The COVID-19 pandemic has caused unprecedented devastation of lives and economies on a global scale. Ireland’s agri-food sector is not immune to the effects of the economic turmoil at home and in vital export markets.
The unprecedented social restrictions to control COVID-19 have created seismic shifts in food markets.
Most critically, the shutting of hotels, restaurants, canteens, and cafés across Europe has eliminated a vital market channel for Irish food exports.
Retail sales of beef and dairy products have increased, but not sufficiently to compensate for the loss of food service
The food-service channel buys around 30% of Irish beef, including about 60% of premium steak and roasting cuts. Over half of eating-out meals include dairy ingredients, making food-service a dominant market channel for butter, cheese, milk and cream.
Retail sales of beef and dairy products have increased, but not sufficiently to compensate for the loss of food service.
Moreover, differences in buying profiles in the retail channel have created market imbalances for specific products. For example, a surge in retail beef demand has involved mince and diced beef rather than higher-value cuts, creating a carcase balance problem. A surplus of steak meat, generally destined for the restaurant sector, is a particular concern.
The demise of food-service has manifested in sharply lower beef and dairy prices (see Figures 1 and 2).
In Europe, lockdowns began with Italy on 10 March. The Irish Government called on pubs and restaurants to close from 15 March, and the UK closure started on 23 March.
Between 15 March and 19 April, the R3 steer price here declined by 30c/kg (8%), while O4 cows were back 52c/kg (16%).
Milk prices have been undermined by weakening dairy commodity markets, with butter and skimmed milk powder prices falling by 16% (€500/t) and 21% (€450/t), respectively. However, cheddar prices have been more stable due to increased retail sales.
Uncertainty will hold back prices in 2020/21
There are open questions about how much further farmgate prices might decline and when we might start to see a turn-around. Much will depend on the speed and success of the containment measures.
There are many uncertainties, including the extent of continuing restrictions under a gradual easing, and risks of new lockdowns in response to further waves of infections. Delays to the normalisation of supply chains and logistics will maintain pressure on prices.
The second primary driver will be the recovery of the global economy needed to kickstart growth in exports again. Weak economies will stifle incomes and hamper demand in export markets.
Dairy products can also be affected. Rabobank has forecast that Chinese dairy imports in 2020 will be down 19%
The red meat sector is especially sensitive because more cautious consumer spending may suppress expenditure on prime meat cuts as people substitute with cheaper alternatives, including chicken. Dairy products can also be affected. Rabobank has forecast that Chinese dairy imports in 2020 will be down 19%.
Consumer confidence will also affect the food-service recovery, although continuing social distancing protocols may also curtail its capacity. Consequently, the enduring impacts of the crisis on the future buying habits of consumers remain unclear. Will interest in home cooking from scratch continue, or will the prepared foods and eating-out cultures resume as before?
Also relevant is the EU policy response to stabilise markets. In times of severe market disruption, market support measures such as public intervention and Private Storage Aid (PSA) are available under the CAP.
The European Commission announced a programme of PSA for the dairy and meat sectors as part of a package of COVID-19 support to the agri-food sector. Unfortunately, the initial funding of only €80m for the EU-27 is too feeble, given the extent of the problem.
Commissioner Wojciechowski appears to be adopting a wait and see approach. Further measures may follow, but existing pressures on the agriculture budget may also hinder the response.
In the US, there are suggestions about an incentive scheme to cut milk output by 10%
In beef and dairy, demand reduction due to COVID-19 is interfacing with strong global production, causing an excess supply problem. In this context, voluntary supply control measures, particularly in the dairy sector, may help to shore up markets by easing the supply pressures. In the US, there are suggestions about an incentive scheme to cut milk output by 10%. Similar measures may come on to the agenda in the EU.
The unprecedented disruption from COVID-19 has not finished rippling through food supply chains, and businesses are grappling with enormous uncertainty. Consequently, there are significant risks of further weakening in farmgate prices during 2020.
Potential impacts on dairy
and beef farm incomes
How might the COVID-19 crisis impact farm incomes in 2020/21?
We can try to answer this using financial simulations based on farm-system averages from the Teagasc National Farm Survey (NFS).
We confine our focus to the dairy and beef (cattle rearing, cattle other) enterprises and model each system using national-average characteristics and efficiency levels. The financial simulation covers the year commencing 1 April 2020.
A baseline for each system conservatively projects farm income as it might have been in a ‘business as usual’ situation without the COVID-19 crisis.
It also uses estimates of input costs and output prices based on pre-crisis levels.
