BLOG

BUILDING A SUSTAINABLE VALUE CHAIN IN FOOD PRODUCTION

25 June 202012 min reading

In order to avoid food shortages, it is imperative that countries keep the food supply chains going. Unlike the 2007-2008 global food crisis, scarcity is not an issue this time. The supply of staple commodities is functioning well, and the crops need to be transported to where they are needed most. Restricting trade is not only unnecessary, it would hurt producers and consumers and even create panic in the markets. As countries combat the coronavirus pandemic, they must also make every effort to keep the gears of their food supply chains moving.

To contain the COVID-19 pandemic, governments around the world have implemented measures, including a severe reduction in the transportation of goods, services that rely on transport, as well as migration of labour domestically and internationally. Workers are less available reflecting both disruptions in transportation systems and restrictions to stop the transmission of the disease, within and across borders. These factors induce overall disruptions in the logistics of the food supply chains, impeding the shipment of food and agricultural inputs, threatening food security and nutrition, particularly for the most vulnerable population segments.

Logistics in food value chains includes all activities that enable the flow of agriculture inputs, outputs, and agriculture-related services, such as transportation, warehousing, procurement, packaging and inventory management. The efficacy of logistics is critical for the agri-food sector, in particular in times of crisis. Disruptions can cause adverse impacts on the quality of food, freshness, its safety, and can impede access to markets and affordability.

Food and agriculture are being affected in all countries as a result of measures to contain the COVID-19 outbreak. The impacts differ across farming systems and make some countries more exposed than others. Most agricultural activities are season-specific and weather-dependent;

they follow a fine-tuned pattern of timing, pacing and sequencing of activities. A delay in one activity can have impacts throughout the production process, affecting yields and output.

Capital-intensive farming could be most affected, particularly where production relies on a great variety and large amounts of intermediate inputs, such as seeds, feeds, fertilizers, pesticides, lubes and diesel. But also, subsistence farmers can be affected. While they rely more on their own farm-based inputs, many have to purchase their inputs on local or regional markets, including their seeds, feeds or diesel. Their input supply chains are typically more fragile and more susceptible to disruptions. Importantly, they use more manual labour and, where the disease takes a direct toll on their health or their movement, this can impede not only their ability to produce for others, but also undermines their own food security. Labour-intensive agriculture, such as fruit and vegetable production, relies heavily on temporary or seasonal farm workers particularly during planting, weeding, harvesting, processing or transporting to markets. A lack or a delay of supply of these products affects people in the informal sector of urban areas who rely on produce from rural areas for their livelihood. The closure of restaurants, cafes, and street-food vendors, for instance, can also lead to significant reductions in otherwise reliable market outlets for many farmers, whose incomes will decline when products cannot be brought to markets.

The food value chain can be broadly divided into two groups: the staple commodities (wheat, maize, corn, soybeans and oil seeds) and the high-value commodities (fruits, vegetables andfishery). The staple commodity production is capital intensive, and the labor shortage issue resulting from the coronavirus-related restrictions on movement has less impact on their production. However, the logistics to distribute the commodities is affected, as it hampers food transportation across cities, provinces, regions and countries.

There are sufficient stocks of staple commodities. Prospects for harvest in 2020 is favourable, assuring food availability. However, logistics disruptions in the supply chains are emerging. For example, in Brazil, a key exporter of staple commodities, there are reports of logistical hurtles putting the food supply chains at risk. Internationally, if a major port like Santos in Brazil or Rosario in Argentina shuts down, it would spell disaster for global trade.

Key staple commodities-exporting countries need to make every effort to find solutions to minimize logistics disruptions, so that major staple commodities can move across countries. In fact, the COVID-19 crisis is an opportunity to identify the bottlenecks and address them. The logistics components of the supply chain need to be properly tested and given special permits to move commodities. Port staff should be considered as essential personnel, and proper health and safety measures, including testing, protective gears and practicing social distancing, need to be in place. These measures will bring stability to international markets. It is the responsibility of multilateral development banks and key donors to support staple commodities-exporting countries to enact these measures.

