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Ecoflation Threatens the Future of Economic Stability

| Thursday December 4th, 2008 | 1 Comment

Ecoflation_SoyField.jpg According to a recent study released by the World Resources Institute, in conjunction with ATKearny, the world has experienced a remarkable rise in the prices of vital commodities in recent years. Including energy and agricultural products, the average price of oil, for example, between 2006 and 2008 rose by 110%, wheat by 136%, and rice by 217%. The purpose to highlight these numbers is to call attention to the increasing scarcity of natural resources – as these drastic increases impact companies, household, and entire economies, it is becoming more and more imperative to find better, more efficient ways to manage them in the 21st century.
“Rattling Supply Chains” as the study is called, which can be found here on GreenBiz, terms the situation of rising prices coupled with increasing consumption and supply chain costs Ecoflation. Ecoflation describes a future in which policies and constraints on natural resources force firms to add to the cost of doing business the environmental costs previously borne by society.


Mainly focused on consumer-good (CPG) industries, or industries that impact CPGs, “Rattling Supply Chains” addresses the issue in terms of 8 key commodities: Oil, Natural Gas, Electricity, Cereals & Grains, Soy, Sugar, Timber, and Palm Oil.
An article on GreenBiz discusses several of the scenarios addressed in the study that contribute to ecoflation. They are four key environmental themes that drive physical and policy changes. The first is the U.S. will enact a comprehensive climate change policy, in effect creating a global price for greenhouse gas emissions. Second, climate changes create water scarcity in major agricultural regions. Third, in response to concerns about deforestation, major consumer product companies in the U.S. and E.U. agree to source all wood and pulp from sustainable forests and use recycled content in all paper products. And lastly, the major biofuel-consuming countries in the world retreat from existing biofuel mandates and instead apply sustainability requirements to all relevant biofuel government policies.
On appearance, these four scenarios (with the exception of the second) detail positive steps forward for the environmental or green movement. However, the point is, if industries, companies, and individual consumption practices do not change alongside with them, costs will rise. Thus, ecoflation.
“The results highlight the need for strategic scenario-based planning,” said Daniel Mahler, a partner with A.T. Kearney and one of the report authors. “Winning companies will anticipate this changing landscape.”
EcoFlationChain.jpg
The authors also provide a few steps for how to begin developing strategies for coping with these possible scenarios:
· Understand environmental impacts and dependencies by looking at how environmental trends could impact costs, and, when possible, seek alternatives with lower impacts
· Inventory the sustainability initiatives of the company, its suppliers and partners
· Prioritize environmental issues and opportunities based on current and future impacts to cost, revenue and reputation
· Evaluate how to reduce exposure to cost variations by redesigning products, examining local versus global sourcing and increasing sustainability standards for suppliers
In fact, companies like Procter & Gamble and Nestle have already implemented sustainability strategies though. Nestle is placing more emphasis on sourcing materials locally to cut down on transportation. Meanwhile, P&G is cross-leveraging research and design teams across different brand categories. Not to mention a company like Clorox that has seen a lot of success with its Green Works line of products. An article on AdWeek poses the example of a brand manager on Pantene might consult with a fellow colleague on Tide for best practices, such as using packaging that requires less plastic.
These are just a few examples of the extent to which many companies have considered going green. Oftentimes, retooling a supply chain to be more sustainable involves “rethinking the product itself,” said Joel Makower, executive editor of GreenBiz. “It has as much to do with improving business practices as it does with improving environmental practices. In fact, the two go hand-in-hand.”


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  • Nathan Schock

    Price as an indicator for scarcity would only be the case if price always tracked supply and demand fundamentals. But over the past year, it has now become pretty clear that there was a significant speculative bubble in the commodity markets.
    Price is certainly important, especially for low-income people, however I think that actual supply and demand figures would be better indicators of scarcity.