Impact of coronavirus on global markets

Coronavirus is currently a global talking point, although reliable data is hard to come by in terms of its impact on agriculture. Trade data will show us the impact for product going into China, but information on trade is always a few months behind, so it will be a while before we see the impact flowing through that. However, here we do a round-up of what we do know and share our perspective on the impacts.

Economic activity in China was much reduced for the New Year holiday, and then beyond as the government tried to limit the spread of coronavirus. While some businesses were starting to operate again from 10 Feb, the recent increase in cases and deaths from the virus are likely to hamper their performance. China is very disease conscious, so even if businesses are operating, consumers will still avoid public contact and social occasions where possible.

The key impacts at present are:

• Chinese frozen food stocks are at very high levels. Every year, during the run up to Chinese New Year, the volume of food in storage increases. Due to the quick spread of coronavirus, a number of Chinese New Year celebrations were cancelled, and, as a result, frozen stocks were not depleted as usual.
• With Chinese frozen stocks at such high levels, temporary suspensions of imports have been reported, and further suspensions are possible.
• Out of home consumption is the most severely impacted, with many restaurants temporarily closed. However, some of the eating out losses will be offset by home delivery, and an increase in retail sales as people stock up on the necessities.
• The Chinese government is encouraging supermarkets to remain open, although reports suggest retail food prices are rising. There are reports of an increase in online food shopping, although this is being limited by the capacity of online retailers to cope with the increased demand.
• Supply chains are significantly disrupted, due to restrictions on movements into and out of infected areas, and workers staying at home to avoid contracting the disease.

The challenge for meat and dairy is the different foods consumed at home compared with at restaurants. Just over half of imported beef and almost two-thirds of imported sheep meat is consumed out of the home in China. That means the closure of many restaurants will hit these sectors hardest. Pork and dairy consumption are also being impacted by the closure of restaurants, although retail sales are only reported as showing marginal reductions.

On the supply side, farmers are having to slow production to deal with the transportation issues, particularly in getting feed in as well as product out. In some cases they are also having to deal with a reduction in the number of workers. All industries are being impacted by supply chain logistics, although this is a bigger challenge for the more perishable products such as raw milk.

Impact in Europe

The impact on beef in Europe is likely to be limited, as the European market (including the UK) is fairly self-contained, neither importing nor exporting large volumes. There are also few options for imports to increase due to the quota limits, and high tariffs on volumes outside of quota limits.

For lamb, if New Zealand’s exporters are confident they can continue to achieve higher prices in China than in Europe then the impact on lamb is also likely to be minimal. However, logistical challenges and the loss of out of home sales will be impacting lamb sales. If exporting to China becomes difficult, even temporarily, then Europe could be seen as a good alternative for this product. The Middle East and the US would probably see imports increase also. It is worth noting that freight between New Zealand and China is approximately two weeks, compared to the six weeks to the UK. Overall, whether we see a rise in UK imports of lamb will depend on how New Zealand exporters need to manage their position.

For dairy, the reduced footfall at grocery retailers will be increasing the stock levels at retailers leading to the potential for increased food waste. For the UK, trade with China is still small compared with domestic and EU sales. It is more likely that the EU and UK will see a knock-on impact from New Zealand being unable to ship product into China, and looking for other outlets instead.

For pork, during the first week of February China temporarily suspended pork trading and the US hog futures market reacted negatively to the news. While trading has re-started, coronavirus is compounding supply chain issues associated with African Swine Fever (ASF) and it is likely that further logistical problems will emerge going forward. However, it is also likely that it will now be more difficult for attempts at herd rebuilding to get underway. This could mean Chinese pork production declines by more than expected this year, generating an even larger supply gap, which may ultimately encourage imports.

Some exporters also believe the coronavirus outbreak could increase demand for imported products longer term. Clearly, with the situation still developing, any possible impact is difficult to anticipate at this time.

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