Focus Report: 2024 Food & Agribusiness Market Outlook

Amid a market with many twists and turns, the most resilient food and agribusiness companies will grow and improve their safety and risk management programs to overcome challenges such as falling commodity prices, rising costs, and uncertain market conditions.

Net income for farms and the food processing sector is down for the first half of 2024, according to CSIMarket, and costs of inputs, insurance, and loans are up. The food and agriculture industries also are facing challenges from product liability and food-related recall claims. For example, there were 224 recalls from the Food and Drug Administration and 89 from the U.S. Department of Agriculture in 2023, a 31% year-over-year increase for the USDA, according to the U.S. PIRG Education Fund.

The USDA projected a 20% year-over-year decrease in net farm income for 2024, with challenges coming from falling commodity prices and increasing costs of inputs such as fuel, labor, equipment, loans, insurance, and shipping. Extreme weather events, persistent cyberthreats, supply chain disruptions, global market volatility, and ever-increasing regulatory demands are all financial stressors on farmers, processors, and manufacturers.

Insurance brokers face a tightening market for their food and ag clients as many standard agricultural carriers exit certain agribusiness sectors and/or opt for stricter underwriting guidelines, higher premiums, and decreased primary limits. Even clients with a good loss history in some strained classes of business are having to turn to the excess and surplus (E&S) market. Those insureds who qualify for captives are finding greater control over risk management and insurance expenditures, a win-win situation.

COSTS AND TRENDS
Premiums in the food and agribusiness sectors are continuing to increase as insurance companies respond to growing claims severity and their own need to maintain capital balance. Property, liability, and commercial auto rates are continuing to increase, sometimes by 20-30%, and several insurers are reducing their limits of coverage across all lines of insurance to control capital at risk.

Many accounts are underinsured on the property side, some by as much as 30%. It’s absolutely crucial to update valuations.

And some accounts are going bare on some liability coverages to save money or because they don’t have modern safety protocols, product tracing, or other safeguards that insurers insist upon for eligibility. Product recall insurance is not automatic in a general liability policy, and pricing is usually high, depending upon the product produced. As a result, coverage may be skipped. Those that do choose these coverages often don’t have adequate limits, either because of cost or because of capacity constraints in their market.

Business interruption, supply chain disruption, and food safety concerns dominate food and beverage companies’ concerns, but the existence of formal business continuity plans and regular updates to those that exist are not universal, especially among smaller companies. This often leaves them unprepared to pull out of a crisis in healthy condition. Extreme weather, natural disasters, and public/political crises grab the headlines, but equipment breakdown, strikes and labor disputes, cargo theft, and supply chain mismanagement are commonplace reasons for product delays and loss.

A fairly large minority of accounts choose business interruption coverage that requires direct damage to the company’s property. That leaves substantial gaps for non-property disruptions, such as utility failure, impassable routes, or downstream problems. At the moment, there is no coverage in the marketplace for true supply chain disruptions, meaning managing the risk through a business continuity plan is all the more important.

A lack of qualified labor continues to plague the industry—on the growing and harvesting side as well as the processing and manufacturing side. Compounding the problem, demand for products is increasing, and in some instances, production has doubled. Use of under-skilled workers can increase the number and severity of errors and injuries in harvesting, processing, packaging, and distribution. Both workers compensation and product liability are affected. Paying special attention to hiring practices, beefing up training for new employees, and increasing supervisor accountability helps overcome these challenges.

To fill the labor ranks, use of immigrant guest workers on H-2A visas is growing rapidly. The latest USDA data indicates there was a ninefold increase in H-2A issuance in FY 2022 over FY 2005. The influx may help with labor numbers, but it is relatively expensive and there are numerous legal and insurance issues that need to be dealt with. A dedicated H-2A specialist is almost a necessity to make sure regulations on wages, living conditions, insurance protections, and safety protections are followed. IOA recognizes the importance of these workers and has a dedicated H-2A specialist to assist with these tasks.

Lawsuits against food and beverage companies are up, with the number of class action filings more than doubling since 2013, according to Alston & Bird attorneys Angela Spivey and Sam Jockel writing in the December 2023 issue of Food Industry Executive. Labeling and contamination by chemicals and heavy metals were favorites of the plaintiffs bar last year, with both product and packaging in their sights.

WHAT’S DRIVING INSURANCE PRICES

Property Insurance
Wildfires and extreme weather events in recent years, such as hurricanes, high frequency of tornadoes, and high wind and hail occurrences throughout the U.S., have been a primary cause of the large increase in reinsurance costs and a hardened property market across all sectors. Inflation has increased the cost of rebuilding, repairing, and replacing everything from structures to equipment. Insurance companies have responded with higher premiums, lower limits, and in some cases higher deductibles. Brokers have had to move accounts in many classes to the E&S market because standard markets no longer want to insure those classes. Poultry and hog confinement and cotton gins are good examples of segments that are out of favor.

Commercial Auto
Increasing liability verdicts are hurting the overall commercial liability sector, and producers, manufacturers, and shippers in the food and ag sector are experiencing the ramifications, with 20-30% increases not unusual for accounts with decent loss history. For accounts with accidents or an unproven history, coverage may have to be sought in alternative markets, and those with a poor history will need to demonstrate serious upgrades in their driver training and safety management processes.

According to CloudTrucks, additional factors related to transportation include:

• Overall, over 82% of agricultural products and 90% of dairy, fruit, vegetable, and nut products rely on transportation by trucking to maintain the supply chain.
• Self-employed owner-operated truck drivers make up about 48% of the drivers within the trucking industry. The average owner-operator has been driving trucks for more than 30 years, and their crash rate is more than two times below the national crash rate for the trucking industry overall.
• Insurance costs have gone up more than 20% in the last years for trucking companies.
• Current challenges for 2024 include issues such as high gas prices, high insurance costs, finding qualified drivers, and adequate parking for long haul truckers.
• To help reduce insurance costs and exposure, technology integration will be important, as
  will the increased use of safer self-employed-owner operators.

Product Recall
Almost half of all food recalls in 2023 were due to nondisclosure of known allergens on the label, according to U.S. PIRG Education Fund. Note that, even though 28% of the FDA food recalls in 2023 were eventually terminated, according to FoodDocs analysis of federal data, the food and agriculture industry still had to bear the legal defense and other costs of the recalls. These are expensive matters that generate product-revenue loss, collection and disposal costs, notification expenses, and legal fees. They may even result in damages if injuries or death were caused by the product. Insurers are pricing based on their financial risk, which is substantial. Having a recall crisis plan and securing product recall coverage with adequate limits is vitally important, especially for food growers, processors, and manufacturers. Standard liability insurance coverage provides little help after a recall occurs.