The geopolitics of food and drink

AT FIRST sight, geopolitics and food and drink appear to have little to do with each other however the following example will demonstrate otherwise.

Back in 2014, Russia seized control of the Ukraine and this resulted in the destabilisation of eastern Ukraine.

The West, the US and the EU responded by imposing targeted sanctions on Russia.

Russian President Putin responded by imposing counter-sanctions in the form of an embargo on European agricultural products, resulting in European food and drink producers losing an important market.

The consequential oversupply of agricultural products in the EU had a devastating impact on prices, as Aberdeenshire's hard-pressed dairy farmers will testify.

Some food and drink producers found alternative markets, including in Africa, and the Aberdeen & Grampian Chamber of Commerce worked valiantly to provide the additional export documentation that these markets demand.

But even so, the producers found themselves under pressure to pay additional "commissions" to facilitate the movement of their products through customs in some African countries.

It may seem that with highly perishable products in tropical climates there is little choice but to pay the commissions.

But those who do could find themselves being prosecuted under the British Anti-Bribery Act.

If they also export to the US, they could find themselves being prosecuted as well under the US Anti-Corrupt Practices Act, quite aside from the reputational damage that convictions would bring.

This is not to say that food and drink producers should not export, or operate abroad.

In most cases they have no choice as they seek new markets for their products, more cost-effective agricultural labour, new ingredients or ideas or they may be dependent on international supply chains.

In the 21st century, it is difficult not to be international in the food and drink industry.

But being international exposes producers to the vagaries of an ever more volatile international business environment.

Academics have generated many frameworks for thinking about this international environment and two have particular relevance for businesses, whatever their sector.

Asymmetric governance captures the idea that while capital flows remain truly global, trade is being increasingly regionalised but policy decisions, especially monetary and fiscal policy decisions remain essentially national.

Thus global capital flows, on which emerging market economies depend, can be driven by decisions made by the US Federal Reserve Bank.

From the point of view of business, it means an unstable system where events in one market can be driven by decisions taken in another.

Multipolarity captures the idea that the world system is no longer dominated by the US, or indeed by western thinking and values, but consists of a number of powers each with their own values and operating rules.

This means that companies must navigate between different rule sets and value systems.

This can be particularly difficult with global supply chains, whose individual parts may be operating with different rules or value systems.

As shown by the Russia example above, food and drink producers can be subject to a broad range of what are sometimes called "geopolitical" risks.

In fact, these risks extend far further than geopolitical, to include economic, social, political, legislative and reputation risks.

All are factors outside of the commercial contract which can nevertheless threaten the bottom line of companies' international operations.

Other recent examples impacting on the food and drink sector include legislative change, like the introduction of the sugar tax, or the debate over GM foods, which risks leaving European food producers behind in the latest innovations.

But these factors can represent opportunities as well as risks.

Although not strictly related to the food and drink sector, the political upheavals in Turkey and North Africa have been the saving of the Spanish tourist sector (and thus the Spanish economy).

Producers must be as capable of identifying the opportunities to seize as well as the risks to mitigate.

Confronted by geopolitical risks (and opportunities), many organisations tend to a passive fatalism.

While understanding the risks of being abroad, they do not see what they can do about it, treating them almost as acts of God.

While it may be true that few food or drink producers in Aberdeenshire could hope to influence Russian policy on the Ukraine (although Putin's love of porridge for breakfast may offer an opening!), there are things you can do to better prepare yourself for operating abroad.

Firstly, companies can be aware of the geopolitical factors that can affect their business, for good or bad.

They can get used to asking the key "what if" questions.

This leads to a holistic view of the markets they are operating in, understanding how what happens in one market can affect what happens in another.

This is joining the geopolitical dots.

But it also allows companies to understand when they are hedging risks across different markets, and when they are doubling down on risks by depending on markets driven by the same causal factors.

Companies must also understand that not all shocks are predictable.

Unpredictable shocks, what Nassim Taleb has called "black swans" and Donald Rumsfeld termed "unknown unknowns", are inevitable in the interdependent world of the 21st century.

They require food and drink producers to develop "enterprise resilience", moving to an organisation with the agility to adapt to change before the case for change becomes urgent; anticipating risks and identifying opportunities.

Part of this lies in hedging risk across different markets, but part of it lies in developing contact networks of influence and information which not only leave you better informed, but also with friends and supporters when things go wrong.