1 The scenarios
We look at two COVID-19 scenarios (Table 1) based on different assumed price trajectories:
‘Moderate’ impact scenario: prices stabilise close to current levels corresponding to the already observed market effects of the lockdowns. ‘Severe’ impact scenario: prices deteriorate more sharply, by almost double the initial impact, due to pessimistic assumptions about supply-chain disruption and food-service recovery. 2 The impact on farms
Table 2 shows the projected baseline average farm income for each system and the estimated change in average income under the COVID-19 impact scenarios.
The estimates show the sizeable threat of COVID-19, especially to dairy farm income in both absolute and percentage terms.
The COVID-19 scenario impacts on average incomes of the beef systems are lower, but they represent a deterioration below an already unsustainable level. CAP direct payments stem potential losses, but average market income (excluding direct payments) in the severe scenario collapses to €3,200, -€8,200, and -€6,000 for ‘Dairy,’ ‘Cattle Rearing’ and ‘Cattle Other’ farms, respectively.
3 National impact
Table 3 provides a summary of the estimates aggregated to the national level.
The figures suggest a combined reduction in the farm income of the dairy and beef sectors of nearly €600m in the moderate impact scenario and almost €1bn under the severe impact projection.
These are preliminary calculations, and it is essential to note that estimates based on simple averages conceal the substantial variability in impacts according to individual farm circumstances and performance. Remember also that any price forecasts currently have high uncertainty.
The potential income challenges urge farmers to focus on the efficiency and cost areas that are within their control. Robust financial planning, especially cash flow budgeting, is crucial at this time.
The potential severity of the COVID-19 crisis on farm cashflows necessitates a suitable policy response.
Government policy is also critical in mitigating the severity of the COVID-19 crisis on farm cashflows. In this context, the inclusion of farming in the €2bn COVID-19 Credit Guarantee Scheme is a positive step. This Government support for flexible, low-cost lending to small and medium-sized enterprises will help to provide businesses with essential liquidity needed to cope with the immediate financial impacts.
The EU approach to recent agricultural crises has focused on direct income support through its exceptional aid mechanisms and relaxation of state aid rules.
Budget provision for targeted supports to protect farm incomes will require early consideration. Experience of previous aid packages for dairy (2009, 2016) and beef (2019) shows the importance of assistance reaching farmers with sufficient urgency to prevent hardship and longer-term damage to businesses.
The COVID-19 pandemic has caused unprecedented devastation of lives and economies on a global scale. Ireland’s agri-food sector is not immune to the effects of the economic turmoil at home and in vital export markets.
The unprecedented social restrictions to control COVID-19 have created seismic shifts in food markets.
Most critically, the shutting of hotels, restaurants, canteens, and cafés across Europe has eliminated a vital market channel for Irish food exports.
Retail sales of beef and dairy products have increased, but not sufficiently to compensate for the loss of food service
The food-service channel buys around 30% of Irish beef, including about 60% of premium steak and roasting cuts. Over half of eating-out meals include dairy ingredients, making food-service a dominant market channel for butter, cheese, milk and cream.
Retail sales of beef and dairy products have increased, but not sufficiently to compensate for the loss of food service.
Moreover, differences in buying profiles in the retail channel have created market imbalances for specific products. For example, a surge in retail beef demand has involved mince and diced beef rather than higher-value cuts, creating a carcase balance problem. A surplus of steak meat, generally destined for the restaurant sector, is a particular concern.
The demise of food-service has manifested in sharply lower beef and dairy prices (see Figures 1 and 2).
In Europe, lockdowns began with Italy on 10 March. The Irish Government called on pubs and restaurants to close from 15 March, and the UK closure started on 23 March.
Between 15 March and 19 April, the R3 steer price here declined by 30c/kg (8%), while O4 cows were back 52c/kg (16%).
Milk prices have been undermined by weakening dairy commodity markets, with butter and skimmed milk powder prices falling by 16% (€500/t) and 21% (€450/t), respectively. However, cheddar prices have been more stable due to increased retail sales.
Uncertainty will hold back prices in 2020/21
There are open questions about how much further farmgate prices might decline and when we might start to see a turn-around. Much will depend on the speed and success of the containment measures.
There are many uncertainties, including the extent of continuing restrictions under a gradual easing, and risks of new lockdowns in response to further waves of infections. Delays to the normalisation of supply chains and logistics will maintain pressure on prices.
The second primary driver will be the recovery of the global economy needed to kickstart growth in exports again. Weak economies will stifle incomes and hamper demand in export markets.
