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Agricommodities in the ( Post) Covid 19 World

by VN Saroja

18th March 2020

The world as we know is no longer going to be the same. The Novel Coronavirus will force unprecedented changes on mankind and our lives and work will keep evolving until the virus stabilises or a vaccine/cure are found. Even so changes like reduction in inter city/state/country travel in the short to medium term; periodic lockdowns of city/state/countries to control the spread of the virus as it waxes and wanes with people coming out to work and then being forced to stay home; lower availability of manpower at a given point in time and change in consumption habits will force us to rethink our systems and procedures and policy initiatives. This paper looks into the future to spot some trends with respect to the Indian and Global Agricommodity trade.

On the 26th March, 2020, the Heads of the States of the G-20 had a virtual meet to discuss the broad outlines of how this pandemic is to be addressed by the global community. It is very heartening to note that the tone was co-operative and they resolved to handle the problem together. No threats to shut down trade or stockpile commodities (those may come, with time, but today, everybody is upbeat that the problem can be managed and everybody agrees that the only way to manage is to do it together.) Humans have always travelled from one continent to another and have spread diseases where they go, so that is not likely to change now, hence this co-operation is welcome and required. But today, we are more interlinked than ever through trade and business and over the decades economies have focussed on their own competitive strengths and imported what they were weak at. They were rewarded by governments and stock markets for the same. One believed that the days of “self reliance” and “self sufficiency” were over and as long as someone around the globe had what we wanted, we can access it. A global pandemic that forces 3 billion humans into a lockdown was never imagined or planned for. The walking back of these interconnections and interdependence is not completely possible in the medium term but an overhaul of practices like Just-In-Time will be the first task every country and business and household will undertake. This is will imply more investments in stocks, working capital and storage capacities.

Even as models assessing the possible spread of the pandemic are built, the consensus seems to be that the virus will affect communities for a period of upto 18 to 20 months as the periodic shutdowns to manage hospital capacities, will expand the duration of the virus being in the community. ( https://www.technologyreview.com/s/615370/coronavirus-pandemic-social-distancing-18-months/). The production and supply shocks due to non availability of manpower and possibly inputs will be coupled with demand shocks due to shutdowns. Careful planning would be required to use the days of work to build stocks of inputs and final products at the point of consumption (the factories for the former and the consumption centres for the latter) to minimise exposure of the people manning the supply chains during times of high contagion. Large centralised procurement will again fragment to ensure lower losses and lower travel distance of the commodities especially for fresh and wet commodities. New algorithms will be required to plan the global deliveries, in such uncertain conditions.

With the past years of plenty, there have been discussions on reducing production of cereals and promotion of proteins, but depending on the number of months this virus takes to stabilise, there is no doubt that cereals will again become the focus of all economies because cereals keep you alive even as proteins help you be healthy and strong. Poor and developing countries which may have been debating reducing land under cereals to move to pulses or soy, will postpone such decisions. Availability of cereals to countries e.g. in the Middle East that mostly depend on imports may get impacted or will have to bear a higher price. With Crude Oil prices falling over the past few months, they may begin economising on other imports.

Farm output in general may not see too much of reduction since in the developed world it is mostly mechanised and in other countries, the physical distancing is already a reality when working on farms mostly. But availability of labour in terms of infected suffering the symptoms during the period when they are needed will be an issue, especially if the labour come from far for specific tasks like harvesting. Mechanisation will grow wherever possible. New formalities will need to be developed by the farmers for the protection of the labour under such conditions. These new procedures will add to the cost of production, may increase crop loss and will in general lead to higher prices in the short to medium term.

Shutdowns will affect the markets where the farmer takes his produce. Horticultural crops, dairy and meat and fish and produce with short shelf life will need an uninterrupted supply chain to reduce wastage and make produce available to the people who can only travel short distances to pick up necessities. The produce range will change accordingly to ensure quick delivery and low wastage. While demand for “expensive and fad foods” may reduce, availability of wet bulky produce that are tougher to deliver will also force change in consumption patterns. Belief that all animals being likely vectors for the infection has already reduced demand in many countries for chicken and farm animals. Factory farms may also come under scrutiny for the safety measures they take while growing the animals and disposing the waste.

Horticultural produce that today travel tens of thousands of kilometers, will find more local markets and likely a reduction in prices in the short term, unless the supply chain is undisturbed. The access to export markets may require more phyto-sanitary specifications to be met, making that more expensive and time consuming.

In poor countries, sustenance farming will become predominant if availability of manpower and markets become an issue. One way to tackle would be for the governments to promote more and more high yield seeds including GM seeds so that the output from the available effort is maximum and the farmers’ incomes stay steady despite the problems. If not, farmers will move to hardy crops that have lower yields but require no tending and are locally consumed.

Commodities like edible oil and sugar that are grown predominantly for export in countries like Malaysia, Indonesia and Brazil will find their new base level of exports depending on how the demand changes in the importing countries. Long duration of shutdowns will reduce incomes and as an corollary, consumption in all countries. If self sufficiency is attempted in a lot of countries, demand for these commodities may reduce in the export oriented countries.

With most countries announcing large economic packages for the citizens including some version of a Universal Basic Income, inflation will increase globally. Combined with a lower supply, the demand for commodities like nuts, spices and specialty goods will decrease. There are already jokes floating around the internet that “ people who were on keto diets until last month, are lamenting how fast bread is disappearing from the supermarket shelves, today”. However, food processing industry will get a boost as the shutdowns and lifting of shutdowns, alternate especially in countries that still mostly fresh food oriented. Consumption of processed basic foods are likely to find a market where there was little demand.

Growing of cotton may be replaced by growing foodstuff in the medium term depending on the spread of the pandemic since lower incomes may mean lower demand for garments and the need for food for all will increase. Cotton for face masks will be a new market but overall in an inflationary but lower demand economies likely to prevail for the next few months, discretionary purchases will be the first to take a hit.

- V N Saroja is the Chief Strategy Advisor at Indian Agribusiness Systems Ltd. (Agriwatch.com)