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Economics and Strategy

Geopolitical Briefing

June 29, 2020

Cracks are emerging in the global food supply chain By Angelo Katsoras

Introduction Even before the pandemic, parts of the food supply chain were already under strain for various reasons. These include water scarcity in a growing number of regions, climate change negatively impacting food production in certain countries, swine flu killing hundreds of millions of pigs last year and, more recently, the worst locust swarms in several decades destroying crops throughout East Africa and parts of Asia.

COVID-19 has now greatly added to this strain. Virus outbreaks in meat plants, the partial closure of the economy, and border shutdowns have thrown even more sand in the gears of the global food supply chain.

The importance of the global food supply chain From the farmer’s field to the kitchen table, the global food supply chain accounts for an astounding 10% of global GDP and employs over 1.5 billion people. It has largely managed to keep pace with global demand over the years. While the world’s population has doubled since 1970 to 7.7 billion people, the world’s supply of food has more than tripled over the same period. Although some people rightly argue that it is not evenly distributed, with some nations having to deal with high levels of obesity while others struggle to feed undernourished populations.

Prices, for their part, have been on a long downward trend. The Economist recently estimated that a bushel of corn and a cut of beef cost less today than 50 years ago in real terms. The food sector’s logistical ability to meet global demand has been a key factor behind its success: Food exports have increased 600% over the past 30 years.1 However, this interconnectedness has left the global supply chain vulnerable to disruptions.

Source: “Countries Starting to Hoard Food, Threatening Global Trade,” The Telegraph, March 25, 2020

1 “The global food supply chain is passing a severe test,” The Economist, May 9, 2020

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This vulnerability has been exacerbated over the years by the growing market domination of a small number of large firms. For example, four corporations—Brazil’s JBS, Tyson and Cargill of the United States, and Chinese-owned Smithfield Foods—dominate the global meat-producing sector. In the United States, four companies control the poultry market,2 while in Canada, just three plants–two owned by JBS and another by Cargill–handle 85% of all beef processing.3

Why is the meat sector so vulnerable to spread of COVID-19? While increased market concentration has permitted companies to lower food prices and achieve significant economies of scale via fewer and larger factories, recent events proved that an outbreak of COVID-19 in a few of these plants could severely disrupt national production.

These facilities are particularly vulnerable to the spread of COVID-19 because workers tend to stand shoulder to shoulder by a conveyer belt. The fact that many immigrant workers employed in these facilities share overcrowded living quarters is another contributing factor.

Source: The Global and Mail, April 2020

Even before the COVID-19 pandemic, however, meat and poultry industry workers had long presented among the highest rates of illness of any occupation. In 2016, the U.S. Government Accountability Office estimated that the meat and poultry sector had an illness rate of nearly 160 cases per 10,000 full-time workers in 2013 compared with about 40 cases in the manufacturing sector as a whole.

The virus outbreak has only further highlighted this fact. As of mid-June, 25,523 meatpacking workers in the United States had tested positive for COVID-19 and 89 had died.4 The United Food and Commercial Workers International Union claims that 30% to 50% of meatpacking employees nationwide were still absent as of early June because they were either in quarantine or afraid to return to work. A report published in early May by CoBank, which is based in rural America, estimated that pork and beef production was down approximately 35% from the same time a year before.5

In an attempt to curtail the outbreak and convince employees to return to work, meat companies have been forced to radically change their practices. This has included reducing the number of workers on a shift to allow for social distancing, installing plastic dividers between stations, providing personal protective equipment, increasing pay, and implementing temperature checks for employees. Furthermore, one hundred firms that manage over $2.3 trillion in assets recently demanded that meat companies treat their workers better or face the threat of disinvestment.6 While these necessary operational changes will likely lead to a reduction in infection rates over the longer term, they have also increased operating costs.