Countries that depend on imported food are vulnerable as shipments slow and their currencies plunge against the dollar, reducing their purchasing power. Food price is likely to rise in most countries. Sudden and extreme food price shocks could occur amid drawn-out lockdowns. Following government-imposed quarantine, China saw a spike in food prices because of panic buys. In Italy, demand for flour and canned food shot up, leading to difficulties to sell fresh produce.

Countries should immediately review trade and taxation policy options and their likely impacts to create a favourable environment for food trade. During the 2007-2008 food crisis, the lack of information on market conditions (production, stocks, consumption, trade, prices) and uncoordinated policy interventions by countries contributed to disruptions and food price hike.

Today, countries have the Agriculture Market Information System (AMIS), which provides up-todate information on stocks and prices of key staple crops. Cooperation among countries can help prevent beggar-thy-neighbor policies, which happened during 2007-2008. Large countries increased export taxes and adopted export restrictions, making things worse for everyone, not just for smaller trading partners. Sharp price increases disproportionately burdened poor people everywhere, negatively affecting human development and economic productivity in the long term.

Keeping the global food trade open is critical to keep the food markets functioning. Governments should eliminate existing export restrictions, including export bans. There are lessons learned from the 2007-2008 food crisis on how governments should respond. If one country starts doing it, all others will follow, and it would be a catastrophe for the markets. Harmful import tariffs and nontariff trade barriers should be eliminated. Lower import tariffs facilitate imports and therefore helps to address the immediate concern about low food supplies and rising food prices.

The newly projected economic environments are likely to unleash profound impacts on food demand, access to food and nutritional outcomes, well into next year. The big question is whether COVID-19 will lead to a full-blown global food crisis, resembling what the world experienced over the years 2007 to 2009.

At the beginning of the 2020 COVID-19 crisis, cereal stocks hovered around a multi-year high of about 850 million tonnes. In absolute terms, they were nearly twice as high as at the beginning of the 2007/08 crisis (472 million tonnes). These high stocks should provide a solid buffer against adverse shocks such as, for instance, a bad weather event in the 2020/21 growing season. While important, absolute levels of stocks are not all that matters for buffer capacity. Equally significant is the distribution of stocks over countries, over exporters and importers, and notably, their concentration over major storers.

To put the importance of adequate global food supplies in further perspective, exporters of foodstuffs have an increasingly important role to play in meeting global food needs. Import dependency by countries on the international marketplace for food has steadily increased over time, and now stands on average at around 28 percent globally. However, there is a significant dispersion in the level of food import dependency, with some countries relying as much as 98 percent on the global markets for their food needs. Indeed, many countries that are traditionally heavily reliant on international markets are economically vulnerable, such as those situated in sub-Saharan Africa and South Asia, as well as Small Island Developing States (SIDS).

The degree of exposure of the global trading system to a crisis is also conditioned by the concentration of exporters and importers. A high concentration of exporters makes markets susceptible to logistical constraints or policy interventions (export restrictions) imposed by large players, potentially jeopardizing access to food for importers. Conversely, a high concentration on the import side could mean that a sharp reduction in import demand by one or two major importers could significantly affect prices and jeopardize revenue streams for exporters dependent on these agricultural exports.

SUPPLY CHAIN DISTURBANCES PRESENT A MAJOR OBSTACLE Agriculture and food supply chains are labour-intensive and the effects of the Great Lockdown are bearing down heavily. Labour market shocks arise from mobility restrictions on workers, especially the migrant workforce, and the direct health impacts of COVID-19 are weighing directly on the ability of workers to produce, harvest or process food. The labour force is also affected by a deterioration of occupational health and safety standards. In addition, COVID-19 is having a major impact on moving food to domestic and international consumers, depending on the mode of transportation.

The Baltic Dry Index, which is a benchmark measure for the cost of shipping goods around the world, is hovering at the lowest level in 25 years. For the first quarter of 2020, the index slipped more than 40 percent as the rapid spread of the new coronavirus led to shipping restrictions and weakened demand for dry bulk vessels. The index started to strengthen again in April 2020 as a gradual restart of industrial activity in China led to rising demand for shipping vessels.

While bulk shipments have seen few disruptions and no upward pressure in prices, container and truck shipments are already affected by the COVID-19 outbreak. These affect mainly second-tier ports, transhipments to landlocked countries and truck transportation within large countries. Not just container shipments are under strain; there are also first reports about a lack of truck drivers due to quarantine restrictions, industrial action or actual illness.

