We recognize that businesses operating in the food, beverage and agribusiness (FBA) sector are facing considerable challenges and stress as a result of the global COVID-19 pandemic. Understanding and addressing the rapidly changing implications of this pandemic has not been easy, but one thing is certain: the FBA sector has shown it is ready, willing and able to meet this challenge and do what is necessary to make sure that people are fed.
In this initial bulletin, we have focused on six key factors that have impacted FBA businesses in this crisis. We also intend to provide periodic updates as things evolve.
CHANGES IN CONSUMER DEMAND
COVID-19 is suddenly and significantly changing the way Canadians eat, and FBA sector businesses are playing a critical role in ensuring that Canadians continue to have reliable access to food. We have seen all levels of our FBA sector collaborating and working hard to fulfill the enhanced needs of customers.
Food retail and grocery have seen major increases in demand as consumers shift to eating more meals at home in response to social distancing mandates. Stockpiling behaviours by consumers have been observed in Canada and abroad, with packaged goods and other “convenience” foods experiencing particularly significant increases in demand. While stockpiling trends are likely to be a temporary phenomenon, Canadians are increasingly spending more time in the kitchen making meals from scratch and baking comfort foods. This may impact the long-term demand for a number of food products.
In response to these changes, some FBA producers are focusing on efficiency of outputs by minimizing product variations and delaying promotional plans. Many FBA businesses are attempting to redirect food products by repurposing products initially intended for restaurant supply towards retail customers. However, given the variance in packaging for these purposes and the short shelf-life of perishable goods, such repurposing is not always feasible and charitable donation is an alternative to consider. Ongoing profit losses that result may pave the way for future mergers and acquisitions opportunities.
Canadian grocery delivery services have seen substantial increases in overall volume and average order sizes since the beginning of the outbreak. Restaurants are also shifting to offer more takeout and delivery options, and existing delivery services are making it easier for customers to access their services by offering reduced fees. Consumers are becoming more comfortable with purchasing food products through delivery services. FBA businesses should anticipate that these behaviours may persist even after the COVID-19 pandemic subsides and may have a lasting impact on longer-term consumer patterns.
GOVERNMENT RESPONSE TO COVID-19 CHALLENGES
To date, there has been a small number of government support programs that specifically target the food industry. The Government of Canada is supporting Farm Credit Canada, a prominent Canadian agricultural lender, to provide an additional C$5-billion in lending capacity to producers, agribusinesses and food processors to assist farmers and processors facing financial difficulties. The federal government is also providing eligible farmers with an additional six months to repay outstanding Advance Payments Program loans due on or before April 30, 2020.
More generally, some provinces are implementing economic stimulus plans and other measures that may benefit FBA businesses impacted by COVID-19. Additionally, the federal wage subsidy program is expected to provide up to a 75 per cent wage subsidy for qualifying businesses for up to three months where such businesses have experienced at least a 30 per cent decrease in revenues due to COVID-19.
LABOUR SUPPLY ISSUES
While the Canadian food industry has not yet faced any significant labour shortages relating to COVID-19, food production and processing companies are concerned that they may not be able to maintain production levels if employees become infected with COVID-19 or otherwise need to isolate due to exposure from other employees. The federal and provincial governments are supporting employees who are required to self isolate, self-quarantine or otherwise abstain from going to work due to COVID-19 in various ways, such as loosening requirements for accessing governmental benefits, implementing job protected leaves and providing financial support.
Labour shortages can also threaten the transport of food products. Canada is already experiencing a shortage of truck drivers, and additional COVID-19-related absences may impact the ability to transport goods. In the U.S., limitations on daily driving hours for truck drivers moving emergency supplies, including food, have already been relaxed to mitigate this risk.
COVID-19-related restrictions that limit the ability for individuals to travel to and work in foreign countries have been threatening farm production in countries around the world. Many countries are reliant on large numbers of seasonal foreign workers to plant and farm crops, the absence of which may affect planting volumes directly or indirectly via decreased inputs in response to the concern that there will be an insufficient workforce for harvest. Shifting to domestic workers or decreasing production would cause corresponding increases in pricing. Canada has implemented a system to allow temporary foreign workers to enter the country provided such workers pass a health check and isolate for 14 days upon arrival in Canada. The government response to potential labour shortages in the food sector will continue to be monitored.
SUPPLY CHAIN VULNERABILITIES
In addition to labour shortages, other inputs required to supply food to consumers may be impacted by COVID-19. Grocers and government officials across Canada have maintained that the food supply in Canada is not facing a shortage. However, for those operating in the food industry, there are certain supply chain risks that should be anticipated and prepared for given the uncertainty with regard to progression of the COVID-19 outbreak and the extent to which restrictions will be enhanced as a result.
In China, where COVID-19-related restrictions were particularly extensive, challenges have arisen with respect to agricultural practices. Since China’s Hubei province, the epicenter of the COVID-19 outbreak, is the country’s largest fertilizer producer, the decreased output has generated shortages in labour, fertilizer and seeds, which have driven a production shift from high-value crops to rice. China has made efforts to encourage planting to proceed on schedule, such as reducing check point and toll booth delays for vehicles transporting agricultural products. At a global level, there are concerns about decreasing production for fruits and vegetables and food loss due to transportation issues. The Canadian agriculture and fertilizer industry still appears to be well positioned to provide inputs as required for the upcoming planting season, but increases in restrictive measures that impact transportation could present issues.
The COVID-19 outbreak demonstrates vulnerabilities in labour-intensive supply chains and reliance on international trade. The resilience of global supply chains may be tested if countries become increasingly focused on their internal food supplies and limit exports. Such issues may cause FBA businesses to prioritize resiliency over profitability by increasing reliance on domestic suppliers and investing in technology-focused supply chains.
To date, a limited number of countries have implemented policies banning the export of certain domestically produced food products amidst COVID-19 concerns. Kazakhstan has temporarily banned exports of wheat flour and Vietnam has temporarily banned exports of rice. Each country is a significant global supplier of the respective banned export. Russia is also planning to limit grain exports until June of this year.
While the global supply of grains and oilseeds remains high, we are seeing increasing prices for staple grains internationally. Price increases can be attributed to factors such as delays in adjusting to shifting demand, labour shortages impacting production and transport, stockpiling by importing countries, export restrictions, and transportation constraints.
There is no current evidence to suggest that COVID-19 is being transmitted through food. We are continuing to monitor developments relating to COVID-19 and the impact on food safety. In light of COVID-19, the Canadian Food Inspection Agency (CFIA) is prioritizing critical activities and temporarily suspending low-risk activities. In order to respond to labour shortages and increased demand, the CFIA has already called recently retired inspectors back to duty. The CFIA has also provided guidance on COVID-19-related concerns raised by the food industry.
Beyond food production and processing, businesses at the retail level are also expected to take steps to reduce transmission of COVID-19. Recent guidance from the British Columbia provincial government states that while retail food and grocery stores are not subject to the current prohibitions on large gatherings, appropriate physical distancing must still be maintained in stores. The guidance makes recommendations relating to cleaning and hygiene protocols, use of carry-out bags rather than reusable bags, the sale of bulk items, and physical markers and other mechanisms to maintain distance and crowd control.
How organizations restructure operations, address the strains on their supply chains and innovate to meet the challenges presented by this crisis will help to define the trajectory and success of the FBA sector as we come out the other side. Until then, please stay safe.
For further information, please contact any member of our Food, Beverage & Agribusiness group.
Please visit our COVID-19 Resource Centre to learn more about how COVID-19 may impact your business.
Blakes and Blakes Business Class communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. We would be pleased to provide additional details or advice about specific situations if desired.
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