The evolving uncertainty of the coronavirus (COVID-19) pandemic has impacted the Australian economy and businesses in an unprecedented manner. The food and agribusiness sector has been affected to varying degrees with some food companies experiencing rapid increased demand for products as panic buying escalates across the country and in some cases import competitors are restricted. Other industries such as seafood have had export markets effectively close into China while some domestic food producers have had rapid decline in demand from the food service, restaurant and café sectors.

Imported inputs such as packaging are posing a real risk in the supply chain, and imported ingredients could be disrupted through broader impacts on global distribution systems such as shipping and ports. Other key farm agricultural inputs such as chemicals and labour could also be impacted. Where possible, Australian Retailers and manufacturers should be reviewing their suppliers and identifying local suppliers and/or assess opportunities to reformulate where specific raw materials cannot be sourced.

Most agricultural markets have been strong in the lead up to the coronavirus pandemic and the wide-spread summer rain has lifted farm business confidence. Hence there has been minimal impact from coronavirus at the farm gate. However there are areas that require close monitoring as we expect to see further medium-to-long term impacts to occur due to shifts in food demand, logistics restrictions and supply chain breakdown which will continue to unfold as the pandemic evolves2. We are also likely to see some companies in the supply chain under financial pressure and this could directly or indirectly impact farmers. Overall the ongoing domestic demand for food will remain and our food and agribusiness sector is capable and well-positioned to respond. We do however strongly encourage all food and agribusinesses to refine and develop business continuity plans and build resilience into their supply chains to ride out this uncertain period.

Here are our key insights on the implications of the coronavirus pandemic on the food and agribusiness sector and key considerations for businesses during this time.

Impacts on agricultural global trade from the coronavirus pandemic

Demand for Australian products is decreasing in the short-term as worldwide travel restrictions and quarantine regulations in Australia’s major trading partner countries impacts consumption and spending.1 With closing borders and dropping global demand for imports, Australian agricultural trade is feeling the impacts of coronavirus. As noted in KPMG’s response to the Federal Government stimulus package, exports are expected to decline by approximately three percent in 2020 and imports by approximately two percent.2 Exports to China will likely be most impacted with an estimated 28 percent of Australia’s exports impacted in some way.3 There are signs that China is already re-opening to trade and if demand returns to trend, the positive outlook for Australian food and fibre should also return.

Agricultural industries particularly exposed to decreased trade include some categories within seafood and aquaculture. For example, up to 95 percent of average sales in premium crustacean sectors such as Rock Lobster are typically sent to China.3 ABARES predicts the impacts of coronavirus could wipe $389m off the bottom line of the Australian seafood industry alone.1 Record livestock prices and reduced demand for Australian meat exports have heavily disrupted trade for meat processors3, and cropping may also experience setbacks given the sector’s heavy reliance on imported crop protection equipment (i.e. fertilisers and pesticides).1

Coupled with the impacts of the recent summer fires and the persistent droughts across most of Australia, the agriculture industry will likely be restrained somewhat for the near future as it recovers from current and imminent trade shocks.1 Fortunately, there are upsides to consider. The general shortage of protein in China as a result of African swine fever is still expected to result in strong ongoing demand from China as well as other key Asian nations including Japan, South Korea and South East Asia once the short-term impacts of coronavirus are overcome. KPMG Australia anticipates the return of deferred consumption activity in Australia and in our trading partners in 2021.

Supply chain impacts from the coronavirus pandemic

The volatile market conditions have created some negative impacts on a number of agricultural export supply chains.

  • Decreased availability of labour – this remains a concern for the food and agribusiness sector in accessing foreign workers especially in horticulture, intensive agriculture and food processing industries.
  • Decreased demand for exports – as outlined above, the pandemic has presented both an opportunity for local manufacturers and direct and immediate negative impacts on sectors such as seafood, red meat and wine.
  • Longer lead times due to reduced supply of transport and logistics services and travel restrictions (decreased air and sea freight capacity) – this aspect is being monitored as it relates to imported products both food and manufacturing needs e.g. packaging, and impacts on agricultural chemistry and inputs availability. Supply has also been hindered through the closure of factories in China and across Asia more broadly including Japan, Korea and South East Asia where the impacts of the pandemic are still evolving.
  • Increased market access complexity – through more stringent export protocols as well as tariffs and quotas. This may continue to result in medium impacts.
  • Increased biosecurity regulation – this could potentially lead to increased costs through more stringent inspections and other biosecurity protocols.

