Insights

How the COVID-19 coronavirus is impacting the agriculture industry

 

How the COVID-19 coronavirus is impacting the agriculture industry


Mar 19, 2020
Agribusiness

As the 2020 crop season approaches here in the U.S., many agribusinesses are concerned about the new coronavirus, COVID-19. What impact is the virus having on the agriculture industry? What impact could it have throughout 2020?

COVID-19 has the potential to impact nearly every facet of business. To help all of our clients navigate the constantly shifting circumstances, we’ve created a resource center on our website.

So far, we’ve identified three potentially large impacts on agribusiness:

1. U.S.-China trade deal

Last month, we explored what three big trade agreements meant for ag producers, and the U.S.-China trade deal was one of them. Excitement was high in mid-January when the agreement was signed. China promised to buy $36.5 billion worth of U.S. ag products in 2020.

But COVID-19 has cast doubt on whether China will be able to fulfill that promise. As of March 17, 2020, China had just over 82,000 confirmed cases of the virus. To attempt to contain it, Chinese cities went into quarantine. Much of manufacturing halted, ports closed and supply chains were disrupted as a result.

If China is not able to import as much as expected from the U.S. in 2020, that would have a further negative impact on U.S. ag producers already hurt by the trade conflict itself. President Trump is considering a third round of aid to ag producers, and if trade doesn’t pick up, that aid seems likely.

It’s possible that the swine flu could actually be a silver lining for the U.S. While demand for soybeans is lower in China because the swine flu has decimated pig populations and therefore lowered the demand for soy-based pig feed, China is still the largest consumer of pork in the world. Imports of pork could certainly pick up during the COVID-19 recovery, especially considering the fact that the rate of new infections in China appears to be decreasing.

2. Crop input and animal protection concerns

Because manufacturing has shut down in parts of China and ports have closed, U.S. businesses that rely on China to produce products have already been affected.

For the ag industry, it’s the fact that China is the largest producer of phosphate and a big producer of pharmaceutical ingredients that is most concerning. Phosphate is one of the three main nutrients used in commercial fertilizer. With planting just around the corner for a large part of the U.S., that could have a negative impact on ag producers. If the cost of fertilizer rises, that will put further pressure on already slim agribusiness margins. Even if trade with China does pick up, it may not counteract the costs of  inputs.

The prices of drugs used to protect livestock could also rise. Many U.S. companies that sell animal pharmaceuticals make finished drugs in or source ingredients from China. Manufacturing and supply chain disruptions due to COVID-19 may impact the supply of these drugs and lead to not only shortages but also rising prices.

In addition, there’s concern that other personal protection supplies like N-95 masks and surgical gloves may be in short supply as medical professionals will need more of them.

Supply chains are predicted to experience some strain as both social distancing and the potential for supplies needing to be diverted or shipped elsewhere could negatively impact hauling products. Producers should also continue to monitor changes, as border closings could have an adverse effect on the supply chain.

Some good news has come as Saudi Arabia started an oil price war with Russia. The drop in oil prices is making diesel cheaper, and it’s also softening prices on inputs such as anhydrous ammonia. The ag industry could gain some relief with the price on certain inputs dropping.

3. Commodity prices

Before recent developments with COVID-19, there was optimism that commodity market prices would improve. After the signing of the United States-Mexico-Canada Agreement, there was optimism that it could help — especially by boosting milk prices for the struggling dairy industry. 

Unfortunately, it’s now predicted that prices will take yet another hit with restaurant and school closings over COVID-19 concerns. Even with the surge in grocery sales as people prepare to stay at home, it is predicted that will not be enough to counteract the impact.

And although the oil price war is making inputs cheaper, it’s also doing so for commodities. When oil prices drop, other commodities follow, and that is not great news for farmers.

COVID-19 coronavirus impact: Still too early to tell?

When it comes to estimating COVID-19’s total impact on the ag industry, it’s difficult to tell right now.   This is a fluid situation that evolves from day-to-day, and only time will tell how we’ll come out on the other side of this.

In this difficult time for all of us, we remain committed to helping our clients and communities through this. We know that uncertainty can be overwhelming, and as circumstances are shifting quickly, we are committed to providing you with helpful information. And first and foremost, we hope that you and your families remain healthy and safe.

Related reading:

Coronavirus and your portfolio

What the three big trade agreements mean for ag producers

COVID-19 resource center

Author(s)

Cook_Brad
Bradley Cook, CPA
Agribusiness Practice Leader
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