This article is taken from our IEG Vu platform dated 22/04/20.

IHS Markit analysts in the UK, Germany and the US have been collaborating to examine the entire food supply chain from farm to plate, looking at grains, dairy products, processed fruits and vegetables, meat and poultry and have drawn some alarming conclusions.

The immediate issue is that the world can produce enough food but cannot get it to where it is needed; not in enough quantities and not quickly enough.

The supply chains are creaking. IHS Markit has identified 12 'choke points' between farm and plate. Our analysts reckon one could get away with two or three or maybe even four that could be fixed with a rapid intervention (for example, no people to pick the crops, so wave large sums of money and enforce social distancing) under stress and risk of breakage. Anything more than four spells big trouble.

Principal supply issues

Not enough labour to harvest the crops. This is partly due to transport problems (see below) and partly because of lockdowns. News that (for example) Romania is flying in labour to pick the UK's crops or that the USA's National Guard is being employed as extra staff in slaughterhouses are signs of response, but also signs of utter desperation. India has discovered that it is easier to lock people down and get them to return to their home towns and villages than it is to get them out again.

Also, if social distancing is practised, yields go down unless you add many more staff. That, of course, adds to costs.

Primary and further processing has exactly the same problem. At the simplest level, if you space staff on a conveyor belt two metres apart instead of one, you effectively halve your production rate. Either you work extra shifts or you add extra lines, again raising costs.

Transport

Road freight is delayed at every stage, partly because of the labour issue, partly because of domestic lockdown restrictions and partly because of delays at international frontiers (mainly in Europe).

The Far East ports are jammed with containers because of lockdowns and quarantine. The containers are in the wrong place, the ships are in the wrong place and the crews are in the wrong place because crews are rotated by air and there are no airlines flying. When ships do come in, the crews are quarantined and/or landside personnel are not allowed on board. This adds to delays.

All the essential international paperwork (certification of hygiene, origin, customs clearance etc) is being delayed because it really is paper and has always been flown around the world. But very few aircraft are flying right now.

It is also more difficult to schedule storage, especially temperature-controlled goods, because of the uncertainty that exact delivery times will be adhered to. This caused big problems for China (the only yardstick the world has right now, as it went into lockdown first and is coming out first).

Withholding of supplies and shortages

Already, countries are banning or blocking their exports of food products, particularly of rice, to ensure that there is enough for their own populations. That includes India, Vietnam, Cambodia to start with. Chinese citizens are stocking up on rice, in defiance of government reassurances that all is well and there will be no shortages because they have read the runes and possibly because they do not necessarily believe official statements.

The US is exporting more wheat that may fill the gap - it recently signed a huge contract with China - but IHS Markit believes that the USA's inventory of export wheat is running low.

France's liquid milk exports have dried up as France is converting it into long-life products: milk powder, essentially. The trend is to use more fresh produce for canning, freezing or dehydrating, which will reduce supplies to fresh markets.

In Europe, tomato processors are already restricting the volumes of canned tomatoes that their big clients can buy and the same is happening with frozen vegetables. The hope is to eke out the available stocks until the new harvests in summer and autumn.

For almost everything else, what is in the present supply chains is all there will be until the new harvests, so what shortages there may be will become evident in a few months' time.

Meat

US farmers are sending all their herds to early slaughter because the catering market is dead and so, at the most basic level, nobody in the US is going out for steak & eggs or a nice bacon and egg breakfast in a diner. It takes time to rear cattle to ideal slaughter size and age (less time for pigs and poultry) and farmers are unlikely to start rearing until they are certain that there will be a market for the meat when the time comes, so there will be a gap of several months. Frozen meat will make up for some of the shortfall, but beef prices are likely to soar.

Oil

The crude oil price is now negative. In addition, the ethanol market is dead. As with crude oil, storage facilities are full and production has slumped because, in the US and Europe, the biggest use for ethanol is the motor fuel market and vehicle traffic is minimal because of lockdowns. As nobody's making ethanol, that means a shortage of animal feed because, after fermentation, the mash is dried, pelletised and fed to animals.

In some rich Middle East oil states, citizens get a percentage of the oil revenues. Also, governments rely on it. That money is gone and this is why Saudi Arabia, the UAE and others have been taxing sugary drinks, soft drinks, cigarettes and the rest - because with the low oil price, they had little revenue. It's just got much worse.

With social distancing and food rotting in the fields and poor transport links, the most optimistic IEG Vu estimate is that the supply chain will shrink to 70-75% of capacity. Other IHS Markit analysts think the world will be doing well if it manages 70%.

While this does not sound too bad if one looks at it another way one can say that a quarter of the world's traded food has been removed from the supply chain. This will have severe, possibly terrible, consequences.

IHS Markit has considered whether Western governments will impose food rationing and considers it unlikely: market forces will probably dictate price and availability of some foods, but renewed panic buying on a large scale could change that. The picture for other regions looks worse.

Unrest

IHS Markit expects food riots and looting in any country where there are huge numbers of people living in squalor in very crowded slums and (importantly) where the lockdown has really disrupted food distribution at a time when a lot of dispossessed people have returned home and the infrastructure cannot get enough food into the cities. That means India (Mumbai, Kolkata, Delhi, Pune), South Africa (Johannesburg, Cape Town), Brazil (Rio, São Paulo) and Mexico.

Other cities at risk include Buenos Aires, Lima, Cairo, Lagos, Nairobi, Islamabad and Dacca. Russia may have social unrest because the country already has a poor social security structure and the oil price collapse is going to slash government revenues.

None of these countries' governments is particularly efficient and most famines in history have been caused, or at best exacerbated, by human failings.

What is also worrying is that, in some countries, organised crime is moving in. In Italy, the Mafia is delivering food after telling the citizens: "The government won't help you but we will" and in Brazil's favelas the crime gangs have been reportedly policing the lockdowns with guns and baseball bats. Mexico's drugs cartels, like other organised crime, may see a perfect opportunity for expansion.

Finally, a recession is almost certain to follow. If Country X has furloughed five million of its workforce, will all those people return to work? IHS Markit thinks not. Prices will have soared, unemployment will still be rife, some foods will be in short supply and those who are still working will be careful with their cash. The catering sector will continue to suffer, as will another discretionary spending (cars, luxury goods, holidays etc).

There may yet be time to restore the supply chain to most of its former capacity, but IHS Markit is not optimistic.

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Posted 23 April 2020 by Neil Murray, Editor, IHS Markit