I recently had the privilege to be a session speaker at the annual meeting of the Northwest Food Processors Association in Portland, Ore. I was struck by the seriousness with which the industry’s senior management is considering the risks and opportunities around energy. The willingness to have an open and serious discussion about the future effects of energy and climate change was both impressive and timely.
This industry faces potentially game-changing influences around costs, the demands of their final consumers, and the demands of food retailers. I thought this would be an interesting case to investigate in more detail. The U.S. food industry has evolved for decades on a diet of cheap, freely available energy. This is inevitably reflected in the industry’s operations.
The various energy-related aspects of food processing and packaging, food preparation, sterilization and refrigeration tend to be viewed separately with a relatively low level of integration. Elsewhere in the world, where energy prices have traditionally been higher, there’s a higher degree of energy integration, including extensive heat recovery from process to process.
This low-cost world has changed abruptly in the past few years as energy costs have more than doubled. With energy prices forecast to continue to rise, energy productivity can no longer be viewed as an optional task for operations. It must increasingly be seen as a strategic driver that might even dictate the location of a plant or the processes used in the future. At a minimum, energy cost is increasingly tracked and understood by a wider group of management than ever before, and global competitors with more energy-efficient operations become more serious threats.
Cost is being exacerbated by well-meaning biofuel policies aimed at reducing dependence in imported oil and the carbon footprint of vehicles. Whatever the pros and cons of this approach, it’s diverting land used for food production into fuel production and pushing up the price of crops, the basic raw material for the processing industry. Given this, can an executive in the food industry remain agnostic when it comes to the topic of biofuels?
Fertilizers also are rising in price as natural gas, a crucial component in their manufacture, is in ever-growing demand by electric utilities. In the United States, most of this electricity is used in homes and buildings that could easily and dramatically reduce their electricity demand if they were more efficient. Thus, by a strange series of links, suboptimal building codes are driving up the cost of food.
When it comes to climate change, food is a multidimensional contributor to manmade greenhouse gas emissions. Changes in land use and burning fuels for agriculture, as well as importing food from around the world and transporting the processed food to market, produce vast amounts of additional greenhouse gases. This fact hasn’t escaped the attention of some major food retailers and their more environmentally conscious consumers. Some are planning to introduce “carbon-footprint” labeling requirements for their food and drink products. What food-processing executive can ignore potential Tesco, PepsiCo or Wal-Mart demands for traceable carbon labeling on their products?
A large part of the processed food and drink industry relies on packaging that has significant energy-related aspects. The most obvious is glass, which is becoming more costly to produce as gas and electricity prices increase. The high energy content also is associated with a significant level of embedded greenhouse gas, which must be reflected in any carbon-labeling requirement. Can food processing executives afford not to understand the energy and climate effects of the packaging choices they make for their products?
Last and certainly not least is the effect of changing weather patterns on the cost and viability of farming, which in turn affects the predictability of the cost and quality of raw materials for the food processor. Every climate change model shows a high probability of significant changes in crop patterns during the coming decades. If these risks exist, can a food executive afford not to have some business scenarios to adapt to these changes?
Food processors aren’t alone – every industry will have a different, but equally complex and strategically significant, set of factors. Customers, shareholders and the wider public will increasingly expect management to quantify energy and climate risks, and clearly articulate their plans to manage them.
Peter Garforth is principal of Garforth International LLC, Toledo, Ohio. He can be reached at [email protected].