17 May 2023
#Agribusiness, #Environmental, Social and Governance (ESG), #Transport, Shipping & Logistics, #Procurement
According to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), Australia achieved a record $90 billion in agricultural production in 2022/23.
While this is tipped to fall in the short term (to $81 billion 2023/24), it should not be considered an aberration but a new benchmark of the value the agri-sector can create.
While the COVID-19 pandemic and much of the disruption it caused is now history, like the Four Horsemen of the Apocalypse, new disruptors are on the horizon. As a result, supply chain contract best practices are also evolving, with a focus on responsible and sustainable practices.
This article explores four key areas undergoing generational change and the contractual developments in post-COVID agribusiness supply chains.
When we speak of ASCs, we speak first of primary production (including the inputs necessary to achieve that production), transport and logistics (including storage and export) of that production, and processing of that production (including packaging), primarily but not perhaps exclusively which takes place in Australia.
Supply chain contracts
A challenge inherent in any ASC is that it consists of a matrix (or patchwork) of separate contracts. Many participants will be both a user of goods/services, and a supplier of the same or similar goods and services to someone else in the chain. Attempting to achieve consistency of product and service levels (including ESG reporting, traceability, and time-slotting) along the chain can be challenging.
That matrix can also have a pyramid shape; ‘accumulation’ is a common feature of ASCs. This means that greater numbers of lower value contracts will contribute towards higher value contracts, with the value and sophistication of contracts increasing toward the apex.
The challenge is that lower value contracts are likely to be poorly administered (with inconsistent or non-existent terms and conditions), may not be documented, and if documented, may not be signed.
While there is an understandable tendency by some participants to press the use of proprietary contract forms with terms and conditions that favour the interests of that participant, the result can be counterproductive (and have in some cases resulted in or contributed to mandatory codes of conduct). Proprietary forms may not be ‘industry standard’; they may be overly complex and so more readily misunderstood, and may provoke disputes.
Industry associations can play an important role in developing and promoting the use of standard form contracts, contracting processes and dispute resolution mechanisms that reflect industry standard best practices. These standard forms provide a contracting platform that can then be supplemented by ‘special’ or bespoke terms and conditions to more accurately reflect the particular needs of a contracting party.
In the absence of industry standard forms, there is scope for the development of voluntary industry codes of practice, or in cases of need, mandatory industry codes under the Competition and Consumer Act 2010.
1. Regional roots
Most of our production comes from regional areas. While there is a traditional image of the ‘man on the land’, production is increasingly corporatised, often involving venture capital or foreign direct investment and sophisticated technologies.
ASCs routinely feature the largest international corporates (Viterra or Cargill) and the smallest service providers (truck owners or drivers). This can create contractual and regulatory challenges. For example, industry codes of conduct in horticulture, sugar (cane) and dairy have addressed market power imbalances in sectors where producers have historically been perceived to be vulnerable and ‘unsophisticated’.
The same applies to the unfair contract terms provisions of the Australian Consumer Law.
Codes may however be less relevant/unwarranted where the producer is a corporation with sufficient sophistication and scale to bargain competitively. This process of corporatisation may also have been accelerated by the codes which impose compliance obligations on farmer producers and processors.
Infrastructure (and sometimes the lack of it) and sophistication of that infrastructure is also transforming the regional production landscape. ASCs continue to rely on local and country road networks, which can suffer from poor maintenance (particularly after heavy rains and flooding) and may not be certified for use by some classes of heavy vehicles.
Rail is the obvious alternative to heavy vehicles, and the use of rail should be more attractive when greenhouse gas emissions (GHG) are taken into account.
2. Local roads to global markets
We regularly produce commodities surplus to domestic needs so export markets are important and demand from and access to those markets can drive investment and production.
However the era of free global trade is over. Export markets will increasingly be subject to geopolitics resulting in regulation often with a political overlay. Politics and policy will also ‘direct’ production towards new ‘friendly’ markets. Politically motivated tariffs and sanctions will be commonplace and must factor into any exporters’ risk assessment tools.
How we approach existing and cultivate new markets will have a significant impact on ASCs who should increasingly look to tailor production to demand from particular end-users.
While this may have historically been the concern of ‘exporters’ and government, increasingly, entire ASCs are export-focused, starting with the farmer.
Global trends will also impact local supply chains. The German Supply Chain Due Diligence Act is one such example. The law requires large German companies to conduct supply chain ‘due diligence’ to identify, prevent and address human rights and environmental abuses within their own and their direct supplies operations.
3. Sustenance and sustainability
Nothing is more sensitive than food. However, so is the health of the planet and increasingly, domestic and export markets want to know that food production is both ‘green’ and sustainable.
Concepts such as ‘food security’ have been given fresh relevance by (first) the pandemic and then by the war in Ukraine. This is happening at the same time that concerns over the climate and decarbonisation have reached the front of consumers’ minds.
ESG is no longer an emerging issue – it is now shaping supply chains. Both transport and agriculture are key sectors for carbon reduction targets and potentially for offsets.
4. Technology and innovation
Despite some perceptions, ASCs are highly innovative and rely on the latest technologies to remain locally and globally competitive.
In addition, we can say that artificial intelligence (AI) will change everything, but we don’t know how yet.
One likely effect of AI is that it will both accelerate new developments and reduce their cost, because smaller groups of people will be able to do more, and do it more quickly.
We can expect to see new varieties of plants and animals coming to market, with particular health and environmental claims, more often and more quickly than in the past.
Flexible but resilient
Supply chains must be flexible but also resilient. Above all, they must be profitable, reliable and enforceable.
