This was the first note I produced at the start of the Covid19 crisis, things were at the very start.
Impact on the farming industry:
The farming industry is already feeling the heat from the Covid-19 impact. This on different aspects that make this earthquake maybe as significant as the Brexit for farmers.
The Domestic Demand has lately been driven by an outburst of panic buying mainly felt in urban areas with shoppers stockpiling and leaving shelves empty. But in the meantime the hospitality industry (apart for those delivering at home) has taken a hit and as of the 19th of March 2020 – evening they won’t be allowed to be open to the public.
In 2018-2019 it was estimated by the ONS that a household was spending 40,70£ in food and drinks out of home and 61,50£ for at home consumption. Both the retailing industry and the have separate transformation circuits that have specialized over the years – self-contained circuits.
While the retailing industry reserves are depleted and the farm to shelves supply chain is struggling to deliver the hospitality industry dependent circuits are under pressure for lack of consumption. We face twofold consequences that are the temporary uplift in retail demand due to panic buying and a long term increase in retail due to the lack of the hospitality industry. The food demand from the hospitality industry has stopped abruptly, on the long term many businesses can see their future endangered.
Brexit preparations last year might have better prepared retailers for the Covid19 panic buying with buffers and stocks.
Update: This as been nicknamed as a 2.3 billion pound switch week over week from foodservice to retail - Christmas without preparation before !
Buyers Patterns
Consumers may have gone into panic buying but have also shifted to at home delivery in a very strong move. Buyers have focused on basic products, thus on low quality cuts for meat (porks, beef) or milk (even usually frowned upon long lasting milk) while seasonal veggies are not the most coveted. For example minced beef and frozen foods cheap and easily storable have been in the bucket list of many buyers.
Premium or high quality products have been shunned by buyers. Comparing shelves in shops in the UK has been an interesting exercise. For example Waitrose or Local Shops have been much less emptied than Superstores like Tesco, LIDL or ALDI. It is too early to forecast the impact on different type of businesses. One could fear that the number of retailers could diminish even more.
The confinement might alleviate this urge to buy as people churn through their supply. According to a study by MCA/HIM 1/3 of the consumers had been stockpiling while 67% are concerned that food might be running out. Since the start of the crisis online shopping has increased by 23%. The lack of food on shelves bring back memory of the rationing which stopped late in the UK.
A global fear of the outside might settle in by the end of the crisis and people like in China could revert to cooking thus reducing hospitality recovery. A post-crisis result could be a trauma from the crisis with consumption patterns evolving strongly from what they are today.
Will buyers feel that food security is a priority? What sort of food security people want cheap and ample supply of staple food or an attractive and diverse range of products and retail supplier?
People should consume the same amount of food as on average years but some pattern of consumption could be suppressed as gathering are prohibited, particularly on red meat (BBQ), lamb (Easter market), Cheese and Alcohol.
Impact on the transformation and retail industry
NFU and FUW Covid19 Impact WebPage
At the same time the spread of the virus and measures of self-isolation due to infections (and from school closure, as well as lifeline income support for worker out of work due to COVID impact as well as in sick leave) will start to impact all industries. Due to the high specialization of some equipment’s in the supply chain it is rendered vulnerable to staff not being present. Industries might prefer to stop their equipment rather than producing small volumes. Health security compromises could have terrible effects.
Competitions rules have been relaxed now allowing transformation and retail to share data, cooperate or even to pool staff. Driving hours have been relaxed to ease the pressure on supply chains.
In Livestock marts that stay open the number of buyers will be reduced and farmers will operate on a drop and go policy, only known purchasers and vendors will be given access. Some livestock markets will be closed. There are fears that abattoirs already in low numbers in wales might be stopped (thus meaning a very long distance travel for animals and farmers).
Homogenous group of buyers, more powerful than ever, dramatic choices to be mad decision will be tough, rescoping of milk collection circuits, farms redistribution.
Note: Compared to France and Italy the retail industry has been slow to enforce rules on social distancing – only appearing by last weekend while in France and Italy they started as soon as the confinement began. This might be attributed to the strong centralisation and concentration of the retail industry. The response to panic buying from retailers has also been painfully slow taking 3-4 days before restrictions were placed on mass product buying. This inertia of the retailers, the main food supplier channel for the UK is worrying. The range of products has stayed the same while in France supermarket have started to direct source products from French farmers.
But French farmers have been affected by the decision from the French Government to close open air food markets to reduce crowding and virus transmission. These weekly (or more in some cities) is still an important channel for food supplying in France with a shorter supply chain for fresh products (i-e fruits, vegetables, meat…).
Global impact of the Covid-19 crisis:
Le Marin, magazine (Fr) – DfT - Defra
Global trade has been at a standstill as containers are clogging up China which has been under movement and work restrictions measures for more than 2 months.
At the same time border control is strengthening in Europe while the passenger’s flows are drying up quickly. Shipping has not been able to operate normally as crews can’t be replaced – so far some flexibility has been made into contracts. Exports market won’t be easily accessible in the coming months. Foreign workers are not able to come in to contribute to the greens and fruits harvest thus contributing to staff problems on farms.
Cross channel crossing have been cut drastically – and some companies are planning to reduce it even more. This is a vital link for food imports most notably fruit and vegetables (DfT 2017 Food Balance DataSheet). The DfT is currently discussing a support package for ferry operators to keep goods flow running between the UK and the EU.
