Bigger Than COVID-19: Three Things Affecting Global Agriculture

The coronavirus is a shadow lurking over every person and place on the planet. COVID-19 could have unified the world in a fight against disease, poverty, and health outcomes. Instead, it further inflamed and divided people in their own countries and across borders, exacerbating existing disruptions.

But despite its prevalence and pervasiveness in everything we do in our personal and professional lives, it’s not the most detrimental disruption for agriculture in 2020.

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Trade and Tariffs: Trade destruction in 2020 has led to unsettling uncertainty about demand for agriculture produce, equipment, and crop inputs around the world. Global year-over-year trade volumes fell 18.5% in the second quarter of 2020 following a 3% decline in Q1, according to the World Trade Organization. Full-year declines are expected to hover around 13%, according to the WTO, IMF, and other leading organizations.

But the underlying factors driving the drop in trade were percolating before the pandemic. Trade was already slowing down because of escalating political tensions, lower economic growth, and the 2018 trade war that began with a series of unilateral policy actions by the U.S. against China and other trading partners. While several affected countries filed complaints with the WTO, many retaliated with tariffs on a total of 8,073 products covering $127 billion of annual U.S. exports, of which agriculture commodities were disproportionately affected. Similarly, China’s exports saw a 14.5% drop to top destinations driven by lower U.S. consumption. Tariffs, of course, are the biggest barrier to free trade.

Consider that the pandemic might be intensifying ongoing trends such as nations’ quest to be less dependent on imports for food security and energy, and it appears that global trade paradigms are resetting into a new world order that will take years to evolve and settle.

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Supply and Demand Dynamics: Nothing new here except the ongoing price erosion for major crop protection chemistries due to oversupply from post-patent manufacturers. Simply, the global capacity and production is out of balance with demand. This has been a pervasive issue for the better part of the past decade, and this oversupply manifested in 2019 with supply channels filled to the brim with cheap inventory. This is a primary reason that agriculture production was uninterrupted in 2020.

Prices have continued to fall for much of 2020 as manufacturing economies incentivize production and exports to inject vitality into struggling national GDPs in the wake of the pandemic. Prices are at all-time lows, and inventories are at all-time highs with demand uncertain as producing nations recalibrate food production systems to respond to shifting consumer demand, trade pressures, regulatory challenges, and national priorities to restart sputtering economies.

Consolidation at All Levels: A reckoning is coming for manufacturers, import/export companies, farmers, and others in the supply chain. Businesses fail during recessions, and they will fall in this one, too. More than 225,000 businesses failed in the U.S. alone between 2008-2010, led by notable financial and insurance institutions. But they were not the only ones: publishers, utilities, chemical companies, and farmers large and small were forced to close because they were over-leveraged.

The same scenario is playing out today as liquidity becomes paramount in weathering the storm. The first notable casualty hit headlines in September when TerrAvion, a market leader in imagery and data management, filed for Chapter 11 bankruptcy protection and ceased all operations.

The good news: Disruption brings opportunities, and M&A activity could spike as cash-strapped companies unload assets to continue operations or pay off financiers.

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