As our Chief Economist Dr Brendan Rynne describes ‘‘We have experienced the single largest shock to the economy in close to a century”. While the food and agribusiness sector as a whole has been relatively less affected since the full weight of the pandemic hit, new challenges continue to emerge including weakness in demand in key agricultural markets.
In Australia we have seen some clear phases of the pandemic’s impact on the food and fibre supply chains. Initially we saw the panic buying phase that spiked retail sales and caused food processors to rapidly respond to demand. In this initial phase markets began to close e.g. China – and export channels for products such as seafood were shutdown.
There was then a short consolidation phase as panic buying ceased. Other markets such as the USA and EU were impacted and the fundamentals of the demand shock of COVID-19 became apparent.
Now we are in a third phase where demand impacts are affecting global pricing and farmgate pricing is falling. Weakness in apparel sales globally is reducing demand for fibre with cotton and wool prices significantly weaker. Sugar prices have fallen on the back of reduced oil prices and a shift in sugar production from ethanol to human consumption. This is the longest phase and while estimates are still largely unknown, we would expect that demand is likely to return to relatively normal price outlooks in 2021.
In this current phase we continue to see some disruption to supply chains with reports of delayed shipping and ongoing increased costs in airfreight. There are also reports of restricted access to imported packaging and ingredients.
While it remains to be seen how rapid the rebuild will be from the COVID-19 economic impacts, what we do know is that organisations will be better placed in the medium-to-long term if they can build resilience into their operations by implementing enhanced risk management, scenario planning, removing redundant and inefficient supply chain activities and supplier management leveraging the learnings to date experienced by the impact of COVID-19.
Here are key insights on the implications of COVID-19 on the food and agribusiness sector and key considerations for businesses as we start to towards recovery and rebuild.
If you would like to discuss any of our insights further, please do not hesitate to contact our Food and Agribusiness Leads.
The COVID-19 situation started off as a supply shock (i.e. less workers producing less output), and is flowing into a demand shock (i.e. people buying less and buying different things to what they normally purchase).2 Economic activity in accommodation and food services sectors will halve by June 2020 before a long recovery to their pre-COVID levels by March 2021.3 These reductions in demand have been countered to a degree by strong wholesale demand for agricultural products as major retailers service strong demand during the lockdown and continuing restrictions.
International demand has and will continue to be impacted in the short term as unemployment and uncertainty from COVID-19 reduces disposal income for premium Australian products. However, assessment of Australia’s top 10 agricultural markets (India, China, Indonesia, USA, Vietnam, Malaysia, Hong Kong, New Zealand, Korea and Japan) over the short to mid-term remains favourable, with income growth projected to increase marginally from 3.5 percent in 2020 to 3.7 percent in 2025.4
The impact of COVID-19 on global trade has been immense, with total volume of world merchandise traded expected to fall 13-32 percent in 2020.5 This is a result of a general decline in business activity and consumer demand, diplomatic and trade tensions and the rise of associated protectionist policies (including tariff and non-tariff measures). Australian exports are estimated to fall 3 percent and imports by approximately 2 percent across 2020 with high value perishable and air freighted goods such as fresh meat, seafood, wine and grains taking a significant hit.
In response to COVID-19, a number of Australia’s key trading partners are implementing more protectionist trade agendas, standing up both tariff and non-tariff measures. In May 2020, China revealed it was applying a series of import tariffs on Australian barley (~80 percent) which is considerable, given China previously received 49 percent of Australia’s barley. China also announced it was suspending imports from four Australian meatworks in response to ‘technical breaches’ by Australian parties over the course of 2019. Regional trade for Australian seafood and aquaculture has also fallen, in response to disruptions to airfreight channels over 2020. ABARES predict this could wipe $389 million from the Australia’s seafood industry.
Australia’s future export growth will in part, be dependent on how our political relationship plays out with China and the speed at which the Chinese economy recovers. This will be particularly important for high-value food goods (seafood, fresh meat) and iron ore. Given our narrow export base and reliance on iron ore, swings in demand for this commodity could have a significant impact on our Terms of Trade in the near-term.
As global distribution systems (shipping and ports) continue to be disrupted, Australia may have issues accessing critical production inputs, notably packaging which could further affect our production and export capacity. Key agricultural inputs such as fertilisers, pesticides and labour may also be affected if regular trade flows do not resume. On a brighter note, trade volumes are expected to make a recovery in mid-2021, particularly for high value luxury goods (rock lobster and wine) as consumer confidence lifts and the impact of policy responses are felt.
The Australian dollar has largely recovered from its recent coronavirus-induced lows culminating on 19 March 2020 (0.5571 USD), and is back close to its pre-virus levels in the mid-high 60s (trading at 0.6473 as at 13 May).6
In the short term, the AUD is forecast to remain under downward pressure on the basis of subdued demand from the global economy for Australian exports (primarily from China) and global investor’s propensity to seek safe haven assets such as US and Japanese government bonds.
