The Van Trump Report

Early Predictions for COVID-19’s Impact on the Ag Industry

COVID-19 has left economic forecasters with the very difficult task of analyzing and trying to predict where things go from here. Our friends from the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri are using their talents and tools to try and best forecast what affects and impact the pandemic may have on the agriculture sector. I encourage everyone to read all of the details in their Early Estimates of the Impacts of COVID-19 on U.S. Agricultural Commodity Markets, Farm Income and Government Outlays Report HERE

I should mention, the group’s objective is simply to provide a framework for owners and operators to consider as they seek to develop a working plan for an uncertain future. I always like hearing their thoughts as it helps me gain additional perspective that I can then apply to my own business. 

Impacts Will Vary: Supply chain disruptions and sharp changes in consumer demand have been observed and have, so far, varied considerably by commodity or product. The expansion of shelter in place orders has reduced food consumed away from home and with it altered consumer demand among food products. Though your specific sector may not have been negatively touched yet as much as others, you need to be thinking of how an extended stay in place, or new regulations, or future disrupted supply chains may affect your operation or end-users demand. There is no status quo on which to rest your laurels on, so stay aware and nimble. For instance, don’t make plans that your gas prices will stay this low forever, etc. This goes for all the sectors seeing a huge increase in demand as well. Will that demand remain on the other side? Are you prepared either way?

  • KVT Thoughts – With all of the restaurants closed, we are seeing soybean oil heavily backing up into the pipeline and starting to weight on crush. We are also seeing the same thing happen in the livestock sector as animals are backing up in the pipeline with processing plant closures and demand falling off a cliff with restaurant closures. I’m thinking hard about how this ultimately plays out and perhaps there is some longer-term potential in the backend of the market? I suspect it all depends on how the consumer comes back once we reopen the economy.

As Incomes Begin to Fall, Demand for Agricultural Goods Could Follow: Economic forecasts are calling call for a sharp decline in U.S. GDP in the second quarter in 2020 as well as a contraction for the year as a whole. On top of that, the speed and duration of the recovery are also a source of great uncertainty. I’ve stated more than once that I am not in agreement with the “V” shaped recovery that some are touting once we breakout of the current lockdown. With consumer income contracting, most likely we will see a corresponding contraction in consumer expenditures. While agriculture has fared better than industries such as energy and manufacturing during past economic downturns such as ‘the great recession’ experienced from 2007 to 2009, the sector is certainly not immune from demand and price impacts as a result of the loss of income by its consumers both here and around the world. I suspect supply chains will recover long before consumer spending does.

  • KVT Thoughts: I certainly do not see consumers racing out to gather for entertainment purposes in crowded venues or concerts. I suspect this also adversely impacts food demand, i.e. not near as many brats or hot dogs will be sold at the ballparks, not near as many big barbeques will be taking place, etc. The question is how long will it take to get the consumer back to normal, how long will the herd be spooked? We have to remember, it took the airlines three years to get back to normal bookings post-911.

Looking Across the Ag Sector: It is important to note that key macroeconomic assumptions made in this analysis represent a sharp and significant decline in the national economy in 2020, most notably with the sharpest decline occurring in the second quarter. Also, The scenario assumes a “V-shaped” recession where the market recovers quickly. At best, such an outcome would have to be contingent on a rapid end to the public health crisis and to current restrictions on economic activity.

Consumer expenditures are being negatively impacted by the increase in unemployment and restrictions on economic activity, but the CARES act and other relief legislation may moderate the decline in consumer spending. A decline in consumer expenditures was last seen in 2009, during the great recession. Consumer expenditures on food and beverages tend to be less responsive to income shocks and so are reduced by 2.5% relative to the baseline for 2020.

Oil prices are assumed to decline by 15% as a result of COVID-19. The actual decline in oil prices in March 2020 was much greater, but the analysis assumes that much of the observed decline can be explained by the dispute among oil producers that is not entirely attributable to the COVID crisis. Importantly for biofuels, both gasoline and diesel use are expected to contract. Should restrictions remain in place into the summer and beyond, the actual reductions in fuel use could be greater than assumed here.

Supply chain impacts have been varied and, in some cases, severe. The production, processing, transportation and retailing of food have all been affected in ways that have seriously disrupted normal practices and increased costs. Even if it proves temporary, shifting from a world where a significant share of food is consumed in restaurants to one where far more food is consumed at home may require changes in food processing and distribution that may come with additional costs.

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