Pandemic Demand Shock and the Effects on the Food Supply Chain

The Right Calories Potatoes
The seismic food demand shock caused by the pandemic has severely disrupted the food supply chain. Existing supply chain distribution channels are struggling to adjust to these sudden and unforeseen changes.

 

Toilet paper. It is, in so many ways, both the symbol and storyteller of the pandemic supply chain. We all know at least part of the story: consumers sheltering in place were gripped by fear that they would run out of toilet paper. Demand soared as people began to hoard. Limits were placed on how much could be purchased, further fueling demand. The harder it was to get, the more frantic people became.  

There was plenty of toilet paper to meet people’s needs. So why were store shelves empty? Hoarding behavior is only part of the picture. 

The Right Calories Rotten Fruit
The Right Calories Rotten Fruit

Consumers sheltering in place actually do need more toilet paper, because they are using it at home rather than at work. (Georgia-Pacific reports the average daily home use is about 40 percent higher than average.) The toilet paper US consumers buy is a different product (2-ply and plush, to be exact), sold through different distribution channels from the 1-ply institutional tissue. It is packaged differently (think huge rolls) and shipped on pallets, not in colorful 12 packs.

From toilet paper to the food supply chain, diverting products produced and packaged for one market to sell to another market is no simple task. Across the globe, we saw jolting images in the media of fresh produce being left to rot in the field while consumer grocery stores were getting erratic supplies and newly jobless people lined up for hours at local food pantries.

The Right Calories Chicken
The Right Calories Chicken

“Chicken is being hoarded just like toilet paper,” says Iowa farmer and Global Farmer Network board member, Bill Horan. In a time of uncertainty, chicken is a familiar food many homes would deem essential. Like toilet paper, chicken is sold differently into the two market segments, in this case consumers and food service. According to the National Chicken Council, meat department sales at grocery stores were up an incredible 70 percent (which meant processing plants were working overtime) in mid-March. At the same time, chicken farmers suffered the loss of nearly half their business when food service was essentially shut down across the country. That has chicken farmers spinning to keep up with dramatically different demand.

Many food products suffered from similar supply and demand shocks. Often, the issue is not that there isn’t enough product—it is getting the product in the hands of the folks who need it. As with all stories, there are two sides to this one: the issues of supply on one hand and demand on the other.

Demand

“The food supply in grocery stores, which works really well, is being pushed right now,” says Dale Rogers, professor of logistics and supply chain management at the W.P. Carey School of Business at Arizona State University. “The level of demand that the stores are seeing is probably not sustainable.” In fact, supermarket chains announced enormous spikes in sales: *Kroger reported a 30% surge in March. According to Black Box Intelligence, which tracks consumer behavior related to dining, consumer spending in grocery stores has started to stabilize—but is still up a whopping 16.6% over the same week last year.

Across the globe, the increase in consumer demand from grocery stores is only one piece of the picture. Food eaten away from home accounts for more than half of all food expenditures in the US, and has been steadily rising throughout Europe. The pandemic’s world-wide shutdown of restaurants and institutions caused a seismic shift in demand.

Tom Super, vice president of communications at the United States’ National Chicken Council (NCC) said, “Fifty percent of business virtually vanished overnight. It’s not just restaurants—it’s schools, colleges, sports arenas. That’s fifty percent of the chicken we sell, gone.”

Food service represents roughly half of all beef sales in the US, as well, which means half of beef revenues simply evaporated. The impact on the economy is staggering. In the US alone, beef sold $31 billion into food service in 2018. And it’s not just protein that is affected by the pandemic shutdowns: loss of food service demand is decimating produce sales. Smaller farmers who sell locally not only lose restaurant sales, they lose revenue generated by farm-to-table school programs and farmers markets.

The Right Calories Closed Sign
The Right Calories Closed Sign

Commodity products have their own pandemic-related demand issues, says farmer, Bill Horan. “With consumers sheltering in place, gasoline usage drops dramatically. Ten percent of all gasoline in this country is from ethanol, so now suddenly the ethanol market has collapsed, and it is a disaster. The price of corn has dropped from $4 to $3.”

