The Importance of a Fresh Risk Management Approach for Dairy Farms in 2022

A heightened focus on technology and food safety will continue to provide both opportunities and challenges for the dairy industry in 2022. A fresh risk management approach could provide the right security and resilience moving forward.

While the COVID-19 pandemic continues to pressure the labor market, intensifying supply chain issues across the country, dairy exporters face increased difficulty securing containers and cargo ship space for their products as 72% of containers leaving major ports in places like California left empty to support quick turnaround by foreign-owned carriers.^[1] At the same time, the cost of supplies such as fertilizer, machinery, parts and fuel is on the rise, as the U.S. faces an inflation rate of 6.2%, the highest since November 1990.^[2]

Amidst these new challenges, dairy farmers are striving to build sustainable solutions to more long-term trends in the industry such as their growing reliance on automated technology and the country’s prioritization of food safety.

Family farms and major food manufacturers face new and increased risk with these developments; however, securing the right insurance to cover these risks is also becoming more difficult as underwriting guidelines tighten to safeguard insurers.

Dairy farmers looking to position themselves competitively to insurance companies need to consider the major trends hitting the industry, how they impact their operations and how they might mitigate the risk. Top challenges in 2022 will continue to be food safety and allergens, integrating technology and automation and water conservation.

Risk management challenge #1: Food safety and allergens

Recall insurance and product liability coverage have traditionally been considered unnecessary and overpriced by many businesses in the food and agriculture space.  However, food allergens are an increasing challenge for the food manufacturing industry, as mid-2021 marked the 16th straight quarter that undeclared allergens in processed foods was the top reason for recalls in the U.S. food industry. In 2020 alone, undeclared allergens accounted for nearly half (47%) of 363 FDA and USDA food recalls.^[3]

Dairy, specifically milk, is included in the list of eight food allergens (nine as of April 2021) identified by the Food Allergen Labeling and Consumer Protection Act (FALCPA), which was signed by Congress in 2004. Together, these allergens account for 90% of food allergies and serious allergic reactions in the U.S.^[1] Under this act, food manufacturers are responsible for knowing the allergen status of their raw

materials, mapping allergens throughout their entire manufacturing environment, and properly labeling products.

Along with making sure all dairy products are properly labeled, bacterial contamination haunts dairy producers, requiring a robust, functional and fully cleanable infrastructure of inspection technology.

While supply chain disruptions have resulted in less oversight while producers race to deliver products to consumers, inspections will ramp up once again and businesses will need to have practices and backup in place to prevent and correct accidents.

Risk management challenge #2: Technology and automation

Like every other market, the food and agriculture industries are adopting automation to streamline their processes. From milking the cows to transporting products, previously manually controlled processes are now managed by machinery.

Automation in the dairy industry means less human error, enhanced cleaning, more consistent product quality, improved production capacity and control, as well as more effective tracking of products. But this increased reliance on technology also puts dairy farmers in a vulnerable position.

In October 2021, one of Wisconsin’s larger milk processors, Schreiber Foods, fell victim to a ransomware attack. The company was forced to pause operations at its plants and distribution centers due to a rumored $2.5 million ransom on their computer systems.^[2]

The increase in automation and therefore cybercrime has led cyber insurance in the food and agriculture industries to increase in recent months, and it’s expected to increase another 20% or more in 2022. With that in mind, dairy farmers need to focus on prevention and deterrence, by instituting cyber security practices. Third-party audits, multi-factor authentication and employee training are first steps.

Risk management challenge #3: Water conservation

The drought in the western U.S. has highlighted the need for water conservation.

The record-setting drought in the 11 western U.S. states resulted in 89% of the AmericanWest being in drought in mid-July 2021.[3] The drought has had major implications for farmers and ranchers in the region, with crops going unplanted or unharvested.[4]

And, for the first time ever, the Colorado River, the nation’s largest reservoir that supplies farmers with water in the West, had mandated cuts.[5]

Drought has always been a concern in the agriculture industry. But the focus on water conservation will likely only grow in the coming years based on recent scarcity related to ongoing weather extremes.

The priority for dairy farmers as they begin the new year should be to evaluate their current risk profile, investigate current industry trends and develop risk management practices that will not only work to prevent losses but include backup for when something inevitably slips through. The right insurance coverage is a vital component managing risk.

References

 

^[1] National Milk Producers Federation. “NMPF Continues to Push on Supply Chain Constraints.” November 3, 2021.

² US Inflation Calculator. “Current US Inflation Rates: 2000-2021.” October 31, 2021.

³ TraceGains, “Our 2020 Recall Review,” June 16, 2021.

⁴ U.S. Food & Drug Administration. “Food Allergies.” May 5, 2021.

⁵ Wisconsin State Farmer. “Schreiber Foods hit with cyberattack; plant closed.” October 26, 2021.

6 National Oceanic and Atmospheric Association, “Western Drought Status Update,” July 15, 2021

7 U.S. Drought Monitor, National Drought Summary, July 20, 2021.

8 AP News, “First water cuts in US West supply to hammer Arizona farmers,” August 21, 2021.

Editor’s note: Josh Smart is the North American Practice Leader and Chief Sales Officer for Agribusiness, Food and Cannabis with HUB International and is responsible for leading the strategic initiatives around growing and supporting the agribusiness segment.