As businesses race to respond to these effects, there are a number of steps businesses can be taking right now to mitigate the impacts of disrupted supply chains as much as possible. These include:

  • Safeguard workers by monitoring the contact between employees internally and with other participants across the entirety of the supply chain – this is especially crucial for processing industries, saleyards and farming operations employing labour.
  • Assess supplier risk by creating an internal response team to facilitate the open and consistent flow of accurate information between your key supply chain participants – this extends to distribution partners into retail, hospitality and food services.
  • Inform customers on changes to your supply chains and how this may impact them and the fulfilment of products.
  • Assess changes in product demand and align with production planning.
  • Revise cash flow, working capital management and inventory forecasts alongside supply and demand predictions where possible to ensure businesses remain solvent.

Additionally, given the uncertainty of the timeframe surrounding the length of time the coronavirus pandemic may last, food and agribusinesses should start to plan for the next 3 – 12 months, especially:

  • Use of predictive supply chain enablers to monitor other important regions (supply regions/demand markets).
  • Identify alternative sources of supply (via supplier risk/sourcing assessment support) and where new suppliers are identified, run the network changes through the simulation module to understand the impact on working capital, cost to serve, risk, lead time and delivery in full on time before accepting the changes and updating bill of materials, inventory systems etc.
  • Create use-cases for major supply-demand disruption (e.g. what happens if the pandemic lasts another 6-12 months? What if Europe or North America shuts down?) and install the predictive supply chain risk management solution.
  • Load new and/or updated business continuity plans (BCPs) (if you require assistance developing a BCP, we can assist).
  • Ongoing risk monitoring and network simulation support (strategic and tactical advisory support).

Food and agricultural export supply chains will also be assisted by the federal stimulus package’s allocated boost in funding to Austrade to support in identifying alternate supply chains and trade mechanisms to reconnect typically-exported foods back to the global market.2

Workforce management

We here at KPMG Australia anticipate total workdays lost due to workers becoming ill from the coronavirus could be in the order of 30 million; translating to lost productivity of around 1.22 percent. In a workspace such as an abattoir, packaging and processing plant, the close confinement of workers imposes increased risk to workforces.

Due to the severe tightening of travel to Australia, the horticulture, pork and grain workforces will see a large impact given their reliance on seasonal workers and backpackers. The short-term decreased demand for Australian products has seen workforces heavily dependent on exports (e.g. meat processing) already implementing reduced shifts, temporary shutting of operations, and termination of employment contracts.1

A number of systems have already been put in place to help ease the impact of the coronavirus on workforces. As we emphasised in our response to the fiscal stimulus package, the package will assist agricultural workforces by offering certain small to medium employers (with turnover up to $50 million) support to generate (tax free) cash flow, as well as support for apprentices and trainees through wage subsidies to support the maintenance of a skilled workforce for the future.2 Find out more on how to apply.

Australian dollar

The widespread economic impacts of the coronavirus has caused the Australian dollar to drop to an eleven-year-low,4 (at time of writing) six percent lower on a trade-weighted basis than early January 2020.5 Typically this would benefit exporters given the larger buying power transferred to Australia’s trading partners, however the pandemic’s disruption of supply chains and travel bans is impacting disposable income, and buyers worldwide are significantly less inclined to purchase non-essential exports.5 A weak dollar means the buying power of Australian agricultural businesses for imports decreases, worsening input costs that are already non-competitive compared to other agricultural exporters.

