Risks of Choking Global G&O Supply Chains
Global supplies of grains and oilseeds are sufficient to meet demand, but the supply chain faces several sensitive bottlenecks. Although food, agribusiness, and energy are considered essential, some closures of industries, assets, or regions can provide challenges to global supplies.
Thank you to everybody working in the food and agribusiness supply chain, from farm to fork! We appreciate your hard work to ensure food security in these unprecedented times!
Global supplies of grains and oilseeds are sufficient to meet demand. The preliminary outlook for 2020/21 production calls for another record output of wheat, rice, corn and soybeans. Companies originating, handling and processing G&O are well-managed, strongly focused on the health and safety of their employees, and can adjust to new needs. The key risks arising from Covid-19, however, have the potential to disrupt the G&O supply chain:
a. Government restrictions: Export restrictions (bans or quotas, for example)
b. Movement of goods: Restrictions in inland logistics as well as port disruptions
c. Worker availability and the closure of industries or regions
G&O Supply Sufficient to Meet Rising Demand
Grains and oilseeds inventories globally are sufficient. However, those goods are not all in the right place or right form to meet the currently frontloaded local demand. Global trade and processing industries, such as flour mills are crucial to help bridge these time, form, and location gaps. Rabobank currently does not forecast a significant negative Covid-19 related change in global G&O production in 2020/21. The crop most at risk for production reductions due to Covid-19 is palm oil, given the high need of manual labor and given that the crop must be processed quickly after harvest. Prices of most grains and oilseeds have been volatile so far in 2020, and have performed much better than most hard commodity prices. We currently do not forecast any major acreage reductions related to Covid-19. Yields, as always, will depend mostly on weather, but the availability of fertilizer, seed and crop protection products needs to be monitored throughout the growing season.
Demand for G&O Continues to Grow, Driven by Population Growth
Food hoarding by private households, and an increase in government reserves, have resulted in short–term demand increases for rice, wheat, flour, and starch-based durable foods, while logistical issues and lockdowns in many countries are likely to cut global demand for other products somewhat. The biggest reductions in demand are expected in the biofuel industry, as fewer miles are driven, and as crude oil prices – and with it margins of biofuel producers – have declined. Another sector to feel a negative impact is likely to be the malting sector, given the closure of bars and restaurants, as well as the cancellations of sports events and festivals, which is likely to hurt beer demand. Developments in the livestock sector, including the availability of workers in slaughtering, will determine feed demand.
Risks of Choking the Supply Chains
Handling capacity of grains inland, and in ports, as well as the capacity to process grains and oilseeds into secondary products like flour, malt, vegetable oils and protein meals, is more than sufficient in key export countries to meet the global demand. This is a benefit in times of crisis when some capacity might be unavailable, disrupted or congested. Still, the global trade of G&O relies, for most commodities, on a small number of countries.
Strong domestic demand for food staples like rice and flour, combined with strong export flows, have resulted in rising prices in some key export countries. Governments in the countries concerned have, in some cases, implemented export restrictions. Given the concentration of exports in a few countries, export bans can have a severe impact on global availability. For now, the measures taken by, for example, Vietnam (rice export ban/export quota), Russia (wheat export quota), Kazakhstan (flour export ban/wheat export quota) and other exporting countries, have not yet severely impacted global supplies. Still, in efforts to protect the health of their population and to ensure food security for their own population, more restrictions might be expected. If those measures last over a longer period of time and/or multiple countries restrict export at the same time, supplies in other countries can be threatened, especially in the most vulnerable import countries. It can also prompt a shift in consumption towards more wheat-based products if, for example, rice is heavily restricted, and vice versa.
Movement of Goods and Bottlenecks in G&O Supply Chain
Movement of goods is essential. Border closures (for example in Europe) or restrictions of movements in certain districts/counties of a country (like in Argentina) can impact the supply of goods from the farm to the processing plants and export ports. Port procedures might take longer due to health and safety measures, and loading and unloading rates may also be negatively impacted.
The global G&O supply chain faces several sensitive bottlenecks. Bottlenecks that can severely impact supplies could include problems with inland transport, problems at ports, restrictions to the movement of goods, closure of assets and worker availability.
Figure 3: Key exporting countries of G&O and bottlenecks in the global G&O supply chain
Examples of chokepoints include:
- The majority of Argentina’s soy crush and meal/oil export occurs in a small area near Rosario.
- Brazil ships most of its soy, corn and cotton via the port of Santos.
- The US exports large parts of its corn and soy crop out of two relatively concentrated port regions along the Pacific Northwest and the New Orleans regions.
Closure of Industries or Regions and Worker Availability
Although food, agribusiness and energy are considered essential, some closures of industries, assets or regions can provide challenges to global supplies. To fight Covid-19, Malaysia has temporarily closed the palm industry in Sabah. Given the high need for labor, and the high (~90%) share of Malaysia and Indonesia in global palm oil production, this commodity is especially vulnerable to industry closures. However, if more cases arise, other G&O industries, especially the processing and handling sectors, may face labor issues, or will face difficulties in finding contractors (e.g. electricians for repairs).