• Rabobank Australia Food & Agribusiness Research and Advisory GM Tim Hunt
    Rabobank Australia Food & Agribusiness Research and Advisory GM Tim Hunt

In early January, news came from China of a new coronavirus outbreak. A wet market in Wuhan is believed to have been the origin and as it stands, more than 40,000 people are infected, more than 1000 have died and global economic markets are starting to feel its effect.

Coronavirus (COVID-19) is part of a large family of coronaviruses found in animals and humans. Infections from these viruses can range from a common cold to severe diseases like Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS).

As at 10 February, 40,554 people are infected globally, up 16,254 people from 24,554 on 5 February. According to the World Health Organisation (WHO), in China on 10 February, 40,235 people are infected, 6484 are classified as severe cases and on 11 February the number of people killed by the virus surpassed 1000. There are 319 cases outside of China in 24 countries with one death recorded.

Wuhan is in lock down and the majority of border crossings into Hong Kong are now closed, WHO said. China has responded in several ways, restricting travel inside China, discouraging large gatherings, including for food service and out-of-home dining, and extending the national holiday.

Australian Industry Group (AiGroup) GM, International Competitiveness Louise McGrath told Food & Drink Business that impacts on different industries will be a delayed shock because of the timing of the outbreak.

“Everyone expects a period of quietness at this time of year due to Chinese New Year. If it had happened at any other time of year the impact would be much more noticeable,” she said.

Where impact is being felt

One of the industries most dramatically affected is live animal export, particularly seafood. The Seafood Trade Advisory Group (STAG) said the last seafood airfreight cargo accepted to China was 26 January, with no landings since from Australia, New Zealand and the rest of the world.

STAG said: “There is widespread dysfunction within China at the moment, with road closures and inability to process paperwork/export documentation etc. due to an increasing number of workers staying home. 

“Freight in and out of ports and road transport are heavily affected, with ongoing delays expected.  A high level of administrative dysfunction will have significant effects on all trade partners.”

The national body representing the seafood sector, Seafood Industry Australia (SIA) said it was a “rapidly evolving situation” with the loss of orders impacting many in the industry, from fishers, to exporters and freight companies. On 24 January it raised its concerns with the Federal Government but it remained unclear where trade would return to normal.

McGrath said: “Live exports are the most affected at this stage. Feedback to AiGroup is that online businesses and processed foods haven’t significantly decreased, yet.

“While some airlines have cancelled flights, others are still operating in and out of China. We’re not hearing complaints about a lack of aircraft or access, it is about the drop in orders.

A spokesperson for the federal agriculture department told Food & Drink Business that many Chinese cities are experiencing widespread impacts on businesses, including the closure of restaurants, wet markets and the food processing sector, but supermarkets remain open.

“This is a positive sign for the food and beverage sector, particularly packaged and processed foods,” they said.

The department anticipates staff will slowly start returning to work following the self-quarantine period, but transport restrictions could impact staffing capacity at businesses, including food processors.

“Export bans have not been imposed. In the short term the greatest trade impact on agricultural commodities is for high value fresh food and daigou trade, due to downturns in demand for product and reduced flights to China,” the spokesperson said.

A2 Milk Company CEO Geoffrey Babidge said the company hadn’t had any material changes to its operations since the outbreak. The company announced an assistance package. With its strategic partner, China State Farm Holding Shanghai Co., a2 Milk donated ¥5 million (AU$1.06 million) to the Shanghai Red Cross and the same amount of a2 Milk products to front line medical teams and affected families.

It also pledged NZ $1 million (AU$951,000) to researchers in Australia playing a key role in developing a vaccine, including the Peter Doherty Institute for Infection and Immunity.

Australian Food and Grocery Council acting CEO Dr Geoffrey Annison told Food & Drink Business the council was mindful of the possible impacts the virus outbreak could have on Australian exports and imports of food and grocery products, but the scale of impact was still unknown.