Business considerations

The coronavirus pandemic is placing immense pressure on businesses to quickly react to substantial changes in volatile environments. During this time we recommend that businesses take proactive steps to ensure they are prepared to manage potential impacts both efficiently and effectively:

  • be clear on management roles and responsibilities and secure external support
  • prioritise your people and customers in line with your values
  • know your exposure and how impacts may manifest your organisation to build your action plan
  • plan to contact your staff quickly and through multiple channels
  • implement flexible working arrangements to allow workers to work remotely if needed and if possible
  • test mobile networks in remote working environments to ensure that connection is not compromised
  • prepare and widely distribute your action plan and be ready to update it as the situation evolves
  • test your action plan as soon as possible.6

Considerations around Safe Harbour:
The ‘Safe Harbour’ legislation (section 588GA of the Corporations Act) provides a framework for corporate restructuring outside formal insolvency. It protects company directors from personal liability for insolvent trading if the company is undertaking a legitimate restructure.

Safe Harbour is specifically designed to preserve good businesses, and to protect them through difficult times.

The use of Safe Harbour is expected to increase as a consequence of the coronavirus pandemic as a key strategic initiative to preserve businesses and employment. It is a much preferred outcome to insolvency, but is only available to companies and their directors who act quickly when facing into financial decline. Directors who take action too late face falling foul of the qualifying criteria for Safe Harbour, meaning that Voluntary Administration or Liquidation may become their only options.

Successfully navigating a client into Safe Harbour, ensuring that the directors and the company meet the various qualifying criteria, and the construction of a sufficiently robust and detailed restructuring plan requires expert knowledge and experience, as well as technical proficiency in the application of Australia’s corporate turnaround and insolvency laws. Retaining the services of a restructuring professional who not only understands the Safe Harbour legislation but more importantly is practised in restructuring is key.

Update from Monday 23 March 2020

Relaxation of Insolvency laws

The Government announced on Sunday that directors will receive temporary relief from insolvent trading laws for 6 months. This will now provide directors with the benefit on an automatic Safe Harbour, albeit only for 6 months. Through these changes the Government is aiming to:

  • stop directors of companies, that would be ordinarily viable save for COVID-19, from electing to enter into a formal insolvency process due to the personal consequences from trading whilst insolvent
  • enable directors to increase their focus on managing companies through the COVID-19 crisis as opposed to being concerned by the implications for their own personal positions, and
  • avoid a situation whereby there are insolvencies en masse in a short space of time which would inhibit the ability of companies to be rehabilitated, or flood the market with assets that may not be saleable.

These changes can be seen as a positive response in an unprecedented financial crisis.

Other observations:

  • The eventual unwinding of this response will need further consideration to avoid unintended insolvency outcomes when the temporary protection is lifted.
  • As a consequence of these changes there may be additional counter-party credit risks to some clients which should be assessed on their merits.
  • Directors remain bound by their statutory duties to act honestly and in the interests of creditors where solvency is in issue.

These changes were passed in Federal Parliament on 23 March 2020. Until the changes were legislated, companies had to rely on the Safe Harbour regime for potential protection from insolvent trading.

Deferral of Statutory Demand Period

The government also announced changes to the threshold and time periods for a creditor seeking to recover debts owed to them. These changes we passed in Federal Parliament on 23 March 2020. Previously the debt threshold to wind-up a company was $2,000, and the debtor only had 21 days to respond to the statutory demand. That threshold has now been increased to $20,000, and the time period to respond to a statuary demand now 6 months. While this will provide a de facto standstill arrangement for many businesses’, the counter-party risk is increased for the supplier, adding also to the trade credit and liquidity issues identified above.

Questions for affected businesses

As the situation has rapidly unfolded for certain sectors, affected businesses need to urgently consider these issues and be prepared to make quick and decisive changes to their business model, in order to maximise their prospects of survival. Question to ask:

  • What is their financial position?
  • How has COVID 19 affected their business and sector?
  • How much cash is needed across a range of operating and revenue scenarios?
  • Where is that cash to be sourced from?
  • What do they need from their bank?
  • What non-core assets they can sell quickly?
  • What cost reductions can occur?
  • What creditor standstill arrangements need to happen?
  • Can they contribute or raise new equity?
  • What government support can be accessed?
  • What are the ongoing counter party trading risks?
  • Which stakeholders do they communicate with and how?
  • What are their realistic options and can they be implemented quickly?