Food remains relevant but markets soften due to Covid-19

Ben Santoso

As governments scramble to put in place preventive measures and bolster economies, the big question on the minds of producers in the animal protein industry is ‘How is this going to pan out?’

Tracking the developments in the region, we see hyperactivity in online sales and supply chain disruptions that are slowly being remedied since food is ranked as an ‘essential’ service. Still, the scale of the coronavirus shock, is simultaneously cratering aggregate demand and disrupting supply in the industry and across borders.

Asian Agribiz spoke with Ben Santoso, Animal Protein Analyst at Rabobank Singapore for his view of the current crisis and what he envisages the future to hold.

“Admittedly, Covid-19 has had a net negative impact on chicken demand for two reasons: quarantine measures and slower economic growth. Quarantine measures shift foodservice demand towards at-home meals.

“The economic impact has instantly affected the informal economy and increasingly the formal economy.”

“Despite the flurry of online activity in the retail and food delivery space, this is not likely to fully compensate for the loss in foodservice demand, as overall consumption declines. The economic impact has instantly affected the informal economy and increasingly the formal economy as well,” said Mr Santoso.

More than just Covid-19

He added that other factors have contributed to the demand downtrend, such as the crash in oil price; travel bans, border closures and a literal halt in air travel that has drawn a blank with global tourism; and the drop in exchange rates.

“Reduced spending power has dragged down broiler prices way below cost in many markets. In Indonesia, this year’s Lebaran (Eid festival) peak demand is now in doubt.

“Broiler prices in Thailand have managed to stay at least at cost, as a large part of the traded volume is based on contract prices and the industry is also supported by large export demand. But as Thai domestic demand is also decreasing because of the gap left by tourism and the trickle-down impact on all industries that depend on it, chick placements have nevertheless been reduced,” he said.

Missing links in food supply

As most markets go on lockdown, the food sector is primed for full service. Supermarkets and food retail are to remain open while most food service outlets are only allowed to offer takeaways.

These rules, however, do not filter across the value chain to ancillary services that support farming and logistics.

“In the Philippines, I understand goods going into and out of Luzon require a special permit. There have also been a few cases were local governments in Indonesia and in Philippines have setup roadblocks to restrict movements of people; but this has also affected movements of livebirds.

“In the downstream segment, we expect more demand for mass-market value-for-money, shelf-stable products.”

“These cases have so far been isolated; and there have not yet been any major disruptions from farms receiving piglets or DOC thus far in the rest of Southeast Asia that we are aware of. It would not be surprising to see disruptions in feed raw materials to feedmills such as amino acids, vitamins and minerals as these are not deemed essential. If allowed to continue, this will increase cost due to reformulations, supplier diversification and reduced FCR,” added Mr Santoso.

Will a supply shortage ensue?

Mr Santoso said pork is already in short supply due to ASF in Vietnam and soon in the Philippines. There’s likely to be a beef supply shortage soon resulting from the three-week lockdown in India which would slow shipments of Indian carabeef.

Vietnam hog prices: Source Rabobank

The drop in air freight capacity out of Australia will also impact high-value chilled beef cuts (although over 90% of frozen beef is through reefers). “The big risk is of course potential bottlenecks such as ports in South America and export bans on grains/oilseeds. These would affect supply chain for meat production, although so far there have been no major disruptions affecting exports,” he said.

As the situation closes in on each market, we see that apart from cross-border supply restrictions, there are moves by some governments to also prevent food exports, to ensure sufficient domestic supply.

This will unveil more uncertainties in trade. Import bans and global supply chain disruptions are a reminder to policymakers to rethink global trade. On one hand there would be stronger calls for more self-sufficiency policies; but on the other hand, China’s slowing economy and trade war will necessitate Southeast Asian countries to also diversify trading partners and become part of regional trade pacts.

“The issue of labor availability and health exposure will probably prompt more automation in the longer-term.”

“For Southeast Asia’s animal protein sector, harmonization of food safety standards within the bloc will move ahead. But by opening up, imports will impact local competition, especially in low value cuts and MDM. At the same time, exporters with relatively cheaper exchange rate (such as Brazil and Argentina) should continue to win demand from Southeast Asia,” he suggested.

Meat prices

The higher cattle prices in Australia that Indonesian feedlotters complained about recently were driven by drought, rather than by bush fires or coronavirus, said Mr Santoso. “We are already seeing a 21% drop YOY in feeder imports into Indonesia in the first two months of 2020 and we are likely going to see a similar drop throughout the year.

Southeast Asia beef prices: Source Rabobank

“This will mainly be due to negative feedlotting margins, in addition to reduced consumer spending power (as beef is relatively more expensive than other proteins). Coronavirus will further cut consumption through foodservice closures. This has caused a drop in offal demand. The shift to at-home meals will not fully compensate.

“Beef and pork prices are unlikely to move higher despite potentially more shortage, given the weaker economies and government interventions. The bigger issue will be higher costs as supply chain planning gets shorter to adapt to changes in demand.

Outlook

The longer it takes for economies to return to normal, the more severe the economic damage will be.

The hope of a vaccine is on the horizon and when this happens, it will allow foodservice to bounce back albeit within a weaker economic setting.

“In the downstream segment, we expect more demand for mass-market value-for-money, shelf-stable products. Also, the issue of labor availability and health exposure will probably prompt more automation in the longer-term.

“In the upstream segment there may be a need to reformulate feed ingredients (for example, drop in crude oil prices reduces the need for ethanol, affecting corn and DDGS supplies). In farming there would be further consolidation of independent farms into contract farms or for smaller farmers to exit the industry due to negative margins because of diseases like ASF and AI, which requires investment in better biosecurity or even genetics.

“There may also be negative implications on live animal markets in general (China and Vietnam have banned wild animal markets). However, it remains to be seen whether consumption habits can change. Apart from poultry, we expect negative volume growths across most species in Southeast Asia this year,” concluded Mr Santoso.