Achieving a consistent mid-high 60s AUD trading level provides a more reasonable long term position for Australian growers balancing the cost of inputs (e.g. fertiliser and chemicals) against the return achieved on exported products. Notwithstanding the uncertainty and downward pressure provided by COVID-19, the AUD is forecast to average in the vicinity of 0.68 USD out to 2020-21, with an even more optimistic view out to 0.74 USD in 2024-25 supported by demand for Australian exports of coal and iron ore, and the relativity of interest rates in other advanced economies as the global recovery from COVID-19 takes place.4
ABARES March update summarised the short term outlook for major Australian agricultural commodities, where we saw the demand and value for red meat and dairy products forecasted to drop along with the wheat, wine, barley and chickpea prices.4
We’ve seen these impacts flow through with red meat in particular being impacted by reduced food service demand in the current environment, but has been supported by the retail sector during lockdowns. Export demand has been impacted, however Australia is not alone in COVID-19 complicating its processing and export supply chains with our key competitors including the likes of South America, New Zealand and India also suffering from the disruption.7
Expanding on the comment above, the grains market remains fairly stable with the World Wheat Indicator marginally up in the short term (USD $220 to $225/mt in 2021), but falling over the medium term as production is still projected to outpace growing demand supported by population growth, changing diets and rising incomes.8 With barley pricing under pressure following the Chinese Government’s recent announcement of the 80 percent tariff, traders will be looking to markets including India and the Middle East to place the excess tonnage and support prices. WA will face the brunt of the impact given it provides the majority of Australia’s exports to China.9
A few key commodities have experienced falls in line with the on-set of COVID-19, including the likes of wool which suffered four weeks of successive losses before settling towards the end of May (AWEX EMI 1,179).10 Sugar slipped to near $350/mt before returning to ~$370, with production in Brazil remaining high but concerns growing over the impact of COVID-19 on milling capacity as the country nears its apex of cases.11
In the wake of a COVID-19 induced slump in consumption (12 percent), cotton prices have been impacted, albeit buffered by the continued low AUD and greater volumes on the back of recent east coast rain to provide pricing of back above break-even (over $500/bale) following years of drought.12
COVID-19 has resulted in some of the greatest supply chain disruptions ever experienced in Australian food and agriculture – affecting trade into both domestic and export markets and challenging producers to employ creative freight and operational strategies. In the post-COVID context, there are a number of key ways in which KPMG expects agricultural supply chains to refocus and rebuild, with lasting impacts upon logistics and freight. The questions of ‘where’ we produce and ‘how’ we manage the transportation of food and agricultural goods are likely to face long-term change to drive future resilience.
The pre-COVID world was dominated by a dispersed production model, where internationally-sourced component inputs come together in a final location to be assembled into a finished good. The closure of borders during COVID-19 has underlined the inherent risk of how over-reliance on external (overseas) sourcing can affect overall operations. The rise of ‘micro supply chains’ is expected to become more prominent in the aftermath of COVID-19 – where value-added products such as processed foods and ready-meals are made close to where they will be sold, and ingredient inputs are similarly co-located. In tandem with geopolitical events such as Brexit and US-China trade disputes, local supply chains will become more prevalent as to enable flexibility and continuity of production that ceases to rely as heavily on international supply chains to guarantee ongoing business.
The second long-term impact to food and agricultural supply chains will be the increased digitisation and use of analytics to build ‘smart’ supply chains that are highly efficient and responsive to disruption. Improved quality and quantity of supply chain data will enable businesses to quickly analyse impacts of disruptive events and proactively restructure their logistics. The sector is undergoing a digital revolution, as technologies such as intelligent automation, blockchain, IoT, machine learning and predictive analytics are increasingly integrated into the operations of agribusinesses and food supply chains more broadly. The growing use of these systems and networks will enable ongoing risk monitoring and efficient mitigation when future disruptions occur.
These longer-term transformational changes will occur in the context of the medium-term solutions offered by the Australian Government and industry to support producers, manufacturers and exporters. The most prominent example of this, the International Freight Assistance Mechanism (IFAM), is a $110m initiative to support agricultural exporters with continuing to access key markets such as China, Japan, and the Middle East. High value export products such as seafood, premium meats, dairy and horticulture are able to flow into global markets using this scheme, albeit at lower volumes and on short-notice, inconsistent schedules. Similar initiatives and growing consolidation of export shipments across businesses and industries has aided Australian agriculture with continuing to service export markets, however as the above longer-term changes occur, these supply chains will look and feel very different.
For more information on supply chains from KPMG Australia and to connect with our supply chain leads, see the Business Implications of COVID-19.
The extent to which consumer purchasing habits have changed for the long-term is still yet to be fully realised. We do know however that face-to-face shopping has reduced dramatically, while basket size has increased and contactless delivery has thrived. There has also been an increase in home-cooking, ready-made or convenience meal consumption (as well as an equal and opposite trends towards ‘five-star’ chef-style cooking) and increased loyalty towards brands. Overall, customer expectations on the ability to consistently source food, and trust its quality and safety, have increased dramatically.
