- Strong demand from emerging countries (notably China and India)
- Sector relatively resilient to the economic and health crisis linked to the Covid-19 pandemic
- Sector highly dependent on climatic and biological hazards
- Sector heavily impacted by protectionist tensions
- Volatility of agricultural commodity prices
Overall, the agri-food sector is showing resilience to the economic and health crisis linked to Covid-19, given its essential nature. However, it is also facing some challenges in this context, such as the drop in activity in restaurants, which has led to a drop in demand for the sector overall.
Furthermore, meat production has been disrupted, as many meat processors had to temporarily shut down following Covid-19 contamination of some of their employees. Finally, harvests in Europe and North America were affected by the lack of temporary foreign labour because of border closures.
Coface also expects that biological risks inherent to the sector, recently exacerbated by the African Swine Fever (ASF) outbreak, the consequences of the expansion of the fall armyworm, and the locust invasion in Africa, will put downward pressure on global agricultural production this year.
African Swine Fever (ASF), which continues to plague Asia - particularly China - and Europe, is affecting the global pork market, as China is the world's largest consumer and producer.
Sector Economic Insights
Agri-food remains a resilient sector overall to the Covid-19 crisis, but the impact and the recovery will be differentiated according to its different segments
While the agri-food sector is resisting well to the Covid-19 crisis overall and compared to other sectors (such as transport or automotive), some segments are hard hit. First, the closure of restaurants and bars in most economies during the lockdown and their lesser frequentation when they eventually reopen, due to the caution of consumers and their fear of the epidemic. Furthermore, the resurgence in the number of cases led many countries to close bars and impose very restrictive rules for the frequentation of restaurants, which are responsible for a drop in the demand addressed to the agri-food sector. Indeed, restaurants, which represent an important outlet for producers, have seen their activity crash since the beginning of the year: restaurant reservations worldwide were zero from 23 March to 30 April (-100% year-on-year). They have since recovered but remained, on the week of 14 September 2020, 38.2% below their level of a year earlier. Alcohol producers have been particularly impacted, and to a lesser extent, the other segments of the agri-food industry as well.
In addition to the reduction in restaurant activity, the sector has been impacted by Covid-19 via other channels. The meat segment, for instance, has been particularly affected due to plant closures: many meat-processing plants were closed following the Covid-19 contamination of some of their employees. Smithfield, the world's largest pork processor, had to close several of its plants in the U.S., one of which alone accounts for 4-5% of U.S. pork production. Furthermore, China, fearing that it would import the coronavirus into its territory, banned imports of meat from several plants in Brazil, Argentina and North America, after some of their employees contracted Covid-19. As China is the world's largest importer of meat, these restrictions could have an impact on the concerned countries’ agri-food markets if the bans are sustained.
The agricultural commodities segment has benefited from the situation, although it also had some trouble. First, the phenomena of food storage (particularly pasta) during periods of generalised containment, with half of humanity being in this situation in the second quarter of 2020, caused a boost in demand for the sector. Products such as pasta or flour were particularly affected, causing wheat prices to rise by 15% between 18 and 26 March. Following this increase in demand, some countries (for example Russia, the world's largest wheat exporter) introduced restrictions on food exports, fearing shortages and high food inflation. These restrictions caused inflationary pressures on international food prices, as was the case for rice, of which prices rose by 24% between 1 January and 20 April 2020. Finally, certain countries (such as France, Germany and the United States) faced labour shortages for harvesting agricultural commodities: indeed, the harvests of these countries depend heavily on temporary foreign workers, who, because of border closures, were often unable to enter their territories. To overcome these labour shortages, some economies allowed foreign workers to cross their borders, while others used local labour that was unoccupied due to the lockdown.
In the short-term, the impact of the Covid-19 crisis on the sector is expected to be moderate and vary across segments. Restaurants will be heavily impacted and will recover sluggishly because of measures taken to slow the spread of the virus. The slow recovery of the restaurant industry will continue to affect part of the demand in the sector, which should nevertheless continue to be resilient overall.
The biological risks that existed before Covid-19 are still present.
African Swine Fever (ASF) broke out in Europe and Asia in the summer of 2018. The disease, which has spread throughout the region, has heavily affected Asia and caused havoc among pork producers, particularly in China, which accounts for 50% of global pork production and consumption. ASF in China has several consequences. The most direct is the increase in Chinese pork imports from other parts of the world, such as the European Union and, despite high tariffs due to trade tensions, the United States. This increase in Chinese demand has led to a very sharp rise in pork prices. This increase caused some Chinese consumers to switch to other meats, which led to an increase in external demand for beef and chicken, benefiting Brazil, Argentina and the EU (Brazil is the largest exporter of beef and chicken, the EU is the 3rd largest exporter of beef and the 2nd largest exporter of chicken, Argentina is the 4th largest exporter of beef). Moreover, the decline in the Chinese pig population is reducing the demand for soybeans worldwide, as soybeans are mainly used to feed pigs. According to the U.S. Department of Agriculture (USDA), the pork market in China is not expected to recover in 2020. The USDA expects global pork production to fall by 15% compared to 2019, with beef, chicken and pork imports expected to increase by 19%, 59% and 80%, respectively. Moreover, pork stocks held by China and sold on the domestic market, in an attempt to maintain prices, are decreasing and pressuring domestic pork prices, which were 63% higher in August 2020 compared to their August 2019 level. In addition, cases of ASF have recently been discovered in wild boars in Germany, Europe's largest pork exporter and producer. As a result, several countries, such as China, South Korea, Japan, Brazil and Argentina, have stopped importing German pork, while other EU countries have stopped importing pork from the ASF-affected region but continue to import from the rest of the country. Ultimately, all of this could push the price of pork up and, by substitution effect, that of other meats, which would see their demand increase as pork becomes more expensive.
In addition to ASF, two important biological risks for the agri-food sector should be mentioned: the Fall armyworm (FAW) and the locust. The FAW is a caterpillar that feeds mainly on maize, but also on rice, sorghum and cotton, among others. It was first detected in West Africa in early 2016. FAW has now reached several Asian countries, including Vietnam, Myanmar, Bangladesh, Indonesia, Taiwan and China, as well as Australia. China is the world's second largest maize producer, so the FAW's presence could lead to inflationary pressures on world maize prices. A locust invasion is under way, particularly in East Africa, the Arabian Peninsula, Iran and Pakistan. Locusts are pests that eat crops, especially cereals: a swarm of 1 km² can eat as much food as 35,000 people in a day, posing a risk to the food security of the concerned countries.
The U.S.-China trade war is still a risk for industry players
The ongoing trade war between the United States and China has remained intense, despite the signing of a Phase 1 trade agreement in January 2020, aimed in particular at easing trade tensions between the two countries. The trade war has particularly affected U.S. exporters in the sector, especially of soybeans, as China is a major buyer. Indeed, in Q4 2019, U.S. soybean exports to China were 51% below their Q4 2017 level. Under Phase 1 of the trade deal, China will have to increase its imports of U.S. agricultural goods by USD 12.5 billion in 2020 and USD 19.5 billion in 2021, compared to 2017 levels. However, at this stage, there is no guarantee that China will buy enough U.S. agro goods to meet the terms of the deal: China has little room to increase its U.S. soybean imports, since they are seasonal and that the ASF has reduced China's soybean needs. Most of the increase in agricultural purchases should come from meat, as China’s needs for it have increased precisely because of the ASF
Last update : October 2020