Authors: Shay Eliaz, Lily Murphy
Affiliated organization: Deloitte
Type of publication: Report
Date of publication: 2020
The COVID-19 pandemic has challenged every fabric of modern society, and with it has also exposed some vulnerabilities in our global food system. A system whose modern roots had been developed over decades, has in a matter of weeks come under unprecedented pressure, and has had to rapidly adjust. And while it has not reached the breaking point yet, the changes this crisis has forced on the food system are considerable and have significant implications to consumers, governments, and corporations alike. Whether these changes are structural and here to stay, and whether they accelerate important trends we have witnessed in the past few years, remains to be seen. These are early days still but what is clear is that this disruption to all stakeholders has dramatically increased the levels of uncertainty, and has scrambled forecasts and strategic plans.
Current state of the global food system
To understand just how much of an impact this pandemic has had on the food system, it is important to establish a picture of this massive undertaking. Valued at US$8 trillion and equal to approximately 10% of global GDP, today’s food system is a complex network of players working together to balance a delicate equilibrium of supply and demand.
This system has been designed to deliver calories at high levels of efficiency, an evolution supported by global commodification and trade in goods. One great success of this modern food system is the reduction of global malnourishment, which fell from 50% of the world’s population in 1945 to just 10.8% in 2017. This trend has been accelerated by global commodification and trade in goods. While the system is still far from achieving a just-in-time production model, it was “designed to handle, produce and deliver just as much product as consumers need at any point in time” without surplus. Value chain players globally have reduced inventory levels to conserve capital and have relied instead on unbroken supply chains to deliver the products they need when they need them. As a result, many large outlets now only carry four to six weeks of food supply, as opposed to six months’ supply just 20 years ago.
What this crisis has exposed though is that while there are some sourcing benefits to this model, there are also major drawbacks to these long and complex food supply chains. While long supply chains provide inexpensive food, the rising environmental costs and obscure sourcing pose an ethical threat as well as a practical one. Unexpected surges in demand, as seen during this period, rapidly deplete inventories, leaving the system as a whole scrambling to make up the deficit.
Cracks in the global food system during the COVID-19 crisis
Impact of disruptions to production Farmers who rely on migrant workers to harvest crops have struggled to secure enough labor. In France and Germany, the ministries of agriculture reported that farms in both nations were missing over 200,000 workers. A similar dynamic occurred with farms in Spain, which had a shortage of 150,000 agricultural workers. Farmers in California, Florida, and other US states are dealing with similar migrant labor shortages. This labor shortage issue is further compounded by the virus spreading through fruit and vegetable packers.
Impact of disruptions to processing
Processors too are struggling to secure enough workers to continue labor-intensive production. Those dependent on lost crops may be unable to secure the inputs they need for processed foods (e.g., canned and frozen goods). Additionally, and very publicly, in the United States and Brazil, dozens of workers in meat processing facilities have fallen ill with COVID-19, forcing entire plants to shut down. The shutdowns led to a 15% increase in the price of meat by the end of May. While most of the supply chains have recovered, moving forward prices may continue to remain high as greater attention is placed on worker safety and demand for more packaging increases, leading to increased production costs. While these cases originally seemed contained and did not disrupt the food system dramatically as a whole, the influx of cases is generating concerns about the continuity and is highlighting the very real human and financial toll of this pandemic.
Impact of disruptions to distribution
Many governments imposed restrictions on the flow of goods, including food, as part of their initial response to COVID-19. As many as 29 countries placed restrictions on the flow of food to protect domestic supplies causing further disruption. The flow of goods between countries has been disrupted and, in some cases, has ceased altogether. Governments are using the crisis to erect trade barriers and bring manufacturing home. Countries like Japan, France and the United States have made this a priority despite institutions like the EU claiming that it will be a lose-lose situation for countries as they compete over scarce resources driving prices up.
In the first two months of 2020, China’s exports dropped 17.2% from 2019 levels. In both Shanghai and Los Angeles in February 2020, cargo volumes fell by 20% or more year-over-year. Major suppliers including Vietnam, Thailand, Russia and Kazakhstan recently barred exports of food products such as rice, eggs, grains and potatoes to retain sufficient domestic food supply. As a result of these restrictions, producers have output they cannot harvest, store, or sell while consumers face higher prices and uncertainty about supply. Food prices in China were more than 20% higher in January 2020 than a year previously, as the restrictions exacerbated pork shortages due to African Swine Fever and trade disputes. In the United States, prices at supermarkets rose while manufacturers and grocery stores offered 28% fewer discounts than normal.