2 “The world’s food system has so far weathered the challenge of covid-19,” The Economist, May 9, 2020 3 “'Everything's on the table,” National Post, May 16, 2020 4 “As Meat Plants Stayed Open to Feed Americans, Exports to China Surged,” New York Times, June 16, 2020 5 “CoBank: Meat supplies slow, price increases expected in May, June,” Meat & Poultry, May 6, 2020 6 “Meat Companies Get Pressure from Investors to Improve Working Conditions,” Bloomberg, May 21, 2020

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Labour shortages materializing in the fruit and vegetable sector Unlike grain production, which is largely mechanized in the developed world, the harvesting of vegetables and fruits is very difficult to automate and, therefore, remains labour intensive. In many countries this has left the sector particularly vulnerable to cross-border travel restrictions that have reduced the supply of migrant farm labour. For example:

The closure of American consulates in Mexico could mean that many of the 250,000 visas for agricultural workers will not be issued this year.

In Italy, border closures have reportedly blocked the arrival of 200,000 migrant farm workers.7

In Canada, the agriculture sector employs approximately 60,000 temporary foreign workers annually. The Canadian Federation of Agriculture estimated in early June that over 16,000 jobs were still unfilled.8 In Ontario alone, more than 600 foreign farm workers had tested positive for COVID-19 as of mid-June.9

In order prevent future outbreaks, farms will have to spend more funds on providing these guest workers with much less crowded living arrangements.

India’s labour-intensive agriculture sector exemplifies the difficulty many developing countries have in maintaining lockdowns Though the pandemic had not been brought under control, India’s lockdown was lifted at the end of May. A major reason behind the decision was that India’s labour-intensive agriculture sector desperately needed its workers back to ensure food security. “Wheat is harvested by hand, not combines; burlap sacks of potatoes are loaded on trucks using lines of men instead of forklifts; eggs reach shops on the back of bicycles, not refrigerated trucks. More than half of India is involved one way or another in the growing, delivering and selling of food.”10

Adding to India’s agriculture woes, the worst outbreak of locusts in several decades has already destroyed tens of thousands hectares of crops. The FAO estimates that if unimpeded a 1 kilometer swarm of locusts has the potential to consume as much food as 35,000 people eat in a single day. The massive spraying of pesticides is being deployed in an effort to control the outbreak.11

Source: “Rolling emergency of locust swarms decimating Africa, Asia and Middle East,” The Guardian, June 8, 2020

7 “Global food glut sows seeds of doubt for farmers,” The Telegraph, May 1, 2020 8 “The Sprout: Need for more local labourers on farms, CFA says,” Ipolitics, June 4, 2020 9 “Essential but expendable: How Canada failed migrant farm workers,” The Globe and Mail, June 16, 2020 10 “India’s Food Supply Chain Frays as People Stay Home,” Wall Street Journal, April 8, 2020 11 “A plague amid a pandemic: East Africa, West Asia combat surging locust outbreak,” NBC news, June 22, 2020

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Emergence of supply chain mismatches is another challenge The abrupt drop in demand from restaurants, hotels and schools owing to COVID-19 has highlighted the need for farmers to reconfigure their supply chains toward grocery stores and home delivery. However, making this transition has proved very difficult because commercial and consumer food products are prepared, packaged and consumed very differently. For example:

Restaurants tend to want more expensive cuts of meat than supermarket shoppers do

People are eating differently at home, stockpiling bread and pasta and consuming fewer vegetables than they would when they eat out

Unlike restaurants, shoppers do not need 50 kilogram sacks of potatoes or flour

Some big egg operations only supply restaurants and cafeterias, sometimes with 50-gallon drums of liquid eggs12

The National Pork Producers Council estimated that bottlenecks at meat-processing plants were creating a backlog of 170,000 hogs a day in the United States.13

Because of these disruptions, many U.S. farmers have been forced to euthanize and bury their hogs and many vegetable growers have been forced to let their produce rot in the field at a time when the United States is seeing a surge in the number of people visiting food banks.

In the longer term, more versatile (and expensive) supply chains will have to be developed in order to help farmers switch more easily from commercial to retail clients and vice versa.

Finally, the graphic below illustrates the complexities of Canada’s beef supply chain. A problem at any step of the process can potentially grind operations to a halt, particularly if production is concentrated in a relatively small number of plants.

