in the World Business Council for Sustainable Development’s (WBCSD) most recent climate adaptation and resilience report. In the framework, WBCSD suggests calculating financial risk as the product of:
- Hazard (the likelihood and scale of a climate event)
- Exposure (the amount of assets exposed to the hazard in a given location), and
- Vulnerability (the degree of expected impact to those assets at a given hazard intensity)
Let’s look at a representative example. Consider a food company that sources wheat from a draw area in Topeka, Kansas. To build the risk profile of this draw area, a company would need to determine:
- How likely is it that a significant climate event will hit Topeka? What does the historical data indicate?
- How exposed is their wheat supply from the draw area, should the climate event hit? Is it likely that 30% of their supply would be affected? How does this depend on the type of climate event and the adoption of regenerative practices in the region?
- Assuming the likelihood of the climate event and the extent to which wheat supply is exposed, what is the expected financial impact to the business? What would be the transaction cost of changing suppliers? Would raw prices of the commodity increase? How would that impact the bottom line of the food product(s) that the wheat was going into?
Employing this framework – which includes similar questions to those required in CSRD disclosures – companies can start to build shared visibility internally about the financial risks of supply shocks.
After evaluating risks, cross functional stakeholders can then compare a more complete view of costs against the benefits of investing in regenerative agriculture. For example, yield improvements for key commodities driven by grower practice changes translate into cost savings for the business. Likewise, sustainability benefits include estimated greenhouse gas reductions and removals relative to alternatives like carbon insets or a company’s internal cost of carbon.
How can Regrow help you answer these questions?
This risk analysis is multi-faceted, and relies on supply-specific weather, agricultural practice and yield impact data. A data and insights partner like Regrow can help bring clarity, confidence – and, critically, speed – to this exercise.
Aggregating this type of data across a complex global supply chain is time intensive without the right data and technology partner. Regrow’s Agriculture Resilience Platform is designed to help companies analyze their ag supply chain risks associated with growing practices and generate detailed strategies based on forward looking emissions scenario analyses.
To learn more about how you can leverage our supplier specific data and planning insights to inform your business strategy, please don’t hesitate to get in touch with us - we’d love to talk with you.
