Strong export position plays tricks on Flemish agricultural sector in corona time

Economic opinion

The corona crisis hasn’t been pretty for the Flemish agricultural sector. The subsectors strongly focused on export and food services have been hit especially hard by the contraction in the economy, lower demand, increasing protectionism and a slew of logistical problems. Many subsectors are looking for creative solutions to alleviate the temporary shock. In the longer term, these solutions may not be sufficient to address the many challenges present. Good policy can mitigate these challenges. Above all, a stimulating policy to improve access to current and new markets at home and abroad appears to be desperately needed.

That the coronavirus is having an impact on the Flemish agricultural sector is obvious. However, the magnitude of the impact and the recovery period for the various subsectors are determined by a diverse set of factors.

Dependence on exports

Global lockdowns from spring 2020 onwards are expected to cause world trade to fall by 13-32% (WTO) in 2020. This decline is due to lower economic growth, but also to logistical problems such as additional border controls, no return cargoes, insufficient staff for loading and unloading ships, and maritime containers not returning on time. These logistical problems play an important role in the trade of agricultural products. The more global the trade of a certain agricultural product, the greater the impact. Strong export-oriented sectors in Belgium are, for example, potato processing, the pork sector, the poultry sector and the dairy sector. In 2019, 90% of the 2.2 million tonnes of frozen fries produced in Belgium were destined for export, one third of which were sent outside the European Union.  This makes us the world's No.1 exporter of frozen fries. The pork and poultry sectors have a degree of self-sufficiency (i.e. ability to supply one’s own needs) of 249% and 230% respectively, with a very specific intra- and extra-European marketing chain for certain parts. The powdered milk market is also a very globalised market. The impact of the coronavirus crisis on these sectors is therefore considerable.   

On the other hand, we have to conclude that price setting in sectors that are more focused on the domestic market, such as beef, favoured producers and that there was less competition in our domestic market from Southern European fruits and vegetables in the first months of the European lockdown.

Sales channel

Ease of access to the market is the determining factor regarding the magnitude of the impact of the coronavirus crisis and the course of the recovery period. The impact of the crisis and the expected duration of the recovery varies across various agricultural activities (see Figure 1). We focus on a few notable subsectors. 

A striking example is the Flemish decorative plant cultivation sector, where normally an average of 40% of annual turnover is realized between 15 March and 10 May (the period of the lockdown). For certain floriculture products, turnover in this period rises to more than 80%. That turnover largely disappeared this year. After the opening of the garden centres in the Netherlands and abroad, sales of certain floriculture products, such as patio and balcony plants, went very smoothly again.

The cessation of economic activity in the hospitality and events sector ('foodservice') also affected many other sectors. The (temporary) extra sales through retail did not compensate sufficiently for the lost event-related sales. Even more so, sales to the foodservice sector are still lagging behind for potato products, dairy products, meat and poultry, eggs, frozen vegetables, etc. Large events are not (yet) possible, and so the typical sales of our Belgian fries at festivals, for example, also fall by the wayside. There was some compensation via the sudden interest in consumers obtaining local food directly from farms.  

 

Creative solutions

As a reaction to this enormous crisis, it is possible to temporarily stockpile. Such market interventions also support prices. The problem with building up stocks is that storage involves extra costs. It also prolongs the crisis as stocks return to the market sooner or later, putting new pressure on price formation. In the potato sector, the processing of potato stocks under contract was largely honoured, but was postponed, resulting in extra storage costs, possible loss of quality for the potato grower and extra storage of the end product at the processor. 550,000 tonnes of potatoes found an alternative outlet, mainly as animal feed, but this was done at rock-bottom prices. The expectation is that the sale and pricing of loose potatoes will remain difficult at least until mid-2021. In the poultry sector, fresh breast fillet, the most yield-determining part of the broiler chicken, was often frozen because of the more difficult market situation. However, frozen breast fillets that will return to the market in the coming months will have to compete with cheap imported fillets from Brazil and Thailand, among other countries.

Persisting uncertainties

The agricultural sector has clearly been looking for creative solutions to deal with the coronavirus crisis. The above developments take place against the background of uncertainties such as the further evolution of the pandemic and related measures, the permanence (or otherwise) of more protectionism, chauvinism and food nationalism, the economic consequences of possible recessions and a changing consumption pattern.  Above all, we must not forget that, in addition to corona, there are many other market influences in the agricultural sector that can have a mitigating or reinforcing effect.

The imminent (no-deal?) Brexit is already making itself felt in certain sectors. After all, accounting for 10% of our exports, the United Kingdom is an important trading partner for many agricultural products. In the pork farming sector, moreover, the all-pervasive African swine fever is shaking up the global market thoroughly. As a result, European exports are hampered and there is a major shortage of pork products in China, which accounts for half of the world's pork consumption. 

To support the sector, many measures have been taken to create some extra breathing space for companies in the short term, such as the emergency fund for the floriculture and potato sectors, the nuisance premium, and support from the financial sector via the bank plan. In the longer term, promotion and support can help the sector regain access to certain export markets or to tap into new sales channels at home and abroad.  

Disclaimer:

Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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