Source: “'Everything's on the table,” National Post, May 16, 2020

12 “Where’s the beef? Pandemic exposes cracks in US food system,” Christian Science Monitor, May 18, 2020 13 “The meat industry is trying to get back to normal. But workers are still getting sick — and shortages may get worse,” Washington Post, June 8, 2020

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Are we headed for a surge in restrictions on food exports? The supply disruptions mentioned above have sparked fears of food shortages and have led many countries either to implement controls on food exports or to stockpile food. Examples of this are highlighted in the map below.

Source: “Agriculture markets eye normality as countries ease export restrictions,” S&P Global, June 3, 2020

The worry is that a spike in food trade restrictions could push prices up further. In 2007-08, 33 countries put in place restrictions on food exports. The World Bank estimated these measures were responsible for most of the 116% average rise in the price of rice at the time.14

Disruptions lifting U.S. food inflation in midst of global economic downturn While prices are falling across a wide swath of the U.S. economy, there is one notable exception: food. The U.S. Labor Department reported that the prices by U.S. consumers paid for groceries jumped 2.6% in April, the largest increase since February 1974.15 In May, prices climbed another 1%. The same pattern has been observed in Canada. While the general inflation rate was -0.2% in April, the first time it turned negative since 2009, food prices went against the trend and rose 3.4%.

14 “The world’s food system has so far weathered the challenge of covid-19,” The Economist, May 19, 2020 15 “US grocery costs jump the most in 46 years, led by rising prices for meat and eggs,” CNBC, May 12, 2020

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

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3.00%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

The prices U.S. consumers are paying for groceries has spiked One month percent change, seasonally adjusted

NBF Economics and Strategy (data via Federal Reserve Economic Data)

April 20202.6%

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Food protectionism placing upward pressure on price of rice Despite projections for near-record global rice supplies in 2020, prices in certain regions rose to their highest levels in over seven years in mid-April after several countries imposed export restrictions in response to worries over food security. From February to mid-April, rice prices jumped 10% in the United States, 32% in Thailand, and 25% in Vietnam.

Source: “Global trading prices for rice rose to highest level in 7 years due to export restrictions,” USDA, May 27, 2020

2.0

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

U.S.: City average meat prices surge amid COVID-19 pandemicBeef, 100% ground beef, price per lb. – Pork, All pork chops, price per lb. (last data: June 26, 2020)

$

NBF Economics and Strategy (data via U.S. Bureau of Labor Statistics)

Pork

Beef

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China hit by even higher rise in food prices The price of food in China rose 14.8% in April from a year earlier. This was down from the 21.8% increase registered in February but still far above the minuscule 0.4% rise in non-food prices in April.16 While China, too, has struggled with virus-related disruptions to its food supply chain, the spike in food inflation has been driven largely by pork. Indeed, in the past two months alone, pork prices soared 81.7% (May) and 96.9% (April) from the same periods the previous year.17 This is explained by the fact that the swine flu wiped out more than half of China’s 440 million pigs in 2019.18

The shortage of pigs forced China to import a record 400,000 tonnes of pork in April, up nearly 170% from the year before.19 China alone accounts for half of the world’s pork consumption.20

Source: “China's pork imports in April jump 170% to record high,” Reuters, May 24, 2020

16 “China stocks up food and oil supplies as coronavirus spurs fears about shortages,” CNBC, May 1, 2020 17 “China producer prices fall as pandemic hits global demand,” Financial Times, June 10, 2020 18 “Special Report: Before coronavirus, China bungled swine epidemic with secrecy,” Reuters, March 5, 2020 19 “April Red Meat Exports Weather Production Challenges, Economic Headwinds,” U.S. Meat Export Federation, May 2020 20 “China loves its pork, but prices are rising and that could be a problem,” Washington Post, September 9, 2019

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Food inflation in China Year over year percentage change in food inflation (Last data: April 2020)

y/y % chg.

NBF Economics and Strategy (data via Refinitiv)

Reached +21.9% year on year in February

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Automation in agriculture sector set to spike The combination of worries over the spread of COVID-19 and higher operational costs will lead to a surge in demand for robots that grow and deliver food. Here are few examples of the types of robots that could see an upswing in demand:

U.S.-based FarmWise builds a robot equipped with artificial intelligence that enables it to identify weeds for removal, thus helping farmers become more efficient.21

Source: “Five robots that hope to save the US food supply chain,” Financial Times, May 18, 2020

Israeli-based Fabric builds automated fulfilment centres. Before the pandemic, online deliveries accounted for less than 5% of America’s $682-billion grocery market. They are expected to represent over 10% by the end 2020.