Generally, lower incomes and supply chain disruptions suggests that total merchandise trade will likely fall between 13 to 32 percent in 2020. The World Trade Organization (WTO) expects a recovery in trade in 2021, although the extent is likely to be limited. However, trade in agricultural products is projected to contract more significantly, but less than the average across all goods and services. A number of factors suggest that agricultural trade is likely to be less affected than total merchandise trade.

First, demand for agricultural products is relatively income-inelastic; food is an essential product for all, and the options for import substitution, i.e. replacing food imports through domestic production, are limited at least in the short term. Second, a considerable amount of agricultural trade (especially cereals and products in the oilseed complex) takes place in bulk shipments, highly capital-intensive, and trade logistics in many routes are highly automatized with little human interaction. Disruptions due to health reasons are no doubt possible, but they are less likely to result in protracted interruptions of trade flows. Third, while global food value chains are also becoming increasingly complex, the international division of labour in food and agriculture is much less pronounced than in other sectors. Finally, international prices of food have begun to decline, and this is a sector that has limited recourse to widespread trade restricting measures, such as export bans or taxes.

Global food production prospects are positive, stocks are high, international food prices are low, trade is broaderbased with more importing and exporting countries, costs of bulk transportation are depressed, fertilizer and input prices remain stable, energy prices have collapsed and competition from biofuels has virtually seized. Policy-makers in 2020 are more experienced in dealing with global crises, and arguably also better informed and better prepared. In high-income countries, central banks are now fully familiar with the instruments of monetary easing; they have been adding new instruments to accommodate additional credit needs.

The importance of ‘global stabilizers’ – allowing market forces to equilibrate imbalances – are key to solidifying the fundamentals for international food security. In order for these stabilizers to do their job, the current hindrances to logistics and distribution must be addressed and mitigated. In this regard, governments must recognize the importance of ensuring that trade, whether internal or international, remains open and frictionless, free from restrictions, and meets food capacities in terms of volumes and fulfilling nutritional gaps. This also implies speedy clearances at customs, borders and ports.

The truism that food is the most fundamental need requires that farmers and agricultural workers are placed on the same footing as health workers engaged in fighting COVID-19. Equally, global and national food systems should be regarded as on a par with health systems in ensuring that hunger and poor nutrition problems are not allowed to escalate. This in turn requires that farmers maintain and invest in productivity, with access to affordable credit, and that consumers have normal opportunities to procure food and meet their nutritional needs on the marketplace. Not all countries have the fiscal means to manage the impacts of the pandemic, especially SIDS, which are highly dependent on food imports. Also vulnerable are localized shock-prone countries in sub-Saharan Africa, which are in the grip of other crises, such as pest and disease outbreaks (locust, African swine fever), adverse weather conditions, or compromised security. Their societies are facing a loss of income-earning opportunities as well as deepening threats to their livelihoods. As a result, cooperative international support and interventions will be imperative to safeguard the vulnerable populations of these countries and avoid an aggravation of their food insecurity.

The world was awfully unprepared for the pandemic. But by keeping the gears of the supply chains moving and actively seeking international cooperation to keep trade open, countries can prevent food shortages and protect the most vulnerable populations.

SOURCES FAO-Biannual Report on Global Food Markets COVID-19: From a global health Crisis to a global food crisis?, Maximo Torero Cullen

------------COVER STORY INDEX------------

  • Agriculture and food supply chains during and after the COVID-19 pandemic The supply-demand gap occurred not because of inadequate production or drought during the COVID-19 pandemic. It is caused by the risks of access to products and uncertainties because of changes in demand. The pandemic will have at least short and middle-term effects on global and longer chains and governments will tend to prefer shorter and regional chains. This may decrease the role of China’s role in these chains. [button color="red" size="small" link="https://millermagazine.com/english/agriculture-and-food-supply-chains-during-and-after-the-covid-19-pandemic/.html" icon="" target="true"]>> Read More[/button]
Articles in Cover Story Category
08 March 20222 min reading

Innovation in the milling industry

19 November 201418 min reading

International Standards prondıng advantages in Commerce

“Standards; the international language of commerce, are the essential means of developing global ma...