52 Risks® Update (January 2021): What do tequila, guacamole, and risk management have in common, managing risk in 2021: key COVID-19 learnings and takeaways (+ infographic), and more.
Welcome to 2021. I hope everyone has had – or perhaps are still enjoying – a great vacation break.
Supply Chain Risk and Commodity Price Risk
This is not a holiday quiz – but what do tequila, guacamole, and risk management have in common? It turns about that the key ingredients in tequila (being agave) and guacamole (being avocado) have experienced supply chain issues and price volatility in recent times.
In an article in late December 2020, Forbes reported that due to booming tequila sales in 2020, there was now a severe agave shortage. Many tequila producers were struggling to secure supplies of agave and prices were at an all-time high. For larger producers, price increases have offset any margin impact. Smaller producers, however, experience a margin squeeze in times of high agave prices. As noted in the article, vertical integration has assisted some tequila producers. For example, Codigo 1530 sources 50% of its agave from its own properties. The lead time in increasing agave production is long, however. Fully grown agave – the most productive – take seven to eight years to reach maturity.
Moving on to guacamole and avocados, Bloomberg reported that Chipotle’s operating margins were exposed to 5-10% fluctuations based on the price of avocados. Fortunately for Chipotle, the supply-side response from avocado producers now underway will see this volatility diminish. Agriculture is however in many respects a zero-sum game and the resulting impact for existing producers will be lower revenue as prices reduce (which inevitably happens). Will the avocado market end up looking like the oil market with lower, long term lower prices?
Both stories highlight the short-term impact on markets from unforeseen changes in demand. This is due to the long lead times needed from some commodities/inputs to respond to price signals. In the short term, the financial impact can be significant if not monitored and managed.
For those interested in reading more about commodity price cycles the World Bank has a plethora of resources here. Its latest Commodity Markets Outlook (October 2020 here) has some excellent analysis and long-term price series.
Supply Chain Risk and Commodity Price Risk are both risks under the 52 Risks® framework.
Managing Risk in 2021: Key COVID-19 Learnings and Takeaways
January 2021 is one year on from the emergence of COVID-19 in China. The extensive operational and financial disruption caused by COVID-19 and accompanying economic contraction resulted in a myriad of business responses to deal with the crisis. There have been many positive stories emerge from this period, from a risk management perspective. These learnings have made organizations stronger and more resilient.
A summary of my key observations from the various industry and business forums I have been involved in are here. There are many takeaways for managing risk in 2021.
You can download the infographic here
Peter Deans