Again, says Dale Rogers, “It’s really not that the supply chains aren’t working. It’s that we set our triggers and processes to deal with a normal demand.” No one knows how long these changes in demand will last. Even companies that could re-jigger their distribution channel processes are wary to do so for what could be a short-term need.

“In demand shock, if you turn on the factories to meet unanticipated demand, at some point it will fall back down and you’ll still be making extra,” says Dale Rogers. That extra, he says, is what ends up in the enormous secondary market—or, in the case of perishables, getting dumped. New government programs have emerged to divert wasted food to food pantries, while philanthropic organizations continue to play a crucial role in shifting food to where it is needed most. Together, efforts like that get food to the jobless and the hungry while ensuring farmers are paid for their crops.

Supply

Farmers and producers have continued tending land and livestock and can attest that those empty grocery store shelves are not about lack of food. They have literally tons of product normally shipped to food service that is now going to waste—while consumer demand and the need to feed a suddenly soaring jobless population, skyrocket.

The Right Calories Harvestors
The Right Calories Harvestors

“We have a huge surplus of grains and we are happy to sell them,” says Horan. “The input supply chain is fine in the US. We have fertilizer, herbicide, seeds. We have diesel fuel, and we have natural abundant rain. We look pretty solid. And in rural states, the pandemic is less of an issue. We’re going to survive and plant another crop.” The supply now is fine, says Horan, because corn is an annual crop, fully planned a year in advance and replenished annually.

The issue is getting food to the right places.

“Variability is the enemy of supply chain management,” says Dr Rogers. “Suppliers have triggers and processes that deal well with normal demand.” A sharp spike—or a change in where that demand is coming from—can cause all kinds of disruptions.

Transportation

Pre-existing vulnerabilities become more acute in times of supply chain disruptions. In the US, says Dr Rogers, “we’ve had a truck driver shortage for the past ten years.” The pandemic-induced need for more drivers caused a jump in transportation prices and a fall in capacity relative to demand.

On a global level, grounded planes and ports with newly restricted hours and staff are also causing some slowdowns and disruptions in moving the food supply around. This is of greatest concern to regions that import much of their food, like Africa, the Philippines, and the Persian Gulf.

Labor and shutdowns

Workforces are shrinking. Not only is there a loss of labor when people fall ill, but many workers are afraid to go to jobs in crowded packing houses. In many food industry sectors, these crowded conditions are for poorly paid jobs, meaning workers are potentially sharing the virus with other low wage earners. For this reason, the virus has spread like wildfire through warehouses and factories, causing complete, temporary shutdowns.

When a packing or processing plant must close for three weeks because too many closely-contained workers became infected, it creates a backlog of product that doesn’t enter the distribution channels. If that product is animals, they still have to be fed, and if it is harvested crop, it needs to be stored. Highly perishable product has to be dumped. All are clearly costly to producers, growers, and consumers.

The impact of these shutdowns on our food supply varies greatly based on the industry. A temporary shut down in a processing plant for produce or fast-growing livestock, such as chickens, might cause only a minor blip in availability to the public. That same closure in a meat packing plant can cause a more significant financial and logistical strain on the producer, who now has a backlog of mature animals that continue to need to be fed and tended.

Trade policies

As countries decide on their own approach to both curbing the spread of the virus and protecting their economies, they develop policies that may affect availability and pricing of crops. Some countries, like consumers, are panic buying (especially staple foods), others are loosening restrictions on food imports, and still others are halting exports of key staples.

Most countries are still scrambling to formulate policy as more information about the virus and its spread emerges. Many experts agree that the effects on food availability are likely to be temporary for most regions, and that poorest regions will be the hardest hit by disruptions in food supply.

The toilet paper lesson

While grocery store shelves are still fairly empty where toilet paper was once housed, a few weeks after the hoarding began, we hear relatively little about a lack of availability. Perhaps we are all working our way through the stashes we hoarded, or maybe we got accustomed to using less plush, but more available, 1-ply tissue.

Similarly, we may face temporary shortages of specific foods and items as suppliers adjust their processing, packaging, and distribution channels and face short-term facility closures. Consumers may have to adapt to different availabilities in the marketplace, and perhaps fewer choices, but it is not because there are food shortages. The issue is getting the food to all the right places, including both food pantries for the increasing jobless population, and grocery stores.

* Kroger is a US supermarket chain