Shifting Food Supply Chain

A Look at Commodity, Food Trade in a Post COVID-19 World

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Ken Eriksen, senior vice president and head of client advisory and development for energy, transportation and policy at IHS Markit, and Paul Hughes, chief economist at IHS Markit, discuss the market situation for commodities, which focuses heavily on U.S.-China trade. (Screen capture by Nick Scalise from DTN Ag Summit)

OMAHA (DTN) -- Mergers and acquisitions could accelerate in the food supply change post COVID-19, leaders at the market analysis firm IHS Markit highlighted Monday during the opening session of the 2020 DTN Ag Summit.

Ken Eriksen, senior vice president and head of client advisory and development for energy, transportation and policy at IHS Markit, analyzed some of the shifts in commodities and food trade in a post COVID-19 world.

Mergers and acquisitions in agribusinesses and food companies could increase in some sectors, especially for companies that are "poorly capitalized, or have a very rigid and fixed supply chain," Eriksen said, but there also will be opportunities when that disruption happens. "Be realistic where you are at and how nimble you can be versus how well capitalized," he said. "Where is it you could be in this matrix, if you will, to take advantage of the situation?"

In the grains sector, years of tight margins and low profitability are now showing signs of recovery that could slow the potential for mergers and acquisitions, Eriksen said. There's a pathway forward now to start making some money. A wide range of grain-sector companies of various sizes are assessing the market opportunities.

"Many of them are starting to consider what should our options be? Should we be looking at expansion, modernization, bringing in new equipment, handling different types of commodities in this environment?" Eriksen said.

Paul Hughes, chief agriculture economist for IHS Markit, said food service and restaurants have been among the most affected by COVID-19. Hughes expects more of those businesses to be bought out by equity companies or even larger food chains.

Biosecurity is also going to become an ongoing issue, especially in livestock production, which will make the food supply chain more resilient going forward. The packing industry has adapted to improve the safety of their employees and efficiency in their plants. That's brought the packing industry back to nearly full capacity.

"I have to say I'm quite impressed with all of the innovation and adaptation that has taken place in the food supply, not just in the U.S., but globally," Hughes said.

Eriksen pointed out how COVID-19 immediately changed the business for home delivery services such as Fed Ex, which is based in Memphis. Transportation companies in general are making a lot of adjustments to move at a quicker pace while managing their container space.

"Certainly they are really unable to keep up at such an incredible pace of what's going on with the overnight delivery and to move things as fast as they could," Eriksen said.

These shifts overall will likely convert into major structural shifts in supply chains and distribution centers to get goods moved both nationally and internationally. The economic impacts could also lead to some short-term protectionist challenges, such as trade barriers.

While vaccines just now are starting to be distributed, the impact of COVID-19 globally means it could take as quickly as half a year to as long as five or six years for some countries to recover their losses in Gross Domestic Product, Eriksen said.

The agriculture and food supply chains are still adapting to the coronavirus even in December as cases continue rising nationally and government adjusts. Flexible organizations are adapting quickly. Some profitability is returning to grain handling areas, but other sectors of agriculture that rely heavily on labor -- such as fruits and vegetables -- are continuing to adapt, especially if they produce more perishable products.

The first half of 2020 was all about demand destruction -- especially in biofuels and vegetable oils -- and depressed prices, Hughes said. The second half of the year was all about U.S.-China trade, partly due to the phase-one agreement and also due in part to China's recovery from African swine fever and COVID-19. China, economically, has rebounded from the coronavirus.

Looking at sales, IHS Markit forecasts $18 billion in soybeans sales to China in the next 12 months, as well as $4.3 billion in corn, $3 billion in cotton and $2.25 billion in pork. Overall, sales are projected at about $31.5 billion over the year, though Hughes noted there are some other areas in agriculture that could see higher sales as well, but they aren't watched as closely as major commodities. "So there are many other sectors that may fall out of what we are looking at here right now," Hughes said.

IHS Markit forecasts U.S. soybean exports at 2.35 billion bushels (bb), which is 150 million bushels (mb) higher than USDA's 2.2 bb forecast right now. USDA's forecast right now "looks unrealistically low," Hughes said. USDA right now pegs U.S. ending stocks at 190 mb, but IHS Markit is coming in at 78 mb. Exports may need to be slowed, or domestic crush reduced, otherwise U.S. buyers may need to import with such low forecasts for ending stocks.

Yet, Brazil and Argentina may also continue having a dry soybean season because of La Nina conditions that could affect production in both countries, Hughes said. "This is certainly a situation -- with the world already in a tight situation with soybeans -- lead(ing) to potentially another leg higher on soybean prices."

The DTN Ag Summit continues Dec. 8-9. This year's event is virtual and as a DTN subscriber, your registration is FREE. Register at and enter code DTNVIP20 to get free access.

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Chris Clayton