Dairy products can also be affected. Rabobank has forecast that Chinese dairy imports in 2020 will be down 19%
The red meat sector is especially sensitive because more cautious consumer spending may suppress expenditure on prime meat cuts as people substitute with cheaper alternatives, including chicken. Dairy products can also be affected. Rabobank has forecast that Chinese dairy imports in 2020 will be down 19%.
Consumer confidence will also affect the food-service recovery, although continuing social distancing protocols may also curtail its capacity. Consequently, the enduring impacts of the crisis on the future buying habits of consumers remain unclear. Will interest in home cooking from scratch continue, or will the prepared foods and eating-out cultures resume as before?
Also relevant is the EU policy response to stabilise markets. In times of severe market disruption, market support measures such as public intervention and Private Storage Aid (PSA) are available under the CAP.
The European Commission announced a programme of PSA for the dairy and meat sectors as part of a package of COVID-19 support to the agri-food sector. Unfortunately, the initial funding of only €80m for the EU-27 is too feeble, given the extent of the problem.
Commissioner Wojciechowski appears to be adopting a wait and see approach. Further measures may follow, but existing pressures on the agriculture budget may also hinder the response.
In the US, there are suggestions about an incentive scheme to cut milk output by 10%
In beef and dairy, demand reduction due to COVID-19 is interfacing with strong global production, causing an excess supply problem. In this context, voluntary supply control measures, particularly in the dairy sector, may help to shore up markets by easing the supply pressures. In the US, there are suggestions about an incentive scheme to cut milk output by 10%. Similar measures may come on to the agenda in the EU.
The unprecedented disruption from COVID-19 has not finished rippling through food supply chains, and businesses are grappling with enormous uncertainty. Consequently, there are significant risks of further weakening in farmgate prices during 2020.
Potential impacts on dairy
and beef farm incomes
How might the COVID-19 crisis impact farm incomes in 2020/21?
We can try to answer this using financial simulations based on farm-system averages from the Teagasc National Farm Survey (NFS).
We confine our focus to the dairy and beef (cattle rearing, cattle other) enterprises and model each system using national-average characteristics and efficiency levels. The financial simulation covers the year commencing 1 April 2020.
A baseline for each system conservatively projects farm income as it might have been in a ‘business as usual’ situation without the COVID-19 crisis.
It also uses estimates of input costs and output prices based on pre-crisis levels.
1 The scenarios
We look at two COVID-19 scenarios (Table 1) based on different assumed price trajectories:
‘Moderate’ impact scenario: prices stabilise close to current levels corresponding to the already observed market effects of the lockdowns. ‘Severe’ impact scenario: prices deteriorate more sharply, by almost double the initial impact, due to pessimistic assumptions about supply-chain disruption and food-service recovery. 2 The impact on farms
Table 2 shows the projected baseline average farm income for each system and the estimated change in average income under the COVID-19 impact scenarios.
The estimates show the sizeable threat of COVID-19, especially to dairy farm income in both absolute and percentage terms.
The COVID-19 scenario impacts on average incomes of the beef systems are lower, but they represent a deterioration below an already unsustainable level. CAP direct payments stem potential losses, but average market income (excluding direct payments) in the severe scenario collapses to €3,200, -€8,200, and -€6,000 for ‘Dairy,’ ‘Cattle Rearing’ and ‘Cattle Other’ farms, respectively.
3 National impact
Table 3 provides a summary of the estimates aggregated to the national level.
The figures suggest a combined reduction in the farm income of the dairy and beef sectors of nearly €600m in the moderate impact scenario and almost €1bn under the severe impact projection.
These are preliminary calculations, and it is essential to note that estimates based on simple averages conceal the substantial variability in impacts according to individual farm circumstances and performance. Remember also that any price forecasts currently have high uncertainty.
The potential income challenges urge farmers to focus on the efficiency and cost areas that are within their control. Robust financial planning, especially cash flow budgeting, is crucial at this time.
The potential severity of the COVID-19 crisis on farm cashflows necessitates a suitable policy response.
Government policy is also critical in mitigating the severity of the COVID-19 crisis on farm cashflows. In this context, the inclusion of farming in the €2bn COVID-19 Credit Guarantee Scheme is a positive step. This Government support for flexible, low-cost lending to small and medium-sized enterprises will help to provide businesses with essential liquidity needed to cope with the immediate financial impacts.
The EU approach to recent agricultural crises has focused on direct income support through its exceptional aid mechanisms and relaxation of state aid rules.
Budget provision for targeted supports to protect farm incomes will require early consideration. Experience of previous aid packages for dairy (2009, 2016) and beef (2019) shows the importance of assistance reaching farmers with sufficient urgency to prevent hardship and longer-term damage to businesses.
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