- The Coronavirus pandemic has put the global food supply chain under unprecedented strain. What are the long term implications?
- Protectionist measures adopted by some countries, transport issues, labor shortages and changing demand are causing disruption like never before, while continued delays and shortages threaten to bring higher prices, increased competition and a heightened risk of corruption.
- We look at the critical steps organizations should take now to augment their compliance efforts and mitigate the risk.
Until a few months ago, the thought of going into a grocery store and not being able to buy exactly what you wanted was inconceivable. Then came the coronavirus pandemic.
In the early stages of the outbreak, supermarket aisles full of empty shelves were a common sight. Pasta, flour, vegetables and, would you believe, toilet rolls were like gold dust. Supermarket brawls and overflowing shopping trollies soon became the norm, such was consumers’ fear that stores would run out.
In sharp contrast, on many farms the problem was too much rather than too little. It’s hard not to feel shocked by the images of farmers plowing vegetables back into the fields or pouring milk down the drain.
But how can there be surplus produce on the farm when the shelves are bare?
Demand has changed and the supply chain has been thrown into disarray. For now, governments and retailers insist there is sufficient food to meet demand, but experts fear that if disruption continues, a global food supply crisis could be on its way.
Here we take a closer look at the issue and the likely knock-on effects, from increased prices and competition for food to the heightened threat of corruption.
Weakened Supply Chain
The supply chain is under pressure like never before. According to John D. Anderson, Department Chair of the Agricultural Economics Department at the University of Arkansas, “We have had a major shift in how we consume food and where we consume food, and it has taken the supply chain a while to catch up on that.”
Before the Covid-19 crisis, Anderson says, almost 40-50% of food was consumed outside the home, whereas now we are all buying food at the grocery store to eat at home, and the supply chain is having to adjust.
Worker illness is also having an impact, creating deficits of some products. In the United States, meat processors have been forced to close some of their facilities due to outbreaks of the virus. At the end of April, Tyson Foods took out an advert in the New York Times warning that “the food supply chain is breaking” and “there will be limited supply of our products in grocery stores until we are able to reopen our facilities that are currently closed.” More recently, fast food chain Wendy’s announced that beef is temporarily off the menu in some of its locations, due to constrained supply.
Similarly, in the agriculture sector labor issues are creating headaches and threatening the normal flow of supplies. As the summer harvest approaches, farmers around the world are struggling to find the seasonal workers they need. Border closures and travel restrictions mean that many countries are finding it hard to access their usual migrant workforce. In Europe, France, Germany and Spain are urging locals to help fill the gap while the UK has flown in workers from Romania by charter. But even if farmers do recruit the much-needed help, there’s always the risk that workers will catch the virus and crops will go un-picked and never reach the stores they’re intended for.
Protectionist Measures, Logistics Issues
Few countries produce all the food they need and rely on imports to varying degrees.
However, protectionist measures adopted during the pandemic have made importing food more difficult – in some cases impossible.
Just as we’ve seen consumers stockpile food, some countries have stopped or restricted exports in order to preserve domestic food supplies. Russia, the world’s largest wheat exporter, has limited grain exports from April to June while India, the world’s largest rice exporter, has stopped signing new export contracts due to labor shortages and logistics disruptions that have also had an impact on existing contracts.
Transporting food is another challenge. Many of the world’s food supplies are transported by sea, but movement is slow due to the closure of ports and goods being held up in transit as governments increase inspections of incoming cargo. Air and road transport are equally fraught.
According to Abdolreza Abbassian, a senior economist for The Food and Agriculture Organization of the United Nations (FAO), the real fear is this:
“What if bulk buyers think they can’t get wheat or rice shipments in May or June? That is what could lead to a global food supply crisis.”
The fear is that the people who are most in need will suffer the most. This includes nations reliant on imports and, according to a new paper from the UN’s Committee on World Food Security (CFS), the world’s poorest citizens. This has led major businesses, farmers’ groups, industry, non-governmental organizations and academia to call on world leaders to implement a series of measures including maintaining open trade, while members of The Association of Southeast Asian Nations (ASEAN), which include Indonesia, Malaysia, Philippines, Singapore and Thailand, have pledged to ensure “food security, food safety and nutrition in the region”.
Heightened Risk of Corruption
Measures such as these will surely help but some shortages or delays are inevitable, bringing with them higher prices, increased competition and, as we’ve recently seen with Personal Protective Equipment (PPE), a greater risk of corruption.
