Tag: Coronavirus

Covid Crisis and the Meat Sector

The past month has been one of the most tumultuous for generations as the meat sector as it has grappled with the lockdown brought about by the onset of the Covid-19 pandemic (Covid crisis).   Retailers and their partners have struggled under the strain of consumer panic buying whilst continuing operations whilst implementing social distancing.  Vast swathes of the food services and catering trade (aside from limited delivery and click-and-collect operations) have also presented significant challenges throughout supply-chains, particularly in beef and lamb but also in pigmeat.

Market Impacts

The beef sector has experienced price declines recently, primarily due to the loss of the food services trade.  In the UK, about one-third of beef product sales in monetary terms are to the food service sector.  Such sales consist of the highest value products (e.g. fillet steaks).  With the implosion of demand, this has a much more pronounced impact on carcase value, which some have estimated to have declined by around £200 per head (or 15-20%) at the processing level.  Increases in retail sales which have taken place are primarily for mince and burgers, which are of lower value, thus only partially compensating for steak sales losses.  At the farm level, price declines have remained relatively small with GB steer prices on 18th April (324 ppkg) approximately 4% lower than prices on 21st March (336 ppkg).  If the Covid Crisis continues for a sustained period, further farmgate declines are likely. 

The lamb trade has also experienced issues, although the Easter holiday and the recent commencement of Ramadan have helped prices to recover recently.  That said, major concerns remain due to the closure of the food services sector in continental Europe, most notably France.  As more UK lamb comes onto the market later in the year, any oversupply at that point will have a much more pronounced effect on prices.  If restaurants do open, they are unlikely to be operating at capacity, due to social distancing measures.  As most lamb is eaten outside of the home, this will present difficulties.

Similar trends have taken place in the pig meat sector with convenience products (e.g. bacon and sausages) seeing sales increase significantly but demand for roasting cuts has decreased markedly.  There are additional complexities at play more globally in pig meat.  Processing capacity in the US has been hit by coronavirus cases amongst workers in meat plants, meaning that production lines have shut down.  Whilst Europe has not witnessed processing disruption on the scale of the US, food services demand has lowered, meaning price declines have resulted.

Much of what will happen in the pig meat sector will be governed by the recovery in the Chinese market which has been hit by both the Covid crisis and African Swine Fever (ASF).  China has started to re-open again after a lockdown in some regions, and some analysts have predicted that Chinese demand will be back to 90% of normal levels by the end of the year.  On the supply-side, it has had to deal with ASF which has almost halved its breeding sow heard, and is only in the early stages of recovery.  Short-term, the deficit of pork in China should help European prices recover from Covid.  It could also provide some support in other protein categories but will not compensate for the losses in carcase value seen in beef, nor the potential oversupply in lamb as the UK production season progresses.

Support Schemes

In reaction to the Covid crisis, various forms of support have been instigated across Europe.  Some mechanisms have been aimed at the wider economy, whilst more recently, specific measures to support the farming sector have been announced by the EU-27.

Looking at the economy generally, whilst the UK has opted for a furlough system (subsidising 80% of wages up to £2,500 per month), this scheme is of limited use to the food sector as it necessitates workers being off work for that period.  This has created difficulties for processors who have to continue operations whilst also coping with price declines.  The wage subsidy systems in place elsewhere in countries such as the Netherlands, Ireland and New Zealand, arguably offers more support to sectors such as agri-food where turnover declines are projected, but production must continue.  In the Netherlands for example, if a 25% decrease in turnover is projected, the State will subsidise approximately 22.5% of wages for a 12-week period.

The EU-27 has also recently announced a range of measures to support agricultural commodities, including the re-opening of Private Storage Aid (PSA) for several commodities including beef (25,000 tonnes) and lamb (36,000 tonnes).  Pig meat will not be supported by this scheme.  PSA will allow the temporary withdrawal of products from the market for a minimum of 2 to 3 months, and a maximum period of 5 to 6 months.  It has been initiated to reduce supply and rebalance the market.  There are shortcomings though.  In beef, storing product means freezing it, thus value deterioration versus fresh.  Also, when the storage period ends, that product will need to be released onto the market thus increasing supply and lowering prices at that point.  The EU plans to formally agree the scheme by the end of April.  Previously, the EU also announced plans to offer increased flexibility to CAP and Rural Development funding, including larger BPS advances to farmers.

In the UK, however, there has not been any announcement of support specifically directed towards the agri-food sector.  Whilst many of the more generic support measures (e.g. Coronavirus Business Loan Interruption Scheme (CBILS)) will offer some assistance, more support is arguably required. Especially, given the extent of the price declines and impact on turnover.  Otherwise, many businesses will come under severe pressure in the weeks ahead, with many likely to cease trading.  If this happens, it will take the sector much longer to recover.

Covid 19 Impacts on Farming

The spread of the Covid 19 coronavirus has seen the world stop working as we understand it.  The impact on the supermarkets and food availability for consumers has been clear.  Here are our thoughts on the crisis on the wider food and farming industry.  They can be divided into short, medium and long-term implications.

Short Term

The Consumer: Supermarket shelf stripping has been a consequence of both panic buying and preparing to feed families and elderly for prolonged periods without the use of food service, restaurants and coffee shops.  Consequently, the demand for most goods including milling wheat for bread and biscuits has rocketed; the broiler kill rate has gone up sharply and the demand for other meats has also increased hugely.  The emergency is to replace the empty shelves with goods for the consumer.

