Agri-Food Industry Barometer COVID-19 implications
Coping with a new reality
As the COVID-19 virus is strongly affecting our lives and daily routines, people around the world are above all concerned with the health of their family and friends. Besides the impact on human life, organizations also experience major impact from this global pandemic.
As a market intelligence company, we are in touch with a lot of stakeholders from different organizations and keep close track of the consequences of the current situation. We compiled our insights in this blog, to try help you better understand the implications of COVID-19. In this blog we focus on three Agri-Food sectors (Dairy, Bakery, Horti- and agriculture), as their service is now more vital than ever.
The Dutch dairy industry is an economic powerhouse. Yearly, around 14.5 bn. kg of milk is being produced by 17.000 dairy farms. Next to production for local consumption, the majority of produced dairy is for export purposes, representing an export value of €7.7 bn. (2018).
Last month showed a surging demand for dairy in the retail. This was mainly related to basic dairy products, like fresh milk and other dairy like plain yoghurt. Despite the high volumes, margins for suppliers of retail decreased. The increased demand is now stabilizing, consumers experience that there is continuous supply of retail products, and there is no valid reason to keep on stockpiling and emptying the retail shelves.
For dairy producers and processers, keeping their factories operational is a challenging task. Due to additional measures in the light of safety and health, there is a reduction of number of production workers on working teams. This new reality requires flexibility in shift planning and asks for the possibility of rapid operational adjustments in the factory. For now, there are no clear warnings that milk delivery from dairy farms and supply of milk products for retail are in peril.
On a global scale, commodity prices for milk, milk powder and butter are adjusted downwards, due to a reduction in dairy demand from China and major disruptions in the global supply chain. Looking at the future, there is concern about a structural slowdown of export demand for dairy, despite stability in consumer demand. Slowdown could be fuelled by the fact that dairy shipments require more protocols and procedures to be shipped internationally. If this trend continues, it will put even more pressure on the already falling prices of dairy commodities.
What could be the long-term consequence of this pandemic for the dairy industry?
At Hammer, we assume that production and processing companies will re-evaluate their current product portfolio and tend towards diversification to increase resilience in times of crisis. The pandemic will probably also strengthen the already ongoing trend of ‘local for local’ in food production. This will force food producers to adjust their portfolio and re-evaluate current logistics. Also, this crisis uncovers the boundaries of production capacity and shift planning which can lead to operational insights for the future. We also expect more vertical integration within the supply chain, to further reduce uncertainty and risk.
Last period showed a strong demand for flour and raw materials in the bakery sector. Also, retail sales of bread products did grow strongly during the first weeks of March after the announcement of national safety measures to contain the spread of the virus. Similar to demand for dairy, increased demand for bakery was boosted by stockpiling behaviour of consumers but is now stabilizing towards normal levels. This sudden peak in demand did not only occur in the Netherlands, according to Nielsen, e-commerce sales of baking mixes in the US experienced a stunning +489% growth compared to the same period last year.
For manufacturers mainly producing for the foodservice times are undoubtedly very troubling, as restaurants, café’s, schools, airports and canteens are all experiencing a complete shutdown. The total Dutch foodservice market is valued at €21 bn. (ING, 2019). Taking a closer look at bread consumption; almost 39% of bread consumption value takes places out-of-home. Bread producers also experienced bad pre-Eastern weeks. Probably due to the effect of social distancing less family encounters took place and accordingly sales of typical festive Eastern bakery products and confectionery suffered from this.
Bakeries also have to deal with and to adjust to this new reality. Since the new safety measurements only a few customers are allowed to enter the bakery at the same time. This led to the deployment of several new initiatives: traditional bakeries focus on e-commerce for bread sales and offer their clients delivery of fresh bread services by e-bike or other types of transport, or open a to-go counter.
What could be the long-term consequence of this pandemic for the bakery industry?
At Hammer, we assume that when the dust settles down, the processing bakery industry will enlarge their stocks of materials, to be better prepared when other disruptions will arise. This will lead to a short peak in demand. Bakeries delivering to out-of-home (36% of total sales) could suffer for longer time from social distancing policies. It could also be expected that flour processing companies will re-evaluate their current sourcing partners and switch to partners more closely to their own factories to reduce uncertainty in times of crisis. For the traditional craft bakeries, this situation provides them with options for new revenue streams, like e-commerce and delivery, that can sustain also after the crisis.
Horti- and agricultural sector
The Dutch horticulture sector is world-famous and considered a market leader in cultivating, processing and selling of fruits, vegetables, flowers and herbs. The Netherlands has 9.000 hectares dedicated for greenhouse horticulture, representing an added value of €7.2 bn. (WUR, 2017) and responsible for 1% of the total Dutch GDP. With respect to retail sales, there was a small spike in sales of paprika, tomatoes, cucumbers and other vegetables related with health benefits. Wholesale demand has almost been completely diminished.
There is no doubt that the current situation is a devastating blow to the floriculture sector.This should have been a flourishing time for this sector with Easter and Mother’s Day. Instead, massive volumes of flowers are being destroyed due to the declined demand. Floriculture represents a yearly export value of €10 bn. and counts for 10% of total Dutch horticulture export.
The market for fries’ potatoes also heavily suffers under the current circumstances. Producers have a huge surplus, because out-of-home demand has collapsed. The price of 100kg fries’ potatoes took a dive from €15 euro in March 2020 to €2 in the beginning of April 2020 (NieuweOogst, 2020). TheNetherlands is a huge exporter of frozen fries, especially to the United Kingdom. Also, a lot of the produced fries are for consumption within the Netherlands, where there are over 400 fast-food restaurants and almost 5.000 smaller snack bars for which fries play an essential role on the menu.
Another concern in the horticulture sector is the slumbering risk of absence of labor. The harvest of fruits and vegetables heavily depends on the efforts of seasonal workers, mainly living abroad. There is uncertainty among cultivators about their working capacity, which comes fora substantial part from Eastern-European countries. Even when there is enough labor to continue harvesting, there is the risk for corona related diseases among the work force. Forecasted damage for the Dutch greenhouse horticulture sector at this moment is around €2 bn. (LTO).
A minor bright spot is a slight increase in export of horticulture towards China, as the country is recovering somewhat from the current crisis.
What could be the long-term consequence of this pandemic for the horti- and agricultural industry?
Considering long term future, the expectation is that the ‘local for local’ trend will increase, which is unfavourable for vegetables producers in net exporting countries. However, this is positive news for the providers of greenhouses and greenhouse technology since investments in food producing units may be higher on the priority list of net importing and highly urbanized countries.