When countries aren’t able to source what they need when they need it, normal procurement procedures fall by the wayside. Usually, government agencies making purchases ask for bids in advance. The details are published on open internet portals and contracts are awarded based on strictly regulated criteria. However, in these unprecedented times, some government agencies are buying medical equipment from suppliers directly, often verbally, without bids, without a transparent process. And criminals and unofficial suppliers are taking advantage. This is what happened in Italy, where reporters from the Organized Crime and Corruption Reporting Project (OCCRP) found that state contracts were awarded to companies whose heads had been accused of fraud and misappropriation of public funds.
The lack of transparency is enabling companies without any relevant experience to become medical equipment experts overnight and, worryingly, win bids for essential supplies. In Bosnia, it led to the owner of a raspberry farm securing a contract to provide 100 medical ventilators.
Price gouging is also common. There is evidence of some manufacturers charging five, ten even twenty times what they normally would. And because people are so desperate, they’ll pay any price. Meanwhile, soaring demand is creating a grey market, inhabited by “pop-up brokers, speculators, and even scammers.”
It is likely that similar practices will blight the food supply chain. Certainly, history shows that food shortages and corruption often go hand in hand, at the expense of the most vulnerable. The controversial oil-for-food program is a case in point. It was set up in 1996 to allow Iraq to sell enough oil to pay for food and other essentials for its citizens, which were suffering under strict UN sanctions. However, the scheme was abused by UN staff, by Saddam Hussein and by western and Middle East companies, who made millions from illegal kickbacks and surcharges to win contracts.
Another country that has suffered the effects of food insecurity and corruption (and is now under US sanctions as a result) is Venezuela. President Nicolás Maduro and his allies have been accused of siphoning off money intended to feed the nation’s starving population, exploiting a state-run program set up in 2016 to distribute food boxes at subsidized prices. It’s a story of overvalued contracts being awarded to ‘friends’ of the President without a bids process, and a firm engaged to acquire food outside Venezuela importing only a fraction of the food that had been contracted.
Food Supply Chain Risk
Corruption can be intentional misperformance or failure to perform a recognized duty, driven by desperation or a desire to take advantage of a situation, as illustrated by the examples above. However, organizations can equally find themselves the unwitting victims of corrupt behavior, which is why it is so important for them to protect themselves in the current crisis.
Organizations are operating in unprecedented circumstances and may be tempted to take shortcuts. Say their existing suppliers can’t access what they need for any reason, they may turn to new suppliers.
In their haste to source supplies, they may even start working with these new partners before completing any formal screening, which opens them up to risk and liability.
Without proper vetting, they could end up doing business with a company whose Ultimate Beneficial Owner is engaged in financial crime or subject to sanctions or whose practices violate labor or human rights regulations.
Engaging with new logistics partners carries similar risks. We read that makeshift transport providers are springing up to meet a surge in demand. Are these companies legitimate and operating in a lawful way?
Intermediaries such as third-party customs agents can also leave organizations exposed. As companies face intense pressure to quickly obtain goods and clear them through customs, they may be more inclined to pay bribes to customs officials to get goods moving. And customs staff and other officials will often turn a blind eye for the right price, sometimes to the detriment of health and safety standards. It has even been said that corruption of this type led to the coronavirus outbreak in the first place, with (bribed) inspectors giving the Wuhan market a clean bill of health late last year.
Tackling Corruption Now
To mitigate the risk, it is crucial that companies double down on their compliance efforts. Failing to do the right thing now will have serious reputational impacts after the crisis has passed.
There are two key things for organizations to keep top of mind:
- Knowing your customer has never been more important
It’s critical to ensure that any new supplier on-boarded in the coming weeks and months is subject to increased supplier due diligence. This includes understanding their beneficial ownership, having visibility of their track record and diving a little deeper into how their services will be provided.
- Keeping a watchful eye on third parties can stop issues in their tracks
Ongoing monitoring of third parties enables organizations to trace and monitor critical suppliers on a global scale. This makes it possible to identify possible disruptions earlier to enable agile responses when problems surface.
In many ways, organizations are at the mercy of the coronavirus crisis, powerless in the face of a global pandemic that has changed life as we know it. However, they can do something about the knock-on effects and protect themselves from the corruption risks it brings.
As Former UK Prime Minister Winston Churchill once said, “Never let a good crisis go to waste.”
In compliance terms, this means using the current crisis as an opportunity to ensure that your third-party risk management program is watertight.