Annison said: “It is our understanding that China is currently experiencing supply chain challenges with closures on some domestic national highways and cancellations of airfreight into and out of China. This is affecting the sales of perishable goods and sales through cross-border e-commerce.

Annison reiterated the WHO message that there is no evidence coronavirus could be transmitted through processed food products. “Indeed, it is known that food processing conditions are generally very effective at destroying viruses,” he said.

The AFGC would work with industry to help navigate and mitigate issues that arise as a result of coronavirus.

How times have changed

Parallels have been drawn between the SARS outbreak in 2003 and this coronavirus (COVID-19). But Rabobank Australia Food & Agribusiness Research and Advisory GM Tim Hunt said much has changed in the intervening years.

In 2003, around 5000 people were infected with just under 350 people killed. It also wasn’t contained, with 1755 cases in Hong Kong and just over 1000 infections around the world, Hunt said. The coronavirus has spread more widely than SARS, it has occurred at a different time of year and the Chinese food service sector is roughly 10 times the size it was in 2003.

But overwhelmingly most importantly, in terms of food and agriculture, Australia is far more exposed to China in 2020 than in 2003. “In 2002, Australia sent eight per cent of its ag exports to China, in 2019 it was 28 per cent of our food and ag exports, and the range of products much broader and much more of it to be consumed in China

"Add to that the links between our economies in education, tourism and investment, and we have a very different environment in which we will see impacts," Hunt said. 

The current impacts on F&B and agriculture are caused by measures to stop the disease from spreading and consumer behaviour. Regardless of when coronavirus is contained, Hunt said it will “almost certainly” have a larger impact on food and beverage industries than the global SARS epidemic in 2003 – including in Australia. He sees impacts coming in two rounds.

“The first-round impacts are already being felt. Industries that rely heavily on selling into the food service market in China, especially if those items are perishable and require quick distribution. So rock lobster shipments from WA and New Zealand have all but ceased in the last couple of weeks. New Zealand mutton shipments are heavily impacted. They're sold frozen into the market but orientated to the food service industry. Chilled meat shipments for food service is a risk category, even though it only accounts for about 10 per cent of our beef shipments.

“Wine is not perishable, but sales will be impacted for those that sell to the food service sector. Other sectors might increase like vitamins and health supplements and foods you eat at home, like instant noodles and other processed foods.

“The second round of impacts – and hopefully we don’t get there – is that if the virus continues for many months, becoming extensive and enduring, then we will see a drop in wages, then a drop in the sale of premium F&B. It will go beyond logistical disruptions and food service sales to eventually impacting the consumption in general of meat, dairy, grains and seafood.”

In the event coronavirus has second-round effects, the currency exchange rate would act as an “important stabiliser” for Australian agricultural exporters, with the Australian dollar likely to depreciate significantly as the market responded to slowing economic growth and rising risk concerns. And this, Hunt said, would “somewhat offset” any fall in global commodity prices when expressed in local currency terms.

Potential impact on global markets 

For Hunt, the critical question of how much the negative impact of coronavirus could shift the global markets has four components. “Firstly, and this comes quite soon, is the end of the extended Chinese holiday, seeing when people go back to work and how they behave. Secondly, the government restrictions on gatherings, so groups eating together. While that continues there will be impact on those supplying the food service industry.

“Thirdly, when the virus begins to slow. Until that starts, we won’t see much relaxing. SARS took 3.5 months to slow but was then capped at four months.”

While there have been reports that new case numbers are levelling out, questions are being cast on the integrity of the figures as reports of medical teams running out of testing kits surface.

“Finally, looking at whether it spreads to other countries. If it spreads to Vietnam, or Indonesia or South East Asia generally, then we will see the same impacts but in a second very large marketplace for our products.

“Given what we have seen on the ground, along with news received from major chains – for example, the closure of stores by Starbucks, Haidilao, McDonald’s, and Yum China – potential revenue losses for both retail and foodservice for the Chinese New Year week could range from 20 per cent to 80 per cent,” Hunt said.

