COVID-19, the Global Economic Crisis, and their Impact on Agribusiness (Part 1)

• May 26, 2020

The coronavirus pandemic has changed the routine and well-established ideas of people about almost all areas of life. Andriy Yarmak, an economist at the Investment Center of Food and Agriculture Organization of the United Nations (FAO) writes how it affected the food industry in his blog on Eastfruit.com.

Due to the rapidly changing situation in the world, it seems relevant to talk about what is happening now in the agricultural sector, fruit and vegetable industry, and dwell on different segments of the market of vegetables, fruits, berries, nuts, potatoes, fresh herbs, and much more. Besides, we will assess the possible consequences for these sectors in the near and medium-term, starting from the basic scenario of a pandemic. We will dwell in more detail on the situation in countries falling within the scope of the EastFruit project: Uzbekistan, Moldova, Georgia, Russia, Tajikistan, Ukraine, Belarus, and Poland.

In the first part of the blog, we will talk about the global situation in agribusiness. Then we will go on to analyze the fruit and vegetable industry and individual countries of the region.

Thus, let’s start with global trends.

1. The world is already in a state of the most severe global economic crisis of this century, and, possibly, in the worst crisis since the Second World War. What does this mean for economies? Currencies will depreciate, and the concept of value will be significantly modified.

2. The crisis will have a less negative impact on the agricultural sector compared to the effects on other sectors of the global economy because the need for food will continue. However, even within the farming sector, some subsectors and countries are already negatively affected. Even the IT industry is likely to suffer more significantly, despite the massive increase in demand for IT solutions for remote work. Therefore, investing in the agricultural sector now is a good idea.

3. The global economic crisis will make the vast majority of people and companies in the world poorer. This is especially true for countries that used to earn money exporting oil, gas, and other fossil hydrocarbons (due to a sharp decline in hydrocarbon prices) and those that used to have developed industry or exported industrial raw materials. Therefore, the demand for expensive and optional products that can be easily replaced in consumption can fall sharply, while the demand for more basic, irreplaceable food products can even grow.

4. The global market, due to border closures and restrictions on food trade, is no longer actually global. It is not impossible when in one country prices for a specific type of strategic food product can skyrocket, and many residents will not be able to afford it, while in another country this product will be sold at a bargain price unprofitable for the farmer because this country restricts the export of this strategic commodity. In the long run, everyone loses since farmers stop growing the product, which is becoming unprofitable, and the price crisis takes on a global shape.

5. Investments in the agricultural sector, despite the crisis, may even grow, as the situation in other sectors will be worse. But preference will be given to industries with the highest level of mechanization.

6. Food losses will rise sharply, because:

• Due to quarantine measures, people rarely shop, but they are buying more products at a time. Accordingly, food products are going bad already in the consumers’ refrigerators;
• The disruption of the supply chains leads to ships’ downtime for many weeks, which often leads to partial or even complete waste of the transported food. Similar problems arise not only in sea transportation but also when shipping by other vehicles.
• manufacturers may have difficulty harvesting certain crops due to labor shortages in certain countries, which depend on seasonal labor;
• farmers may have financial difficulties ensuring the entire production cycle, as well as traders and processors, which can lead to poor quality and increased losses, as well as reduced productivity.

7. The crisis will have a significant impact on agricultural sectors that are directly related to energy prices, in particular, bioethanol, where sugar cane and corn are the main sources of raw materials, as well as on biodiesel, where rapeseed is mainly used. Together with a possible drop in demand for meat, the long-term impact on global corn prices will be greatest. Pressure will also be exerted on sugar and rapeseed prices. But this does not mean that prices will necessarily fall everywhere because the number of new trade restrictions will increase/appear, serious local shocks and price disparities are possible. For example, sugar or corn may be too expensive in the importing country and too cheap in the exporting country.

8. At the same time, the demand for food crops, such as food wheat, rice, and cereals can grow significantly, because these are basic and inexpensive strategic products that people begin to consume during recession times.

9. The vegetable oil industry can also be divided, cheap oils having a certain advantage. However, in general, the oil industry will suffer less than others, since vegetable oil is an essential basic and strategic food product. A certain negative impact for producers and processors is possible only in terms of the decreased demand for protein meals in case of a decreased demand in animal husbandry. However, the significant advantage of the grain and oilseeds sector is the absence of labor problems since almost all production is mechanized.

10. Processed grain food products are also unlikely to suffer very much, although there may be local protectionist measures in individual countries. This subsector may also be negatively affected by the devaluation of the currencies of importing countries against key currencies. However, they are least affected by the recession in the HoReCa segment, that is, the restaurant and tourism business, because such products are easier to cook at home.

11. The meat industry may suffer more than others, as the demand for more expensive types of meat may decrease. At the same time, poultry farming may even win, because it is the cheapest type of meat. The fishing industry could suffer even more significantly.

12. The dairy industry may also suffer losses, especially the segments that are focused on the production of expensive cheeses and other high value-added products. It is likely that the prices of milk protein and fat will converge again.

13. The fruit and vegetable industry will develop completely heterogeneously. Besides, some segments may grow sharply, while others will practically disappear.

14. The global logistics, trade flows, and food production of FMCG (branded, ready-to-eat, and packaged) products will also change dramatically. Demand for products for restaurants, hotels, and the catering industry will drop sharply, so there will be a rollback in value-added. Countries where tourism provided significant demand, will sharply reduce the volume of imports of raw materials and finished products. Accordingly, trade flows will also change.

Summing up, those countries that produce everything necessary to provide their population with food adequately will have an advantage. In particular, Ukraine has a high level of food security and is a net exporter of almost all basic food products. Besides, Ukraine, relatively recently (in the ’90s of the last century), gained invaluable experience in ensuring food security by mass processing of household plots by the population and production of everything necessary on their own. Another benefit for Ukraine is the return of many labor migrants, which will provide the agricultural and food industries with the labor needed.

However, the sharply increased dependence of Ukraine on the import of fertilizers, seeds, plant protection products, and other technical elements is causing concern. At the same time, it is still difficult to expect significant problems with their supplies; most likely, they will increase significantly in price. At the same time, rising food prices can more than offset the increase in production costs.

In the second part of the blog, we will focus on the fruit and vegetable industry and the impact of coronavirus and the global economic crisis on the production, trade, and processing of vegetables, fruits, berries, and nuts of individual countries of the region.

Source: EastFruit