After decades spent refining efficiencies in planning, production, and just-in-time distribution, the Food & Agribusiness sector suffered the type of jolt this year that no one anticipated. The sudden appearance of the coronavirus pandemic saw processing plants shuttered, distribution channels stressed, commodities markets shaken by unusual volatility, and some consumer sectors disrupted.
Much of the Food & Agribusiness industry has since returned, but the very real shock to the entire supply chain—from farm to fork—continues to resonate. While many commodity prices have stabilized, some food inflation is likely to follow. The protection and healthcare of industry workers will remain a top consideration. Versatile product packaging has been needed and distribution is under intense, new scrutiny. And corporate strategies are being fully rethought.
Indeed, the recent supply chain challenges have delivered both profound impacts to the industry as well as valuable new lessons. We see the greatest impact in four key areas:
- Although many supply chains were stressed, most of the underlying market structure survived. Among the most immediate effects of the global pandemic was a sudden imbalance of supply and demand, and in a matter of weeks, markets responded with relative efficiency. Prices soared for some commodities—including wheat, rice, and durum—as consumption grew and some countries effectively closed their borders and hoarded the grains. In some places, egg prices more than doubled. Other products, including meat-based proteins, encountered supply disruptions that led to scattered shortages. While risks remain involving energy prices and supply chain disruptions, the global market for food commodities appears to have mostly stabilized for the time being.
- On the demand side, the impact from shuttered restaurants and foodservice outlets meant that manufacturers and distributors needed to adapt quickly. The logistics chains that historically provided direct store distribution or supplied large regional warehouses were confronted with new pressures on inventory and enterprise resource planning (ERP) systems. Although these work well in a stable economic environment, with such a massive shock to the system, the traditional inventory supply chain management was thrown for a loop. And while producers were able in most cases to provide raw materials, manufacturers were challenged with changing their products to a suddenly altered landscape of retailers. As an example on the retail side, the sale of frozen-food products, which increased more than 90 percent at the peak of the lockdowns in March compared with the same period last year, remain very much in demand. With some reopening happening in the U.S., year-over-year weekly increases still remained around 20 percent as of mid-June compared with a year ago.
- The consumer response was immediately felt and, from our perspective, is likely to remain. Faced with the inability to dine out as usual, or even find prepared foods from their normal source, consumers turned to those products found on store shelves and jumped into online order deliveries. Many consumers discovered—or perhaps rediscovered—canned foods and staples they had not purchased in years. Bread flour and yeast were but some of the popular products as baking returned to households. Much-improved frozen foods, more healthfully prepared products, and even animal-free protein were some of the alternatives consumers chose when confronted with closed local restaurants and a surge in meat sales that challenged some retailers. For the first time in our lives, many of us spent time ordering our favorite foods online: in our case, duck meats and related farm products from New Jersey; preferred chocolate bars from New Hampshire; and an excellent set of vegetable antipasti and main courses from an Italian restaurant in the neighborhood—all perfectly home-delivered. In fact, both Conagra and General Mills reported very significant increases in e-commerce sales in the three months ended May 31 compared with a year earlier. We expect some of this demand to continue in the ”new normal” future, leading to a volumes-based tailwind for the industry.
- Our belief in the underlying financial strength of the industry was also reinforced. Many companies we talked to were focused on managing the impact of increased food-at-home consumption and the shutdown of many foodservice markets. Production and logistics shifts from foodservice to retail were top of mind, prompting questions about liquidity needs in the face of supply chain disruptions and uncertainties of what might lie ahead. Supply-chain financing, including credit needs and receivables risk, were also key interests for many of our clients, as were questions of strategic refocus regarding possible external growth. Given the disruptions occurring and the unknown duration of the impact of the pandemic, many companies have begun to reconsider their corporate strategy in light of a new market environment. Rather than shelve expansion plans entirely, the industry is likely to pursue new, albeit adapted, types of capital expenditures and different value-based acquisitions.
Much of the relatively quick recovery of most of the Food & Agribusiness industry has come thanks to the nature of the business itself. Essentially an industry based on just-in-time supply chains and fast-moving goods with inherently limited shelf lives, flexibility and agility were already at the core of much of the industry’s success.
While we expect more challenges and changes to come to the Food & Agribusiness sector, the industry has shown itself well prepared as it adapts to a new global environment.