COVID-19 is Taking a Bite Out of Food Supply Chains
Initial assurances by authorities that food supply chains would remain robust during the COVID-19 outbreak are giving way to a more complex reality. At this time, food shortages are not a problem in most of the world. But the pandemic and the economic shutdown are starting to reveal systemic weaknesses in the supply chains that bring food to markets and may be pointing the way towards trouble ahead.
Published: May 4, 2020
Meat Supply Chains
The COVID-19 pandemic is threatening the protein supply chain with foodservice demand in a free fall and processing facilities being forced to shutter because of infected workforces. A recent flurry of temporary plant closures across the industry because of infected workers has raised alarm bells that protein shortfalls may plague an already strained food supply chain in which restaurant traffic has ground to a halt in key U.S. regions, while retail struggles to keep up with a surge in demand from pantry loading and panic buying. These supply chain disruptions are coming as large parts of the industry were set to capitalize on increased global demand for protein in response to China's pork supply shock resulting from the Asian swine flu outbreak last year. Instead, companies are scrambling to respond to a quickly changing landscape, some with better prospects than others. This article assesses the credit and liquidity outlook for various segments of the protein sector, including beef, poultry, and pork, as well as the dairy industry in the U.S.
Protein Producers' Degree Of Diversification
Numbers of plants are in parenthesis.
Bubble size represents sales (estimated for protein segment in Cargill's case).
Source: S&P Global Ratings diversification assessment and company information.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.
The Essential Podcast, Episode 7: Vegetarian Nation – Supply Chain Disruption and the Coming Meat Shortage
On April 26, John Tyson the Chairman of Tyson Foods gave a stark warning that meat processing plant closures resulting from the COVID-19 crisis may soon lead to meat shortages in supermarkets across the United States. Meanwhile, restaurant closures have also upended supply chains as food service companies struggle to adapt to a new and radically different distribution model. In this episode, host Nathan Hunt interviews S&P Global Market Intelligence reporters Alex Bitter and Michael O’Connor to understand supply chains, the restaurant industry, and the damage wrought by a global pandemic.
Listen to the podcastFood Supply Disruptions During Coronavirus: Three Issues to Watch
The steady supply of food globally is taken as a given most of the time, with food supply chains running reliably most of the time. The coronavirus pandemic has raised challenges for global food supply chains — this report considers three major issues.
First, the coronavirus pandemic has raised concerns about the security of supply of critical products. As outlined in Panjiva's research of May 5, there has been an obvious focus on medical supplies with the risk of long-term protectionist measures.
Dairy Supply Chains
The global dairy industry is struggling with lower demand and a steep decline in prices as the spreading COVID-19 outbreak wreaks havoc on its supply chains.
The closure of thousands of restaurants, offices, hotels, schools and coffee shops has dramatically reduced demand for milk, butter, cheese and ice cream in the U.S., Europe and parts of Asia. Countrywide shutdowns have led to the large scale absence of workers in dairy factories and milk processing plants. Meanwhile, a large quantity of domestic orders have been canceled, exports have been hit and milk prices have slumped.
Key Takeaways
- The impact is vast: The global milk products industry generates $716 billion of revenue each year, of which $85 billion is in the U.S., according to Statista. India is the world's largest milk producer, with 22% of global production, followed by the U.S., China, Pakistan and Brazil, according to the Food and Agriculture Organization.
- For big dairy buyers such as Nestlé SA, maker of Haagen-Dazs ice cream; Danone SA, maker of Activia yogurt; and The Unilever Group, maker of Ben & Jerry's ice cream, lower milk prices are a good thing because it means lower manufacturing costs. At the same time, many supermarket shoppers have stopped buying expensive, high-end dairy products in order to save money.
- The NMPF and the International Dairy Foods Association have jointly submitted a "Milk Crisis Plan" to the U.S. Department of Agriculture, hoping to tap funds provided under the CARES Act, the stimulus package recently passed by Congress.
Food in Focus
On-the-shelf U.S. grocery prices rose faster than wholesale costs in March. But the monthly estimates came with more qualifications than usual as the novel coronavirus hindered on-the-ground documentation of food prices.
The difference between year-over-year changes in consumer food prices and wholesale costs turned positive in March for the first time since May 2019, according to data from the U.S. Bureau of Labor Statistics, or BLS. While the final-demand food index of the producer price index, or PPI, rose 0.8% during the month, the food at home index of the consumer price index, or CPI, advanced 1.1% over the same period, BLS said.
Key Takeaways
- A methodological detour from the BLS coincided with a surge in grocery sales during the month as consumers stocked up to comply with stay-at-home orders and restaurants halted dine-in services or shuttered completely.
- Weekly data from other government and private sources is being used to monitor March food prices. That data shows that prices for proteins, including beef, chicken, pork and eggs, all increased during the second half of March, though meat prices gave up many of those gains before the end of March.
- What consumers buy at grocery stores — and how much they pay for it — will likely be dictated by how food supply chains adapt to consumers eating more at home.
Grocery Real Estate
Amazon.com Inc. will have its pick of the nation's distressed retail real estate as it pushes deep into the brick-and-mortar market with a new grocery concept , experts said.
The Seattle-based e-commerce company will have supreme negotiating and pricing power — even more than traditional grocers, given its brand and the havoc the coronavirus outbreak has wreaked on the commercial real estate market, particularly retail.
"If you're a landlord and you're looking at one or two of your anchor tenants falling over, and Amazon walks up and says, 'Hey, would you like us to build this new concept grocery store at the end of your mall? Then the answer is, 'Yeah,'" said James McCann, CEO of McCann Investments, which invests in early-stage grocery tech companies. "They are going to be getting very good deals as a result of the current real estate market."
