Friday, 15 May 2020
In order to aid business decisions, AHDB has today published its potato balance sheet. This highlights supply and demand estimates for the 2018/19, 2019/20 and 2020/21 seasons. Evidently, in these ever-changing times, the outlook remains unclear, largely working from scenario B outlined later in this article. These supply and demand estimates will be updated on a regular basis when new data becomes available.
The past couple of months has been a tumultuous time, with the potato industry not immune to this. Social distancing, and a national lockdown, have altered behaviours and markets enormously. Food service and hospitality industries have largely ground to a halt, and won’t look to resume until 4 July at the earliest.
Moreover, when businesses can reopen, it will not be in the guise we recognised prior to lockdown. The big question remains – for how long will these restrictions be in place?
Here we offer some thoughts around what the short, medium and long-term impacts could be on the potato industry and build on possible scenarios which may impact the market and our balance sheet assumptions.
The packing sector experienced a large sales bump at the end of March, as consumers panic bought and stockpiled. Since then, retail levels have returned to more the norm, as consumers work their way through stockpiles and shopper frequency at supermarkets is reduced due to social distancing measures. Given that the packing sector is c.75-80% retail market focussed, the large-scale closure of food service and hospitality has not been felt as keenly as in other sectors.
In scenario A we would assume that daily life would begin to return to normal from mid-May, with life phasing back gradually and back to normal by November. There is no second wave.
Given this, the packing sector might continue to see a small uplift in Q3 and Q4 of this year, with levels returning to seasonal norms at the beginning of 2021. Until social distancing measures are eased, and consumer confidence returns, we would expect in home eating occasions to be increased on average levels.
Scenario A would also potentially have the most limited economic impact. A downturn in the economy has a direct effect on peoples spending habits in eating out (figure 1). Indeed, after the 2008 recession, the hospitality industry suffered a heavy decline, only really starting to recover 5 years later. At the time, a PriceWaterhouse Cooper survey found that the first two cuts to expenditure consumers would make in times of hardship were on fast food (14% of respondents) and eating out (11% of respondents).
Scenario B sees a slower reopening of the nation from June onwards, with a full cessation of lockdown by December. This could provide a larger, longer uplift for the packing sector. Consumer confidence may well be more impacted, affecting footfall and dining out opportunities.
With the public more likely to eat at home, potentially moving festive gatherings to smaller home based occasions rather than out of home, this could boost the packing sector volumes and average consumption levels may not return to seasonal averages until Q2 2021.
Scenario C could be felt if the UK enters a second lockdown period if a second wave of the virus hit after the current lockdown eases. This might see a lockdown situation maintained until the beginning of next year, with schools not returning until January and the hospitality industry phasing a reopen from March.
For the retail sector, the fourth quarter of this year could see the largest potential uplift as festive gatherings usually held out of the home could be replaced with in home occasions, as with scenario B. This again in turn could provide a sizeable boost to the packing sector.
In all scenarios, there is a downturn in foodservice demand, felt most severely in the longer lockdown period. However, with overall foodservice demand accounting for c.20% of the sector, the overall uplift for the packing sector should remain positive for all scenarios.
However, as the end of March stocks survey showed, pre-packed stocks in grower held stores were 22% above the five-year average and 19% higher than at the same point a year earlier. While prices for best quality have been holding of late, a combination of high volumes and repurposed processing and chipping stocks entering the fresh supply chain may very well weigh on prices for the rest of the season.
Imports only make up a small proportion of domestic supply, ranging between 5-10% of total availability. Given that North-West Europe is one of the main suppliers, and they have been experiencing similar purchase behaviours to the UK during the pandemic, their domestic demand has likely increased. Coupled with this, the output at ports due to staffing illness and social distancing has been negatively affected. Therefore, it seems sensible to assume that the UK packing sector will not face a significant threat from cheaper imports.
Alex provided an in-depth look at the processing sector last week, highlighting the current situation and what the short-term impact might be. A fall in demand of c.183Kt for the 2019/20 season could be anticipated. But what could be the impact going into next season?
With a fall in this season’s demand, and only a very limited volume of stock able to be repurposed, it seems sensible to assume there will be a sizeable carry into next season. Additionally, the same is true on the continent.
Currently, processors are honouring contracts, but with cold stores full, some are making heavy losses selling excess material for animal feed – for as little as €10/t in some cases. If there is the opportunity to find a home for this product in a more viable market, they will surely be considering this.
While it is anticipated that the European processing area (which is the predominant sector on the continent) will decrease this year, this is following several years of expansion.
Therefore, should the area remain sizeable, and growing conditions prove clement, then we might expect another decent production year on the mainland. In the face of a large carry from the 2019 harvest, these extra continental supplies could weigh on the UK market.
The retail sector accounts for c.40-45% of the processing market and as for the packing sector, retail sales saw large uplifts during the initial lockdown period. In scenario A, this uplift could maintain until the end of the year, until the hospitality sector returns to more “normal” levels.
However, the economic impact could hold back dining out occasions, as highlighted in figure 1. The potential decreases in volume are shown above, with only scenario A showing a return to average levels during the next four quarters.
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