COVID-19 is Taking a Bite Out of Food Supply Chains

The COVID-19 pandemic is threatening the protein supply chain with foodservice demand in a free fall and processing facilities being forced to shutter because of infected workforces. A recent flurry of temporary plant closures across the industry because of infected workers has raised alarm bells that protein shortfalls may plague an already strained food supply chain in which restaurant traffic has ground to a halt in key U.S. regions, while retail struggles to keep up with a surge in demand from pantry loading and panic buying. These supply chain disruptions are coming as large parts of the industry were set to capitalize on increased global demand for protein in response to China's pork supply shock resulting from the Asian swine flu outbreak last year. Instead, companies are scrambling to respond to a quickly changing landscape, some with better prospects than others. This article assesses the credit and liquidity outlook for various segments of the protein sector, including beef, poultry, and pork, as well as the dairy industry in the U.S.

Protein Producers' Degree Of Diversification

^{Numbers of plants are in parenthesis.
Bubble size represents sales (estimated for protein segment in Cargill's case).
Source: S&P Global Ratings diversification assessment and company information.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.}

The global dairy industry is struggling with lower demand and a steep decline in prices as the spreading COVID-19 outbreak wreaks havoc on its supply chains.

The closure of thousands of restaurants, offices, hotels, schools and coffee shops has dramatically reduced demand for milk, butter, cheese and ice cream in the U.S., Europe and parts of Asia. Countrywide shutdowns have led to the large scale absence of workers in dairy factories and milk processing plants. Meanwhile, a large quantity of domestic orders have been canceled, exports have been hit and milk prices have slumped.

On-the-shelf U.S. grocery prices rose faster than wholesale costs in March. But the monthly estimates came with more qualifications than usual as the novel coronavirus hindered on-the-ground documentation of food prices.

The difference between year-over-year changes in consumer food prices and wholesale costs turned positive in March for the first time since May 2019, according to data from the U.S. Bureau of Labor Statistics, or BLS. While the final-demand food index of the producer price index, or PPI, rose 0.8% during the month, the food at home index of the consumer price index, or CPI, advanced 1.1% over the same period, BLS said.

Amazon.com Inc. will have its pick of the nation's distressed retail real estate as it pushes deep into the brick-and-mortar market with a new grocery concept , experts said.

The Seattle-based e-commerce company will have supreme negotiating and pricing power — even more than traditional grocers, given its brand and the havoc the coronavirus outbreak has wreaked on the commercial real estate market, particularly retail.

"If you're a landlord and you're looking at one or two of your anchor tenants falling over, and Amazon walks up and says, 'Hey, would you like us to build this new concept grocery store at the end of your mall? Then the answer is, 'Yeah,'" said James McCann, CEO of McCann Investments, which invests in early-stage grocery tech companies. "They are going to be getting very good deals as a result of the current real estate market."

For years, the Trump administration looked to replace the North American Free Trade Agreement, battling lawmakers from both parties and the nation's northern and southern neighbors for a signature trade policy piece to boost U.S. manufacturing and farmers.

Now that the United States-Mexico-Canada Agreement is set to take effect July 1, the coronavirus pandemic threatens to upend the pact's implementation and wipe out its promised benefits.

"It's hard to see how this can be implemented during the pandemic," Simon Lester, associate director of the Stiefel Center for Trade Policy Studies at the Cato Institute in Washington, said in an interview. "Companies are struggling to remain in operation and stay out of bankruptcy. It's too much to ask to have them reconfigure production at the same time."

A slew of temporary shutdowns at meat-producing plants in the U.S. to control the spread of COVID-19 is raising more concerns on long-term corn feed demand, analysts said.

In the 2019-20 marketing year (September-August), feed and residual use is likely to account for nearly 46% of the domestic corn demand in the US, according to the US Department of Agriculture's latest World Agricultural Supply and Demand Estimates report.

"The primary obstacle for the animal protein industry today is the disruption at the plants due to COVID-19. The loss of a plant for just a few days is manageable, but these extended closures are exceptionally disruptive, not only to the processors but also the producers that supply those plants," Christine McCracken, senior animal protein analyst with Rabobank, said.

Coronavirus has sown chaos in food supply chains in a matter of weeks as consumers avoided restaurants and turned to grocery stores for a greater share of food purchases. Now, the companies that process and distribute food are figuring out how to catch up.

Foodservice distributors and manufacturers who sold their products to restaurants have suddenly found themselves with products never intended for sale directly to consumers, leading many to improvise in order to recover some of the lost revenue. But industry and supply chain experts say that will be a tall order since shifting sales to retail channels comes with costs, and even then, retail sales will not necessarily make up entirely for lost foodservice revenue.

Agriculture has always occupied a special place in the field of environmental and social sustainability. However, the sector's multiple problems are too deeply rooted for long-term sustainability to be achieved soon. Agricultural yields have peaked in developed countries, and are still lagging in developing markets. That said, public policy is evolving, and bright spots are emerging as investment and training help change agricultural practices and the livelihood of farmers. S&P Global Ratings is observing how the chemical and consumer goods companies it rates are responding by working with customers and supply chain participants to offer more sustainable agricultural solutions.