Key Takeaways
- Amazon has been quietly planning new locations for its grocery store format over the past year, but experts say the company recently expedited efforts to snap up real estate vacated by retailers ailing from the coronavirus crisis.
- Citing conversations with an anonymous retail REIT board member, Bill Bishop of Brick Meets Click, a longtime adviser to the retail food industry, said Amazon has agreements-in-principle for "dozens and dozens" of leases with the unnamed REIT. Across the country, the company will capitalize on existing, distressed sites rather than embarking on its own ground-up development, he said.
- Big data will light Amazon's way. Analysts said the company will leverage its massive database on consumer behavior to select sites, and the result will likely be a real estate clustering in suburban areas around major cities.
U.S. Supply Chains
For years, the Trump administration looked to replace the North American Free Trade Agreement, battling lawmakers from both parties and the nation's northern and southern neighbors for a signature trade policy piece to boost U.S. manufacturing and farmers.
Now that the United States-Mexico-Canada Agreement is set to take effect July 1, the coronavirus pandemic threatens to upend the pact's implementation and wipe out its promised benefits.
"It's hard to see how this can be implemented during the pandemic," Simon Lester, associate director of the Stiefel Center for Trade Policy Studies at the Cato Institute in Washington, said in an interview. "Companies are struggling to remain in operation and stay out of bankruptcy. It's too much to ask to have them reconfigure production at the same time."
Lack of White House supply chain czar hamstrings coronavirus response, Dems say
The White House needs a supply chain czar to oversee procuring and distributing medical supplies, such as personal protective equipment and ventilators, during emergencies like the current crisis involving the new coronavirus, Rep. Frank Pallone, D-N.J., told reporters.
The lack of a single person at the White House in charge of supply chain issues in the current emergency has impeded the nation's response and has resulted in confusion for states and local jurisdictions as they compete with the federal government for critical supplies, Pallone said during a March 30 media call hosted by House Speaker Nancy Pelosi, D-Calif.
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Demand Disruption
A slew of temporary shutdowns at meat-producing plants in the U.S. to control the spread of COVID-19 is raising more concerns on long-term corn feed demand, analysts said.
In the 2019-20 marketing year (September-August), feed and residual use is likely to account for nearly 46% of the domestic corn demand in the US, according to the US Department of Agriculture's latest World Agricultural Supply and Demand Estimates report.
"The primary obstacle for the animal protein industry today is the disruption at the plants due to COVID-19. The loss of a plant for just a few days is manageable, but these extended closures are exceptionally disruptive, not only to the processors but also the producers that supply those plants," Christine McCracken, senior animal protein analyst with Rabobank, said.
Key Takeaways
- Some of the major meat production units that have suspended operations include JBS USA's pork processing plant in Minnesota, Smithfield Foods' plant in Sioux Falls and Tyson Foods' Iowa plant.
- Total red meat production under federal inspection for the week ending April 18 is estimated at 898.1 million lbs, down 6.9% from the previous week and 12.8% lower than a year ago, according to the USDA's Marketing Service.
- "As it's the processors that are closing to cause the reductions [in meat production], that means there are actually more animals to feed in the feedlots that can't get to the slaughterhouses. Those animals will need to be fed longer than usual," said Pete Meyer, head of grain and oilseed analytics at S&P Global Platts.
Commercial vs. Retail Supply Chains
Coronavirus has sown chaos in food supply chains in a matter of weeks as consumers avoided restaurants and turned to grocery stores for a greater share of food purchases. Now, the companies that process and distribute food are figuring out how to catch up.
Foodservice distributors and manufacturers who sold their products to restaurants have suddenly found themselves with products never intended for sale directly to consumers, leading many to improvise in order to recover some of the lost revenue. But industry and supply chain experts say that will be a tall order since shifting sales to retail channels comes with costs, and even then, retail sales will not necessarily make up entirely for lost foodservice revenue.
Key Takeaways
- Food sold commercially to restaurants such as Yum! Brands Inc.'s KFC cannot be easily shifted to grocery stores because it is often packaged differently and requires different approvals, Rob Handfield, a supply chain management professor at North Carolina State University, said in an interview.
- With foot traffic and sales at record lows, restaurants will be forced to dispose of ingredients as they expire and are likely buying less from their suppliers.
- Selling more to retailers, especially the largest U.S. grocers, is unlikely to be as profitable for processors and their suppliers as selling to restaurants, where markups on individual dishes tend to be higher.
Sustainable Agriculture
Agriculture has always occupied a special place in the field of environmental and social sustainability. However, the sector's multiple problems are too deeply rooted for long-term sustainability to be achieved soon. Agricultural yields have peaked in developed countries, and are still lagging in developing markets. That said, public policy is evolving, and bright spots are emerging as investment and training help change agricultural practices and the livelihood of farmers. S&P Global Ratings is observing how the chemical and consumer goods companies it rates are responding by working with customers and supply chain participants to offer more sustainable agricultural solutions.
Key Takeaways
- Large agrichemical, food, and beverage companies are working with major stakeholders on ways to safeguard global food production, at risk from climate events, poor farming practices, and soil erosion, among other factors.
- They also need to manage the efficiency and reliability of their supply chains, while balancing the interests of customers, shareholders, and policymakers to achieve strong sustainability credentials.
- We believe a global breakthrough on the key issues of greenhouse gas emissions, water shortages, soil preservation, and biodiversity is unlikely without direct government involvement.
Further Reading