Yum China – parent company of Pizza Hut and KFC in China has shut around 30 per cent of its Pizza Hut stores. It is the largest pizza chain in China and is four times the size of the second largest. At the end of 2019, China was importing 110,000 tonnes of cheese, the majority of which is imported. Hunt said: “You see a lot of dairy exporters around the world have invested heavily in production capacity and markets to grow their market share.”

A loss of between US$31 billion to US$124 billion across retail and foodservice, could be expected, he said.  

While Rabobank says a quick and effective containment of the virus could lead to a rapid bounce-back, the longer the virus is uncontained beyond March, the more extensive, sustained and structural the impact will be on the F&A chain.

Wine showcase postponed

Australia’s largest fine wine showcase in China was set for the TopWine China (TWC) Fine Wine Showcase in Chengdu in March. More than 100 brands were to be showcased with masterclasses in food and wine pairing, winemaking and viticulture.

TWC and the China Food and Drinks Fair have been postponed.

In the year ending September 2019, Australia’s wine exports to China reached a record value of $1.13 billion – an increase of 19 per cent on the previous year.

In a statement to Food & Drink Business, Wine Australia said: “We anticipate that coronavirus will have an impact on wine sales, particularly to China, but at this stage it is difficult to predict the degree of that impact. Also, our first concern is people’s well-being in China and elsewhere and there will be time down the track to consider other impacts.

“Obviously, the China market is a very important one for Australian wine and we look forward to being in the market. We will continue to monitor the situation and be guided by the advice provided by the Australian Government.” 

Rabobank said on-premise consumption of wine in China in 2019 accounted for around one third of total wine sales. “Sales into this channel are expected to fall in the short-term while restrictions on group dining remain in place. That said, volumes of wine sold via e- commerce are likely to rise as distributors attempt to push more product into, and invest more money in developing, this sales channel,” it said.

The sentiment regarding industry recovery once the virus is contained is mixed. There are those who believe there will be a bounce back like there was after the SARS outbreak. But others are more cautious.

A report in The Sydney Morning Herald this week noted the Baltic Dry Index, which tracks freight rates for the world's largest dry bulk carriers and is regarded as a bellwether for international shipping activity. It is now at all-time lows, having dropped 83 per cent since its peak in September 2019.

A range of Austrade programs are planned for China this year, which may now be more useful than ever as industries recover from the market disruption. A Festival of Australia event scheduled for August is still set to go ahead.


Commodities update (from Rabobank)

Rock Lobster – likely to be the most exposed sector, with 95 per cent of sales going to China. While rock lobster sales from WA have ceased for now, fishermen can leave the lobsters in the ocean and catch their quota later if quota windows allow.

Red Meat – short-term disruption is likely given logistical disruption and reduced eating out by Chinese consumers. The general shortage of protein in China as a result of African Swine Fever is still expected to result in ongoing strong demand from China once the short-term impacts of coronavirus are overcome.

Dairy – at this stage, limited first round impacts as most of what is shipped (i.e. powders and infant milk formulas) have a good shelf life and are consumed at home. That said, cheese consumption could be impacted as it is mainly used in food service (for burgers and pizzas).

Sugar – very little disruption is expected to impact sugar trade flows, processing and consumption. But indirectly, the dip in the oil market – associated with concerns on the impact of the outbreak on global growth – could push Brazilian millers to produce more sugar this season which would lead to a softening in global prices, and ultimately, Australian prices too.

Horticulture – Fortunately the cherry industry had air freighted most of its crop to China before the virus hit, something that would have been highly problematic a month later. In the next two to three months the main threat to export fruit and vegetable crops will be logistical, with demand from Chinese consumers for quality imported fresh produce not expected to fall from current levels.

Grains – limited impacts are foreseen both initially and in the event of a second-round phase.

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