Due to the pandemic, supply chain contracts now incorporate provisions for contingencies such as disruptions in transportation, production, or distribution. Additionally, contracts should include provisions for emerging issues and legislative changes, such as ESG.
Force majeure (FM) clauses are key. Contracting parties must re-evaluate the events of FM stipulated in contracts. They must outline the parties' current obligations and allocate current and foreseeable risks of disruptive events.
Dispute resolution clauses should also be tailored towards the best outcomes. In particular, they must be designed to:
Contract planning and management in the procurement process
Effective contract planning and management is critical to the success of any supply chain. This includes identifying the key performance indicators (KPIs) that will be used to measure supplier performance and incorporating them into the contract.
Additionally, contracts and ‘standard terms and conditions’ should be regularly reviewed and updated to ensure that they remain relevant and aligned with business goals.
Lawyers should consider whether provisions should be drafted as:
It has become common for freight and commodity procurement contracts to be negotiated and (perhaps unwittingly) concluded over text messages and platforms like WhatsApp.
As this is probably now unavoidable, companies should attempt to put policies in place to clarify whether this practice is acceptable and if it is, how it should be regulated so that appropriate terms and conditions are incorporated into those contracts and/or whether such exchanges should be expressly ‘subject to contract’.
Training should be provided to traders so that they fully understand the risks inherent in less formal contracting processes.
Model responsible supply chain standards to inform contract negotiation
Various organisations have developed responsible supply chain standards that can be used as a model for contract negotiation. These standards typically cover issues such as:
As mentioned above, these standards should align with a company’s value statements. They can be recorded in policies and standard terms and conditions, and more broadly, a voluntary code for an industry sector.
Smart contracts for management of sustainable supply chains
Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. They can be used to manage sustainable supply chains by automating processes such as verifying sustainability criteria and tracking products throughout the supply chain, particularly where a product will be comingled and/or used in other production.
While a ‘blockchain’ is probably the best-known example of smart contracting, it is inevitable that generative AI will provide alternative and ‘smarter’ solutions.
Particularly in the case of export contracts, thought should be given as to whether ‘smart’ contracts are enforceable against your counterparty in its home jurisdiction.
Implementing ESG plans through supply chain contracts
Environmental and social due diligence involves evaluating the potential environmental and social impacts of a project or business activity.
ESG plans can be incorporated into supply chain contracts to require suppliers to meet environmental and social standards. However, the drafting of appropriate provisions and their enforcement will present challenges.
The transition to lower carbon production will be uneven. Some producers can invest more readily in carbon reduction technologies than others. Similarly, certain producers will be able to take advantage of lower carbon rail transport compared to others.
Capturing any value associated with lower carbon production, including through segregation, will prove challenging. Greenwashing, or the tendency to exaggerate ESG compliance, will also feature in ASCs.
Agriculture and transport are two of Australia’s largest emitters, meaning there is significant scope for emissions reduction. This will be driven both by government regulation and consumer preference for ‘green’ products.
More ambitious ASCs will recognise and seek to incorporate references to the UN Sustainable Development Goals in broad-based sustainability plans.
To defend against claims of greenwashing, companies will need to be able to verify claims, demonstrate that they are accurate, made in good faith, and backed by thorough due diligence to ensure that GHG claims are fairly and accurately monitored and reported.
Risk-based due diligence along responsible supply chains
Risk-based due diligence involves identifying and assessing risks along the supply chain and taking steps to mitigate them. This can include conducting supplier audits, monitoring compliance with environmental and social standards, and implementing risk management strategies.
Supplier audits can be contentious. They require both a will and the means to actively audit suppliers, and permission from the supplier to submit to ‘ad hoc’ audits.
The better path is to adopt an industry standard, administered and audited by a third party or third parties. Suppliers who wish to achieve that standard may do so voluntarily and display a certificate of compliance. Customers who prefer to contract with certified suppliers may then do so.
Incorporating supply chain standards and risk-based due diligence provisions into a contract
Risk-based due diligence provisions are currently in place for most workplace safety legislation and the Heavy Vehicle National Law, so most participants in ASCs will be at least familiar with the concepts.
Supply chain contracts should incorporate provisions for responsible and sustainable practices, including the use of sustainable materials, compliance with environmental and social standards, and adherence to labour laws.
Perhaps the most current example under Australian laws is the incorporation of ‘modern slavery’ provisions into supply chain contracts.
Not all Australian companies are currently required to comply with the Modern Slavery Act 2018. However, as noted above, aggregation of contracts is common in ASCs. As part of their compliance, companies with over AU$100 million annual turnover (who bear the primary compliance obligations) may require compliance ‘assurances’ from smaller suppliers (a secondary obligation).
This raises the following issues:
Looking into the future, we should expect to see risk-based due diligence laws applying to ESG and particularly, carbon emissions and GHGs.
As mentioned above, Germany’s Due Diligence Supply Chain Law (Leiferketterngesetz) may provide an example of developments we might expect to see in Australia and elsewhere. Under this legislation, companies with more than 3,000 employees are required to monitor their suppliers and subcontractors and to take action to prevent or mitigate harm. The law applies to a wide range of human rights and environmental issues.
In summary, the latest developments in supply chain contract best practices in the agribusiness sector reflect a growing emphasis on responsible and sustainable practices. To effectively manage supply chains, it is important to plan and manage contracts, incorporate responsible supply chain standards and risk-based due diligence, and use smart contracts and ESG plans. By doing so, companies can ensure that their supply chains are resilient, sustainable, and meet the needs of all stakeholders involved.
If you have any questions about this article, please get in touch with partner Geoff Farnsworth below.
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.