Total food requirements should not change overall.  So presumably demand will slow at some point soon when people’s stores and freezers are full.  However, eating habits in the home differ from the restaurant or food service.  With no eating out, evidence suggests consumption of expensive cuts of beef and lamb and ‘top-end’ cheeses such as Stilton will probably fall after a while.  We would expect more chicken and lower priced pig and beef meat for burgers and sausage style foods.  Perhaps people will eat more healthily, with more vegetables rather than a typical restaurant pizza or burger option, so demand may shift.  Beer consumption is falling around the world, people drink less in the home and less alone.

We are also finding several farmers, notably some dairy farmers are struggling to sell their farm goods at the normal prices because they supply the food chain that ends up in the food-service or catering outlets. Suppliers of high-end cheese manufacturers for example are not being paid in full, as most quality cheeses are consumed in restaurants. Other suppliers of places like burger bars and fast food chains are also seeing their conventional supply tailing off. It is clearly taking a while for these supply lines to re-route to where the food is desperately needed.

Prices: Commodity prices move when demand and supply are not aligned.  Expect some volatility. Prices for all the goods mentioned above where demand has risen would be expected to go up (such as wheat up £10 per tonne).  Overall trends may take some time to establish according to how the supply chain manages the flow of goods and how the consumer changes their habits.

Medium Term

The Farmer:  Farmers are relatively good ‘self-isolators’ already.  We would expect many to be able to ‘carry on farming’ with most farms operating as usual as long as supplies get through.  However, staff absences could lead to livestock welfare issues, diversified business dependant on general public foot fall could be hard hit, and estates renting out cottages may be affected as tenants can stop paying rent without the threat of eviction.  The only support farmers will get is loans or Statutory Sick Pay refunds as the Government grants announced by the Chancellor, Rishi Sunak, are based on Business Rates at present and (undiversified) farmers don’t pay rates.

Farm Workers:  Access to casual migrant labour is going to become a big issue if travel bans remain in place over the summer. The Farmers Weekly reports that appeals have started to go out for British workers to work on farms.  This is easier said than done if everybody is staying indoors.

Supply Chain:  This is where we see problems of maintaining physical turnover because of lower staffing.  Abattoirs, packing sheds, mills and other points where bulk commodity starts its transition into branded food products is largely labour intensive and cannot be done at home.  They require lines of people working closely together in sheds.  Many people will not be happy to work in these conditions.  Whether work can be taken outdoors, or spread out will depend on each facility, but it is likely that turnover may fall sharply in some locations.

The flow of cash has also already started to slow, with many firms hoarding cash and not paying each other.  Expenditures that are not short-term-critical are also being postponed.  Profitable businesses unable to turn their profits into cash will struggle in coming weeks and months.  Some supermarkets have committed to pay small manufacturers more quickly than usual.

Retailers are already shifting resources in their outlets towards the supermarket floor and fulfilling online demand.  Whether this distracts them from purchasing and supply roles will depend on how well they are managed.

Trade:  Travel restrictions do not apply to medical staff, medicines or, crucially, goods.  However, there are inevitably going to be plenty of supply-chain glitches, people going into self-isolation, shipping containers not where they are supposed to be etc.  There is no news yet on such matters.

Trade Negotiations:  Michelle Barnier, the EU’s Chief Brexit negotiator, has got Coronavirus.  The UK-EU trade talks had already been put on hold in any event.  This has led to speculation that the Brexit Transition Period, in which the trade talks should have been completed, will be extended.  However the UK Government is currently sticking to the line that the Transition will end on the 31st December.  The deadline for triggering any extension is 31 July.  We await announcements.

Long Term:

Policy:  The severe shortages of food availability in the shops, and the images of desperate panic-buying shoppers might encourage Defra, and Government more widely, to rethink its policies on food security.  Currently, there is peace of mind in Defra that 80% of our imports have been from ‘friendly neighbours’ in the EU.  Might Defra consider that more home-produced goods could be a strategic benefit?

Industries will also look towards Government to support the rebuilding of the UK economy when this calms down.  The cost will be immense.  Whether it will mean major infrastructure projects like HS2 will be postponed remains to be seen.

Supply Chains:  Following the horsemeat scandal of 2013, some food supply chains went to great effort to shorten their linkages, source from fewer and more local outlets.  Perhaps this will do the same.  ‘Local food’ almost became a brand in its own at that point, certainly becoming more powerful than simple patriotism when swaying shoppers how to buy.

Globalisation:  The expansion of global trade routes since 2000 has been considerable, and given consumers more choice, lower inflation, cheap goods and created cost savings.  However, events like Covid -19 could lead to new procurement policies, with maximum percentages from certain countries or suppliers, for example.  Will this lead to a refocus on nationalisation, albeit for a short while?  It might fit with some of the Brexit mantras we have been hearing.

Businesses Generally:  Coronavirus will bankrupt more than it kills.  Several high-profile companies have already been floored, presumably not to recover.  If businesses have to take out (Government backed) loans to continue in business, these still need to be paid back at some point.  This may lead to lower investment in the future and possibly reduced future profitability.  Some firms will use the loans to provide liquidity as their profits are tied up in non-cash forms such as debtors or valuations.

The Economy:  Whilst customers and consumers stay in their houses, the economy is in freefall.  The economic effects of the pandemic look set to outstrip the recession of 2007 to 2009, even though the UK economy a month ago was in a much stronger position than it was back then.  The concern of the markets is shown in the collapse of the Pound (reaching its lowest point against the dollar for 35 years).  This actually helps farming, as it makes goods imported into the UK cost more in Sterling terms.  Commodity prices move as a response to currency shifts immediately, whereas other goods such as agricultural inputs, wages and rent change very slowly.  Thus, the rise in price will favour the farming community.  But it will not take long to for a weak Pound to fuel inflation and the new Governor of the Bank of England, Andrew Bailey, will have to act quick to stop it when necessary. Both the Governor of the Bank of England and the Chancellor have both been in their posts for less than 5 weeks!