There is an imbalance in the market.
Global Economic Context
Given to a lack of confidence facing the first impacts of the Covid-19 mitigation measures markets have gone down in flame nearly as bad as in 2008. Economic stimuli have been offered by the USA, EU and the UK and their main institutions (BoE and Government) to reassure the markets first and then to mitigate the dissemination of the virus. Interest rate have been cut down with a quantitative easing policy being retained by these central banks (BoE interest rate to 0,1 %) to ease the access to liquidity in a finance crush scenario when a lot of firms see their income dry up. The help package pledged by the government would help business to support the crisis financially speaking.
The government bonds interest rates might jump up as did the one in Italy last month were the crisis to be longer and tougher. The spread is increasing in every hard hit country (inc. France). This means borrowing by government could become difficult at some point or come at a very high post-crisis cost with a possible new austerity trend instead of the proposed investment plans. Cuts could be made to non-prioritized sectors.
What will be the effect of such measures? Will it be enough to contain a recession and a potential deflation, will this additional cash cause more uncertainty?
The uncertainty surrounding all businesses facing this new context prevents any investment and anyone is focused on ensuring the continuity of operations for as long as possible. Some choices will have to be made depending on how hard hit are some industries.
Oil prices have gone down as a result of the crisis but the results are yet to be seen on input bills.
Farms and the Covid-19: How fragile are they
A very important thing is to be prepared for the fact that some farmers might get sick (eventually die all the more due to their age average) and to keep operations on farms running (for the sake of the food production, animal welfare…).
The most pressing matter is the deadline for the Single Application Form according to the FUW and NFU, they asked for some flexibility. Advisors or agents can’t meet in the farms and some problems could appear if the RPA is not flexible. For now most inspection have stopped for the most pressing ones on health and safety and TB issues officials are considering how to proceed safely.
Interestingly enough farmers are wary of hikers and corona tourists pacing the right of ways of Wales and England. Some have started to bar the paths at this critical time, all the more because of the lack of responsibility from wanderers – frightening or hurting animals: dogs, motorbikes…
Included in the guidance from the NFU:
- Keep hygiene tight/food contamination
- Implementation of social distancing rules
- Reduce non-essential visitors on the farm
- Monitor inputs and outputs levels
To conclude this impact of Coronavirus on farms business I would like to voice concerns about the way the crisis communication has been handled. Given the choice of words of EU countries in their communication the message evolved but might have remained unclear in some parts of the population, not so much about barrier measures that have been well advertised. For the most isolated farms the feeling of remoteness could overcome the fear of the virus.
Inputs: AHDB and market price analysis
Interestingly enough farmers have also be prone to panic buying in a way on fertilizer, PPP and animal feed. The supply chain for this two main inputs is strong for now and has the capacity to provide what is necessary for the spring peak time.
The oil price is going down due to an inability to use stocks but cereals and soybeans markets are pressured and are considered as refuge investments in the light of the crisis. All the more because of the panic buying occurring in the Northern Hemisphere which increases demand. But the forecast for harvest looks promising. Crops usually used in biofuel have collapsed (maize and oilseed rape).
There is a balance on the main inputs for price variations as for now.
Outputs AHDB and market price analysis
On outputs from farms it is very key to look at the timeframe of production (an harvest or all year round) and whether the product is perishable. (All year round production, Grass fed dairy production – spring peak, early potatoes production…)
On Potatoes: This staple food is very much under pressure, the demand is very high and some contracts have already been adjusted for an earlier delivery. The UK stock is relatively low as lifting was complicated by the wet autumn last year (with a financial impact). The packing chain is running at capacity and the unpacked product price has increased by 21% in the last 3 weeks. The potato market is very volatile usually with a fixed demand but this year there is an imbalance. We note that:
- It’s still planting time and it might be possible to encourage farmers to plant potatoes to ensure a steady stream through the year. A safety net on the crop result could be put together to ensure this to be done.
- A quantity of potatoes not deemed suitable is discarded but could be integrated in the supply chain in case of problem – this would be an interesting reward and security for farmers.
The Potatoes farms tend to use a lot of workers isolated in their tractors and should still be able to work through the season.
Dairy Farms: The product is highly perishable and if collection was to be halted or reorganized on the transformation behalf the effect would be dramatic. The milk price has already started to drop due to the imbalance created by the drop in demand in the hospitality while the compartmentalization of the transformation and retailing doesn’t allow much leeway. More milk goes to the spot markets. Retailers unable to export or sell these products will be strapped for cash and might not be able to pay milk producers. The weakest financially, the highly specialized ones (i-e on spring calving for mozzarella…) could be really hard hit. If based on rented land they could be under pressure rapidly by not being able to get access to commercial loans.
Farms can access the business and worker special grants built up by the UK government but will farmers take this up and what would be the consequences on their future?
Beef: The beef market is holding strong for now with much demand for culled cows, fattened cattle though there is an imbalance in terms of carcass consumption (rear quarters high consumption). Lamb prices are holding on for now as well.
One thing to be wary about in the next weeks will be the amount collected, sold and killed for consumption – the Ouputs flow in general.
The question is as well have price been helped by the depreciation in the pound value that occurred over 3 weeks, losing almost 1/12 to the Euro and more to the dollar.