Impact of disruptions on consumption
The COVID-19 pandemic has brought about significant changes in the way consumers acquire and consume food. Most countries have instituted some form of isolation measures to restrict the movement of individuals, thus reshaping demand. COVID-19 has sped up the adoption of non-traditional food distribution models, as demand for restaurant-based food decreases while demand for online purchases and groceries increases. Despite these changes in purchasing behavior, consumption patterns have remained largely constant in select geographies (e.g., Europe). This stands to reason since food consumption is generally seen as inelastic. This manifestation of aversion behavior has affected primary purchasing modalities, thus, while COVID-19 may have restructured how consumers acquire food, it did not dramatically alter how much they consume.
In the first two months of 2020, China’s exports dropped 17.2% from 2019 levels. In both Shanghai and Los Angeles in February 2020, cargo volumes fell by 20% or more year-over-year. Major suppliers including Vietnam, Thailand, Russia and Kazakhstan recently barred exports of food products such as rice, eggs, grains and potatoes to retain sufficient domestic food supply. As a result of these restrictions, producers have output they cannot harvest, store, or sell while consumers face higher prices and uncertainty about supply
These new patterns of consumption have disrupted the delicate balance between supply and demand. For one, bulk food buyers, such as education institutions and hospitality businesses, have shuttered and stopped buying food almost completely. This has resulted in severe challenges to reallocate the products bound for bulk buyers to grocery stores, food banks or directly to consumers. The scrambled supply-demand signals have generated a paradoxical situation: grocers are limiting shoppers for fear of shortages on certain food products and urban consumers are struggling to access fresh produce, meat and fish, while farmers are struggling to find an outlet for the very same products.24 The plowing of millions of pounds of vegetables back into fields, the disposing of over 750,000 eggs weekly, and the dumping up to 3.7 million gallons of milk daily are the grim result.
Scenario analysis: Future of the food system
The fact that this crisis exposes material vulnerabilities in the food system has become clear and widely publicized. And while many entities have risen to the occasion, adapting their business models and adjusting supply chains to meet the challenge, there is a great deal of uncertainty as to what the food system will look like in the future. This is in part a confirmation of the difficulty in foreseeing the duration, severity, and long-term effects of the current health and economic challenges and their impact on the food system. It is also a tacit acknowledgement that this is a system that was in need of reform before this crisis emerged. Perhaps it was inevitable that a significant shock like this would shine a light on a system that had for the longest time prized efficiency over resiliency, sustainability, and health. The tensions between these competing objectives has existed for some time, mostly below the surface. But no longer. And so, many food system stakeholders are forced to contend with what the future might bring. Will the food system bounce back to its pre-COVID state? How long before it returns to a steady state and what will the new normal look like? Will other priorities, such as making it more nutritious, regenerative, and equitable, advance and force a change in consumption, production, and distribution?
These new patterns of consumption have disrupted the delicate balance between supply and demand. For one, bulk food buyers, such as education institutions and hospitality businesses, have shuttered and stopped buying food almost completely. This has resulted in severe challenges to reallocate the products bound for bulk buyers to grocery stores, food banks or directly to consumers
Globally, decision makers in every organization along the food value chain have already responded in myriad ways to the COVID-19 pandemic crisis. The next 6–18 months will be just as critical for these leaders to determine their organizations’ path towards recovery and thriving in the long-term. Attempting to assess what the future might hold is always fraught with risk, which is why a scenario analysis of the crisis and the food system can help illustrate the options facing these entities among the uncertainty. Key questions on the leaders’ minds include:
- What is the new external business environment, and how is it likely to change? As importantly, what structural changes (if any) might we see?
- What does this environment mean for the food system, and how are these changes likely to influence the sectoral landscape?
- What changes do we need to make as an organization? What do we need to suspend and simplify? Conversely, what should we speed up and strengthen? The answers to these questions will vary based on the future that emerges.
A scenario analysis, while not exhaustive, allows us to identify potential futures based on the following two critical uncertainties:
- Situation: The impact of the pandemic in terms of disease severity and associated economic disruption.
- Lower impact: Following the rapid peak associated with the virus’s spread, the current decline in cases and their severity diminishes as rapidly.
- Higher impact: As more economies open up, additional waves of viral infections emerge, with even more severe consequences to health and economies.
- Response: The level of collaboration between actors at a community, country, and global level
- Significant collaboration: Collaboration within and between countries to contain the virus’s spread through coordinated strategies and best practices (e.g., testing and quarantines).
- Marginal collaboration: Lack of accountability and breakdown in communication leads to distrust and insufficient coordination within and among governments and institutions to prevent the virus’s spread.
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