Source: “Five robots that hope to save the US food supply chain,” Financial Times, May 18, 2020

21 “Five robots that hope to save the US food supply chain,” Financial Times, May 18, 2020

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Will North American meat plants be next to automate? The future of North American meat processing plants can perhaps be found in a facility owned by Danish Crown, the biggest meat processing company in Europe. The facility located in Denmark utilizes extensive automation, including robots to remove organs, tendons and split the spine. This has helped keep its COVID-19 infection rate at a negligible level. Danish Crown began to substitute capital for labor many years back owing to high labour costs in Denmark and Europe in general. Their North American counterparts will likely have to follow its lead as meat processing costs rise in the United States and Canada.22

Automation’s potential in the meat processing sector is evidenced by a robot developed by Scott Technology, a New Zealand-based company. JBS, the world's largest meat processing company, has a controlling stake in the company and uses it to cut lamb carcasses. One of the two robots seen in the picture below generates a 3D model of the carcass. The other robot slices the meat based on the computer model generated.23

Your friendly neighborhood robot butcher

Source: “Rise of the robot butchers,” Business Insider Australia, August 2018

Finally, even before the pandemic, Tyson, another large meat producer, was already planning to automate its meat plants. In 2019, Tyson opened a state-of-the-art facility in Arkansas designed to help the company automate its food production. The company has already invested more than $215 million in robotics in the past five years.24

22 “Covid-19 Makes the Case for More Meatpacking Robots,” Wired, May 25, 2020 23 “The world's biggest meat producer is planning to test out robot butchers,” Business Insider, October 26, 2016 24 “New Facility to Boost Tyson Foods’ Automation and Robotics Efforts,” Tyson Foods, August 9, 2019

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Conclusion In summary, COVID-19 has hit the agriculture sector with a perfect storm of events that has strained the world’s food supply chain. These events include massive virus outbreaks in meat plants, travel restrictions limiting the availability of migrant workers, supply chain mismatches, and increased protectionism.

The higher costs generated by these headwinds will remain embedded in the food supply chain long after the pandemic has subsided. This is because the higher wages, the more stringent safety standards, the upfront costs of investing in automation, and the staggered shifts implemented at the height of the pandemic will, for the most part, not be undone. Operating costs will be further increased by companies forced to invest in additional supply chains in order to strengthen the resilience of the system in the face of any future black swan events. However, it is important to note that, over the longer term, the potential efficiencies realized by automation could bring costs down somewhat.

Moreover, similar to what happened with medical supplies, if persistent food supply shortages emerge, countries will give priority to their home markets before sending anything abroad and will step up efforts to become more self-sufficient. In this regard, President Emmanuel Macron of France recently stated: “Delegating our food supply to others is madness. We have to take back control.”25 In the United States, Democratic Senators Elizabeth Warren and Cory Booker are pressing top meatpackers to explain why they are exporting record amounts of meat to China while the United States is grappling with tight meat supplies at home. The Department of Agriculture reported that the United States exported 112,327 tonnes of pork to China in April, an increase of 257% from a year earlier.26

Finally, in the midst of all these challenges we must not forget that that agriculture sector will still have to keep pace with long-term global demand for food. The Food and Agriculture Organization estimates that the world’s population will increase from 7.7 billion today to just over 10 billion by 2050. The FAO also projects that these people will be eating on average 12% more than they did in 2000, including about twice as much meat and poultry.27

25 “France issues call to 'buy French' as coronavirus erodes single market,” France24, March 28, 2020 26 “U.S. senators question meatpackers over exports to China during pandemic,” Reuters, June 24, 2020 27 “What it will take to avoid a global food shortage,” Bloomberg, June 8, 2020




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Kyle Dahms Jocelyn Paquet Angelo Katsoras Economist Economist Geopolitical Analyst [email protected] [email protected] [email protected]

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