What does this mean? Food retailers (and service providers) will need to provide significantly increased product surety and safety within their supply chains, to improve not only their supply of physical goods but also when and how they sell it. This is a shift away from typical contract risk controls for non-fulfilled supply, and instead towards customer driven outcomes through holistic, whole-of-company and multi-product risk management strategies that better consider category, supplier, regional/international and industry risks – and ensure that these have targeted management or mitigation plans in place to assure product quality and quantity availabilities at the correct, if not all, the time.
As companies shift towards holistic risk management, they will need to adopt and invest in new technology capabilities such as intelligent automation, advanced track and trace, IoT devices, predictive supply chain tools and blockchain platforms. These solutions will be able to deliver the food surety and safety required, by leveraging improved data processing and AI to better predict possible product supply and food safety incidents, allow food retailers and service providers to be proactive rather than reactive in response and mitigation management to better meet customer expectations, implement real-time transactions and facilitate the shift towards cashless, contactless payments and delivery.
With the most immediate and direct workforce impacts from COVID-19 having passed (including addressing and creating appropriate working environments, maintaining productivity at manufacturing sites with social distancing measures in pace, etc.), enterprises are starting to look towards re-establishing a ‘new normal’.
However, the reliance of some industries upon visa holders is still creating uncertainty. Access to unskilled, temporary and seasonal labour remains a key concern, particularly in horticulture and meat processing for example – where the transient on-demand workforce still creates health risks and outbreaks have already occurred. The concessions government has made to-date (including the Temporary Event subclass visa) have facilitated the immediate extension of most existing, and soon-to-expire, visa-holders in-country (where necessary), however these concessions don’t secure new labour sources or provide security of ongoing labour. While international travel is unlikely to recommence in the foreseeable future, the lack of incoming working-holiday makers, seasonal workers and Pacific Labour Scheme visa holders will start to impact business costs as other, typically more expensive, local labour is required.
On a more opportunistic note, the pandemic has created a new (possibly temporary) labour source with a number of local Australians now unemployed and on JobSeeker support payments. In other industries, we have already seen constructive and collaborative responses to this scenario; for example airlines have secured short-term positions for airside staff with over-worked financial institutions or with supermarkets to undertake home delivery, product packaging and shelf-stacking while unprecedented demand for groceries remains high. The food and agribusiness sector has an opportunity to partner with both the public and private sector to replace their typical visa-holding workforce with this new supply of local labour – ultimately, this may address other visa concerns in the longer-term too, such as the transient nature of workers and high costs.
Finally, there is a distinct opportunity for various sectors to further investigate the ability to increase technology, automation and the use of robots in the workplace to reduce the need for human-to-human interaction while ensuring continued supply and in particular, reducing the labour required for various low-skilled, repetitive tasks. These technologies will need to be developed in collaboration with the various sectors to ensure they are fit for purpose and cost effective.
The Government has released a number of updates in the tax and R&D space. The Australian Tax Office COVID-19 response for large business included tailored support arrangements like payment deferral, adjustments to the GST reporting cycle, PAYG variation, and interest and penalty remission. Note these arrangement are not automatically implemented and require businesses to contact the Large Services Team.
Some key relevant economic response updates include:
Businesses with a turnover of $500 million or more are not eligible to use instant asset write-off. From 1 July 2020, the instant asset write-off will only be available for small businesses with a turnover of less than $10 million and the threshold will be $1,000. See the ATO website for more detail.
While immediate actions are being taken by organisations to mitigate the short-term impacts of COVID-19, consideration should be given to ensure effective medium-to-long term rebuilding. Organisations should consider actions to increase agility and become more resilient to economic shocks, through enhanced risk management, scenario planning and supplier management.
Organisations must act with imperative when developing and implementing enhanced risk management practices, focusing on the opportunities scenario planning offers in creating pre-emptive action plans. Scenario planning enables organisations to make effective trade-off decisions on issues, such as, right-sizing and restructuring of regional supply chains, defining where assets should be deployed across the network and how much inventory to hold and where, or the cost of inventory versus the cost of failing to meet customer demand and expectations. By analysing past events and hypothesising future threats, organisations are able to identify strategic and concentrated supplies that are at risk in major crises, and most importantly, recognise when current internal risk capacities prove insufficient.
Further, COVID-19 has impacted domestic and international supply routes and placed significant pressure on production where dependencies are in place. Organisations could benefit from balancing supply and demand and working with internal stakeholders as well as critical suppliers to contractually agree on logistic-based costs and necessary buffer stock, so as to reduce sudden price increases in the face of a future crisis.
Proactive measures should be taken by organisations to uncover additional exposure levels by reaching out to suppliers to better identify upstream supply dependencies and risks within their business. There is an opportunity for organisations to reassess their existing suppliers and identify alternatives to mitigate the risk of future supply shortages or price increases, by considering which near shoring opportunities are valid. This will ensure organisations that have been negatively impacted will rebuild as more resilient and adaptable business that can withstand future supply shocks.
If you have any questions regarding the content of this article and would like speak to someone from our team please contact us.