0
The next six months is all about supply chains. Several months ago, I wrote here how your packer is determining your future. In that piece I argued that when a crisis arrives, like ASF or now COVID-19, it is the supply chain, beginning with your packer and on to the final consumer that will determine whether you experience success, a slow demise or a complete failure. That moment is upon us.
Normally, the global agricultural commodity supply chains, as well as their regional and statewide cousins, perform stunning and wholly unsung heroics every day and night of the year. Trucks, rail cars filled with cartons and containers, as well as ships and aircraft move across the globe in a coordinated dance executing their functions, delivering food and other agricultural commodities in response to, not only contracted sale points, but to spur-of-the-moment profit points wherever they emerge. This is a process called arbitrage. Now we watch and hope as they continue to rise, adjust and attempt to do what only they can do. If you are a praying person, when you finish praying for the sick, pray for the men and women who execute these miracles, because the future as we know it depends on them. They are the people who make the world we live in work.
Regardless of deals, contracts or commitments, random shocks like the COVID-19 pandemic will severely disrupt global and local supply chains. When fresh or frozen pork is loaded into ships or rail for the trip to its final destination, if upon arrival, ports or rail yards are closed or the secondary transportation logistics at the reception location are disrupted, the meat can sit in containers out to sea, for instance, for days or weeks trying to make their port of call. Agreed upon prices can evaporate and be renegotiated on the spot and in many cases, an alternate destination must be arranged at greater shipping cost and lower total revenue.
You can adjust the timing of your next car purchase, hasten it or delay it by months or years. Just as the auto manufacturer can temporarily shutter a plant during purchasing lulls or add a second shift overnight if demand is high. That has just happened in the United States. All car production plants have closed. Not so of course with food animal production and its associated supply chains to final demand. Food animals do not store well, either at the farm or after processing (at least at the best price) or if cold storage is exhausted. “Sell it or smell it”, is the well-known phrase in the meat processing business and they very rarely smell it. They will make it happen since postponement of eating is much more difficult than postponing that new car purchase. Demand will be there, will the supply reach it?
Current public policy actions proscribed to “flatten” the exponential infection rate curve can materially affect current and future demand in several ways. First, if you are required to remain at home except for food shopping or medical care, there will be many people who will first use all available pantry and freezer stores in the home before risking exposure at local markets. Depending on the severity of the personal risk assessment, real or imagined, there will be lighter meals and conservation for many thereby decreasing current demand.
On the other extreme, in areas where the full-on arrival of the virus is still pending, mass waves of hoarding have begun. In simple terms, this is purchasing in the current period for future consumption and it dramatically disrupts supply chains while creating other disruptions both to current and future demand estimates critical to arranging for and maintaining local supplies. Near term surges in revenue for sellers comes back to haunt them with lower future demand as hoarded food and household commodities postpone future purchases. Maintaining constant employment in a surging supply chain is difficult and expensive for businesses who often, after the initial run on the shelves, reduce staff for extended periods.
Black swan events which are engulfing us now create extreme volatility, since they bring not only risk but uncertainty. Risky events have a probability that can be reasonably estimated and successfully handled, more-or-less. Uncertainty is random and very damaging to many supply chains. One thing we know for sure, China experienced very large losses in productivity, employment and business performance and the rest of the world is going to follow quickly. Many other economies in Europe and throughout the world are now voluntarily causing economic damage to their societies by shutting down interdependent businesses to enforce social isolation and save lives. Only wars come close to this kind of destruction of value.
There are many heroic actions taking place throughout the world today, acts of kindness and sacrifice, people running toward the risk at their own peril to save those threatened by it, and people simply showing up to work at some personal risk to restock shelves, keep banks open and perform all the services customers count on day in and day out. Those who produce, market and move the safe and abundant global food supply, which underpins all our hope for the future, are joining with the rest of society in these same heroic acts. Its like that all the time, but in these special times of challenge, thoughtful people come to realize it and understand with gratitude the difference you make.
