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As global demand for food soars, fresh challenges arise

Segment

IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

The Market Intelligence Platform


As global demand for food soars, fresh challenges arise

A new study describes in stark terms the challenge of providing food for nearly 3 billion people in the next three decades while simultaneously trying to lower deforestation rates and curtail greenhouse gas emissions, a task that will require an unprecedented response from governments, food companies and consumers.

The Dec. 5 report, six years in the making, notes that the global population is expected to jump 40% to 9.8 billion in 2050 from 7 billion in 2010. In that time, food demand will grow by more than 50%, while demand for animal-based foods will rise by nearly 70%. The question is whether the world can meet soaring food demand without expanding agricultural land but at the same time also reduce greenhouse gas emissions, an agent of climate change.

"The issue and challenge is much bigger than we realized," Janet Ranganathan, vice president for science and research at the World Research Institute, or WRI, said during a call with reporters to discuss findings from the report ahead of its release.

Tobias Baedeker, an agricultural economist at the World Bank, added: "The gaps between where we are and where we need to be ... have become so large, and the timelines so condensed, that we have no choice but to turn every stone and try to push in every possible direction."

The research was undertaken by WRI, the World Bank, the United Nations and two French research centers, La Recherche Agronomique Pour Le Developpement, or CIRAD, and Institut National de la Recherche Agronomique, or INRA. It was funded mainly by the World Bank and the Norwegian government.

The report echoes findings from a separate study recently published by the journal Nature, which said that between 2010 and 2050, "the environmental effects of the food system could increase by 50% to 90% in the absence of technological changes and dedicated mitigation measures, reaching levels that are beyond the planetary boundaries that define a safe operating space for humanity."

The WRI report identifies three gaps that need to be closed. The food gap — the difference in food production in 2010 and what is needed by 2050 — is estimated at 7,400 trillion calories, or 56% more crop calories than were produced in 2010. A land gap — the difference between the agricultural land area in 2010 and what is needed in 2050 even if yields continue to grow at past rates — is estimated to be nearly 600 million hectares, an area nearly twice the size of India.

And there is a "climate change" gap as well. To do its share in helping prevent global temperatures from rising by more than 2 degrees Celsius, the agriculture sector would have to reduce annual greenhouse gas emissions to 4 gigatons of carbon dioxide equivalent by 2050. At current rates, though, those emissions are projected to hit 15 gigatons per year — a gap of 11 gigatons. The sector's emissions currently total about 12 gigatons per year.

The report's authors stress, however, that the gaps could be filled if sustained action is taken on several fronts. For example, if consumers worldwide shifted 30% of their expected 2050 consumption of meat from ruminant animals — cattle, sheep and goats — to plant-based proteins, that alone would close half of the climate change gap and virtually all of the land gap.

There are some signs of such a shift taking place, with global sales of plant-based meat alternatives growing an average annual rate of 8% since 2010, about twice the sales growth rate of processed meat.

But because the change is slow and small, some observers believe governments might have to intervene. "There's growing momentum for a meat tax," Kevin Brennan, CEO of Quorn Foods, a U.K.-based maker of meat substitutes, said on the media call. "I think we will see that in the five-year-plus time frame."

A separate area that can be tackled is food waste. About one-third of all food by weight produced each year is either wasted or lost between farm and fork. Food loss and waste mainly occurs closer to the consumer in developed regions and closer to the farmer in developing areas. In the region of North America and Oceania, for example, consumption-related waste makes up about 61% of all food waste, with production-related waste at 17%. In sub-Saharan Africa, by contrast, 39% of food is lost in production but only 5% in consumption, according to the WRI study.

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On this front, companies are leading the charge. A recent analysis showed that nearly two-thirds of the world's 50 largest food companies participate in programs that have a food loss and waste reduction target. The analysis, by a coalition known as Champions 12.3, noted that several of the companies, including Koninklijke Ahold Delhaize NV, Conagra Brands Inc., Danone, Kellogg Co. and Tesco PLC, now measure food loss and waste within their operations.

Tesco, which says it has met 70% of its food waste target, recently disclosed that 27 of its biggest suppliers would publish their food waste data for the first time, and that 10 of its branded suppliers including Unilever PLC, Mars and General Mills Inc. would do the same within 12 months.

But the single most important step to meeting the food challenge, according to the study, is to increase crop yields to higher than historic rates and dramatically raise output of milk and meat per hectare of pasture, per animal and per kilogram of fertilizer. Earlier this year, Bayer Aktiengesellschaft completed its $62.5 billion acquisition of seed manufacturer Monsanto Co. When first announcing the deal in 2016, the companies claimed their combined firepower would help them accelerate agricultural innovation in order to meet future food demand.

But while higher productivity produces more food from the same land, there are unwanted effects. "It's what I call the wicked problem," Tim Searchinger, senior fellow at WRI and lead author of the report, said in an interview with S&P Global Market Intelligence. When yields rise and the cost of planting food crops fall, "there's a natural inclination to clear more land" and take advantage of the better economics.

A plausible way to get around the problem, Searchinger said, was if governments were to explicitly "tie programs that increase yields to programs that reduce forest clearance. It remains to be seen if that can be done."


Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

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