COVID-19, the global economic crisis and their impact on agribusiness (Part 1)

The coronavirus pandemic has changed the habitual and well-established ideas of people about almost all areas of life.

Due to the rapidly changing situation in the world, it seems relevant to talk about what is happening now in the agricultural sector, fruit and vegetable industry, and dwell on different segments of the market of vegetables, fruits, berries, nuts, potatoes, fresh herbs, and much more. Besides, we will assess the possible consequences for these sectors in the near and medium-term, starting from the basic scenario of a pandemic. We will dwell in more detail on the situation in countries falling within the scope of the EastFruit project: Uzbekistan, Moldova, Georgia, Russia, Tajikistan, Ukraine, Belarus, and Poland.

In the first part of the blog, we will talk about the global situation in agribusiness, and then we will go on to analyze the fruit and vegetable industry and individual countries of the region.

Thus, let’s start with global trends.

1. The world is already in a state of the most serious global economic crisis of this century, and, possibly, in the worst crisis since the Second World War. What does this mean for economies? This means that currencies will depreciate, and the concept of value will be greatly modified.
2. The negative impact of the crisis on the agricultural sector will be less in comparison with the impact on other sectors of the global economy because the need for food will continue. However, even in the agricultural sector individual sectors and individual countries are already negatively affected. Even the IT industry is likely to suffer more significantly, despite the large increase in demand for IT solutions for remote work of people. Therefore, investing in the agricultural sector now is a good idea.
3. The global economic crisis will make the vast majority of people and companies in the world poorer. This is especially true for countries that previously earned money on the export of oil, gas, and other fossil hydrocarbons (due to a sharp decline in hydrocarbon prices), as well as those that had developed industry or exported industrial raw materials. Therefore, the demand for expensive and optional products that can easily be replaced in consumption can fall sharply, while the demand for more basic, irreplaceable, food products can even grow.
4. The global market, due to border closures and restrictions on food trade, is no longer global. Situations are already possible when in one country prices for a certain type of strategic food can skyrocket and many residents will not be able to afford it, while in another country this product will be sold at a bargain price unprofitable for the farmer because this country restricts the export of this strategic commodity. In the long run, everyone loses due to the fact that farmers stop growing the product, which is becoming unprofitable, and the price crisis takes on a global shape.
5. Investments in the agricultural sector, despite the crisis, may even grow, as the situation in other sectors will be worse. But preference will be given to industries with the highest level of mechanization.
6. Food losses as they are distributed (food losses) will rise sharply, because:
   • now, due to quarantine measures, people are less likely to shop, but they are buying more products. Accordingly, they deteriorate already at the consumer;
   • violation of the supply chain leads to the downtime of ships for many weeks, which often leads to partial or even complete deterioration of the transported food. Similar problems arise in the supply of vehicles and other modes of transport;
   • manufacturers may have difficulty harvesting certain crops due to labor shortages in certain countries, which depend on seasonal labor;
   • farmers may have financial difficulties ensuring the entire production cycle, as well as traders and processors, which can lead to poor quality and increased losses, as well as reduced productivity.
7. The crisis will have a significant impact on agricultural sectors that are directly related to energy prices, in particular, bioethanol, where sugar cane and corn are the main sources of raw materials, as well as on biodiesel, where rapeseed is mainly used. Together with a possible drop in demand for meat, the long-term impact on global corn prices will be greatest. Pressure will also be exerted on sugar and rapeseed prices. But this does not mean that prices will necessarily fall everywhere because the number of new trade restrictions will increase/appear, serious local shocks and price disparities are possible. For example, sugar or corn may well be too expensive in the importing country and too cheap in the exporting country.
8. At the same time, the demand for food crops, such as food wheat, rice, and cereals can grow significantly, because these are basic and inexpensive strategic products that people begin to consume in crisis situations.
9. The vegetable oil industry can also be divided, while cheap oils will have a certain advantage. However, in general, it will suffer less than others, since vegetable oil is an essential basic and strategic food product. A certain negative for producers and processors is possible only in terms of a possible decrease in the demand for protein meals in case of a decrease in demand in animal husbandry. However, the big advantage of the grain and oilseeds is the absence of problems with labor since almost all production is mechanized.
10. Food processing products of food crops are also unlikely to suffer very much, although it is possible that there will be local protectionist measures in individual countries. They may also be negatively affected by the devaluation of the currencies of importing countries against key currencies. However, they are least affected by the fall in the HoReCa segment, that is, the restaurant and tourism business, because such products are easier to cook at home.
11. The meat industry may suffer more than others, as the demand for more expensive types of meat may decrease markedly. At the same time, poultry farming may even win, because it is the cheapest type of meat. The fishing industry could suffer even more significantly.
12. The dairy industry may also suffer losses, especially those segments that are focused on the production of expensive cheeses and other high value-added products. It is likely that the prices of milk protein and fat will converge again.
13. The fruit and vegetable industry will develop completely heterogeneously. Besides, some segments may grow sharply, while others will practically disappear.
14. The global logistics, trade flows, and food production of FMCG (branded, ready-to-eat, and packaged) will also change dramatically. Demand for products for restaurants, hotels, and the catering industry will drop sharply, so there will be a rollback in value-added. Countries, where tourism provided significant demand, will sharply reduce the volume of imports of raw materials and finished products. Accordingly, trade flows will also change.

Summing up, those countries that produce everything necessary to fully provide their own population with food will have an advantage. In particular, Ukraine has a high level of food security, which is a net exporter of almost all basic food products. In addition, Ukraine, relatively recently (in the 90s of the last century), gained invaluable experience in ensuring food security by mass processing of household plots by the population and production of everything necessary on their own. Another benefit for Ukraine is the return of many labor migrants, which will provide the agricultural and food industries with the necessary labor.

However, the sharply increased dependence of Ukraine on the import of fertilizers, seeds, plant protection products, and other elements of technology is causing concern. At the same time, it is still difficult to expect significant problems with their supplies, most likely they will simply increase significantly in price. At the same time, rising food prices can more than offset the increase in production costs.

In the second part of the blog, we will dwell in more detail on the fruit and vegetable industry and the impact of coronavirus and the global economic crisis on the production, trade, and processing of vegetables, fruits, berries, and nuts of certain countries of the region.