Barnett and Company

Unprecedented disruption in US food supply chain

Stories abound regarding vegetable crops rotting in the field and milk being dumped in lagoons, while food banks report surges in demand and shortages of supply. The disruption from the coronavirus infestation has affected every aspect of our lives. But the dislocations in the US food supply chain has presented its own unique set of challenges, with retail prices for some food products spiking while wholesale prices plummet. What’s going on?

One of the true marvels of modern American life is our highly efficient food distribution system. Farmers produce huge quantities of perishable goods including meat, dairy and fruits and vegetables that are harvested and shipped on a “just in time” basis to processors, resellers and consumers. Temporary fluctuations in supply and demand are buffered through the use of cold storage, but in general consumption and production in US agriculture are remarkably closely matched.

Enter the coronavirus-induced shutdown of the economy, and of food service establishments in particular like restaurants, hotels and caterers. While economists expect aggregate consumption of food products to remain relatively stable, the mix and delivery mode is shifting dramatically toward home preparation. For farmers and distributors, it makes a huge difference, as many have specialized in supplying bulk consumers like restaurants and schools versus retail grocery stores.

Americans on average devote roughly half of their annual food budget to eating outside the home. With the forced closure or limited operations of restaurants and other institutional establishments, suppliers are stuck with large surpluses of perishable foodstuffs and no good way to redirect that surplus in the short run to the retail channel.

Dairy producers, for example, sell half of their cheese and 60% of their butter production to restaurants and industrial food processors, typically in bulk packaging not suitable for easy redirection to grocery stores. Shifting from 50 pound blocks of industrial cheese to one ounce slices in retail packaging, for instance, would require a significant investment in equipment. Likewise, converting from filling 48,000 pound tanker cars of liquid eggs into packing foam containers of shell eggs by the dozen is not economically feasible for most specialized producers. The result has been destruction of the surplus, as farmers plow under ripening crops, break unhatched eggs or dump surplus milk given that all available cold storage is full. Come what may, cows gotta be milked.

Meat producers have faced similar imbalances in distribution channels, but are also being confronted with an additional challenge: plant closures due to outbreaks of COVID-19 among workers. So far, at least 13 meat and poultry processing facilities have been idled and output slowed at other plants due to new workforce protection guidelines. Industry experts predict that the nation’s meat supply could be temporarily reduced by as much as 25% due to lack of processing capacity, possibly requiring the destruction of animals.

One obvious question arises: with so much food being wasted, why the acute shortages at food banks? Packaging issues for one, with limited capacity to handle bulk shipments. Also, cold storage capacity is typically limited at food banks. And many of these organizations are now experiencing a shortage of volunteers due to the virus as well. Advocates are proposing several innovative ideas like parking under-utilized refrigerated trucks on site at food bank facilities for temporary storage, but so far cost and logistical issues are complicating the response. 

Large producers have donated as much of the surplus as they can, but transportation is costly, and harvesting represents a significant additional cost on top of the lost crop revenue. For many farmers plowing under is the only feasible option. The Florida Department of Agriculture expects that 75% of the state’s lettuce crop and nearly all of its cucumber harvest will be destroyed.

Produce suppliers have been petitioning the USDA for assistance since March, but the agency response has been somewhat lethargic. Finally on April 17, a new $19 billion aid bill was enacted that includes $3 billion in support for food relief operations, but the actual implementation is still pending and is likely to have only marginal impact.

In general, the US food supply chain is resilient. However, given the magnitude of this most unprecedented disruption, adjustments in supply channels take time. And money.

Christopher A. Hopkins, CFA

Share on linkedin
Share on facebook
Share on twitter