For farmers and consumers, a crazy year in food

The year started with some optimism. Food prices were stable, the trade war was subsiding, and agricultural-commodity prices were showing some strength. China’s hog herd had been decimated by African swine fever, and U.S. hog producers were building inventory in anticipation of burgeoning exports.

Then Covid-19 hit.

Nearly overnight, there was a near-total destruction of demand from restaurants, cafeterias and other food-service venues. Simultaneously, there was a spike in demand for food bought through supermarkets and grocery stores. Spending on food at home was 22% higher in March than January; spending on food away from home was 47% lower in April than January.

The demand shocks had notable effects on consumers, ranging from empty grocery-store shelves to a rapid increase in retail food prices. From March to April, retail prices increased 2.6%, a monthly increase higher than any since the dramatic inflation witnessed in the 1970s.

The shocks reverberated throughout the agricultural sector. About 40% of corn goes to producing ethanol, and fuel demand tumbled. Ethanol plants and corn farmers, already reeling from the fall in oil prices from the Russia-Saudi Arabia price war, were further hit when domestic consumers cut back on driving as they worked from home and complied with stay-at-home orders.

Going to waste

It seemed almost paradoxical that at the same time consumers were experiencing shortages in supermarkets, many farmers were dumping milk and plowing under vegetables. Two dramatic shifts explain the phenomenon.

First, with restaurants and cafeterias largely closed, there were no buyers for many of the products destined for those outlets. Agriculture is a seasonal business involving biological lags—today’s crop and animal products are the result of decisions made many months prior. The process cannot be turned off with the flip of a switch.

More than half of consumers’ food dollars, accounting for roughly one-third of total volume, are spent away from home. And, as this market closed, there was no home for many farm products.

Some argued that the “excess" food could have been used in food banks. However, there was no mechanism in place to compensate the farmer for the cost of harvesting and transportation, and food banks had little ability to process and package raw agricultural products.

Processing is the second answer to the aforementioned paradox. Most agricultural products undergo some kind of transformation on their way to the final consumer. While there are many thousands of farmers and many millions of consumers, there are fewer processors. The processing sector served as a bottleneck in part because of plants specifically designed to affordably produce and package products—whether it be half-pint milk containers for schools or large cheese boxes for pizza joints—that cannot be easily repurposed for retail grocery-store distribution.

About the time the grocery sector began to recover and shelves for most products were restocked, another large shock, this one from the supply side, hit the food and agricultural sector.

In mid-April, workers at beef and pork packing plants began testing positive for Covid-19, leading to the slowdown and ultimate shutdowns of several large plants. By the first of May, roughly 40% less cattle and hogs were being processed, compared with the same point in 2019. With less meat on the market, wholesale beef prices were bid up to a level higher than any previously recorded, and wholesale pork prices were just under their record peak. At the same time, because meatpackers were unable to process livestock, prices of cattle and hogs fell.

In addition to the economic toll on these livestock sectors, millions of animals that had been destined for dinner plates were left on the farm. The backlog of livestock, particularly in the hog sector, which operates on a near just-in-time basis, led to the dire prospect of euthanasia and depopulation.

Fortunately, by June, beef and pork processing volumes had nearly recovered to 2019 levels, as packers instituted a host of precautions for their workforces.

The federal-government response to the pandemic helped offset some of the economic damage. The Payroll Protection Program helped farms and agribusiness firms cover some of the expense of maintaining their workforce. Net farm income is actually expected to reach a five-year high in 2020, surpassing 2019 levels by 21.7%.

But most of the improvement has come from government payments, first from trade-facilitation payments meant to compensate farmers for the adverse effects of the trade war with China, and from the Coronavirus Food Assistance Programs. In 2020, direct farm payments are expected to account for more than a third of net farm income.

Recovery and uncertainty

Despite the deep hits to most agricultural commodity prices that occurred in the spring, prices have rallied through the fall and now generally exceed 2019 levels. These price improvements have come about in response to improving macroeconomic conditions, a derecho windstorm that hurt corn and soybean supply in much of the Midwest and higher-than-anticipated demand from China.

Nonetheless, disruptions to the agricultural economy remain. As of the first of November, consumer spending at grocery stores remains 11% higher and restaurant and hotel spending 30% lower than in January. Retail food-price inflation has abated, but price levels remain significantly higher than before the onset of the pandemic. Whether and to what extent food service will recover remains to be seen, and much will depend on the path of the pandemic.

What about the future? What is the “new normal" in the food and agribusiness industries and in rural communities?

Some changes in food-consumption behavior, such as the shift toward online buying and food distribution, may be more permanent than temporary. Second, food and agribusiness firms are likely to be a little less focused on efficiency and a little more on resiliency to be able to handle future disruptions. For example, firms may carry a little more inventory to handle significant fluctuations in demand and not focus as much on just-in-time supply systems.

Third, sourcing strategies and the structure of supply chains are likely to be reworked—buying from more regional or local suppliers rather than global suppliers that require multiple and more complex transportation modes; diversifying the sourcing of products or inputs from a larger number of plants and locales so they are not as vulnerable to plant shutdowns; and implementing systems so that customers can order online and pick up at local stores or get direct delivery.

In all, the events of 2020 will likely be remembered as catalysts for significant changes in the food system—and the source of great uncertainty for consumers and suppliers. Making the supply chain more resilient, for instance, may mean higher prices for consumers. And farms may lean more heavily on automation to protect against the impact of future pandemics—eliminating many jobs.

Those sorts of trade-offs are likely to be the new normal in the industry for years to come.

This story has been published from a wire agency feed without modifications to the text