Meet the Expert
Who: David Read
Where: Prestige Purchasing
Coronavirus has dominated the media for well over a month, and it’s now emerging that our food system has become seriously out of balance as the disease (and the measures taken to control it) has spread.
Just a few weeks ago our restaurants were full, and our supermarkets were ambling through their usual early spring demand patterns. Now our restaurants, bars, pubs and cafes are shut, and even many of the operators who tried to stay open on a “takeaway” basis have shut their doors – to be replaced by a tidal wave of demand in the supermarkets.
There appears to be no shortage in primary food and drink supply currently. The capacity of our production and importation is such that the risk of major shortages remains fairly low. International travel bans have been imposed by a number of countries to try to stem the spread of the coronavirus, but these only apply to people and not to air cargo and ocean freight. This is critical as 47% of all the food we eat (by value) is imported.
The current challenges have been brought about by a massive shift from hospitality and foodservice into retail purchases, and of course the additional demand created by consumers buying long shelf-life items in excessive quantities. These have led to empty shelves – particularly dried pasta, rice, tinned goods, and some frozen product. Plus, in non-food toilet roll, kitchen roll and anything with the word ‘bacteria’ or ‘gel’ on it.
Suppliers in foodservice and hospitality, particularly in fast-moving perishables, have faced the opposite problem - as orders first slowed, then plunged, before finally ceasing this week in all but a few sectors. Managing demand forecasting, stock levels and waste has been a nightmare. And like the operators, suppliers are deeply anxious about payment for goods already received from operators with zero revenue.
Many suppliers are cutting their operational capacity and stock levels considerably, whilst exploring collaboration with the retail sector, and the possibility of sales direct to consumer.
It will not be top of the agenda now, but operators will need to be prepared for a different landscape when they are lighting up their operations again. Depending on the duration of the social exclusion measures, we will certainly see casualties (particularly amongst the smaller players) within the supply chain, and some of those that do survive will be highly risk averse at just the time when operators are looking for support with cashflow.
Some suppliers may call force majeure on pricing from existing contracts and seek higher price. New contracts may well have any increased risk priced in.
Conversely, operators with cash reserves will be well placed to take advantage of a supply market hungry for volume after an extended period of under-capacity.
The cost of food is determined by a wide range of variables including climate/weather, exchange rates, import tariffs/trade costs, levels of demand and supply, and commodity market trading. What we can say with some certainty is that it is too early to predict an outcome from a coronavirus outbreak with any reasonable degree of accuracy, because (right now at least) the level of infection and its geography remains unpredictable.
If there are issues with food price it is likely to be generated by one of five situations:
- Production challenges – where production is impacted through a shortage of labour in an infected area. An example of this might be UK soft fruit, where we have a heavy reliance on foreign workers to pick our berry crop in the early summer. This capability has already been impacted by the government’s new immigration policy but is likely to come under further pressure in the months ahead.
- Transport restrictions – where the movement of goods is restricted by authorities seeking to ring-fence areas to avoid spread of infection. To date the best example of this is Lombardy in Italy where supplies of specialist local product have been hampered by special movement measures.
- Trade imbalance – where UK production becomes surplus because of consumption falls elsewhere in the world, as happened recently (but in reverse) as China imported more Pork in the wake of the African Swine Fever outbreak.
- Commodity markets – where markets are affected by trader sentiment regarding future sales. Currently markets are in a relatively stable position, but agricultural futures are likely to fall sharply in the weeks ahead. For example, Norway (who are China's salmon export partner) has already seen spot pricing plummet following the COVID-19 outbreak, with surplus supply in the market expected to bring pricing down.
- Abnormal demand – in the retail sector causing product shortage on shelves and even in the whole food supply chain. It looks likely that we will see retail food inflation push up sharply in the weeks ahead, as supermarkets remove multi-pack offers to conserve stocks. In Australia supermarkets appear to be exploiting the opportunity by raising the price of high demand products, though currently this appears to be happening on a more limited basis and only in the independent retail sector in the UK.