Is the fear of extreme weather increasing food prices?
Traditionally, food prices have been impacted by climate events only after the disaster occurred. For instance, a drought leading to lower crop yields or a hurricane disrupting livestock production would drive prices up as the supply chain felt the effects. These were often localized events that affected specific regions and commodities, creating temporary spikes in prices until production normalized. With the increasing number of climate events, that pricing framework has broken down. Now, it isn't just the actual occurrence of these disasters but the mere anticipation of such events that can cause food prices to soar. As Seungki Lee, an agricultural economist at Ohio State University, notes, "Sometimes the mere prediction of an extreme event—like the record-breaking temperatures, hurricanes, and wildfires forecasters are bracing for this summer—can prompt a spike in prices".
The evolving risk of climate change and the expectation of more frequent and severe disasters are now preemptively impacting price changes in the supply chain. Economists are beginning to see a growing trend where weather forecasts play a significant role in sticker shock. The anticipation of extreme weather conditions can lead food manufacturers to manage risks by adjusting prices ahead of time. This proactive approach to potential supply chain disruptions reflects the heightened sensitivity to climate risks. For example, the mere forecast of record-breaking temperatures or potential hurricanes can trigger a spike in commodity prices as manufacturers prepare for the worst-case scenarios.
Example of drought in a corn field
With no relief in sight, we expect this trend to accelerate and the next decade could see even more pronounced effects on food prices. The phenomenon known as "heatflation" could become a regular feature of the global economy, with studies indicating that extreme weather events could push food prices up by as much as 3% per year worldwide and by about 2% in North America. These anticipated increases are driven by the growing incidence of simultaneous disasters in key agricultural regions, known as multi-breadbasket failure. If the current trajectory continues, consumers may face more frequent and severe price hikes, making food affordability a significant issue worldwide.
For procurement managers, it is crucial to actively monitor and forecast climate risks to their supply chains rather than merely reacting to natural disasters as they occur. This proactive stance can mitigate the financial impact of climate-induced price volatility. Tools like Helios' platform, which predicts climate risks at least 16 days in advance and often 2-3 months before market prices are impacted, can be invaluable. By leveraging such advanced forecasting technologies, procurement leaders can stay ahead of price movements, securing better pricing and ensuring supply chain stability regardless of the direction of market changes. This strategic approach not only safeguards against potential disruptions, but will also become “table stakes” for global procurement leaders trying to manage a rapidly changing climate landscape.
