COVID-19 Exposes Vulnerabilities in the Global Food Supply Chain

COVID-19 Exposes Vulnerabilities in the Global Food Supply Chain

Executive Summary

  • The COVID-19 pandemic has upended the food and beverage industry, reducing its operational capacity in production, processing, packaging, and distribution. It has caused a shift toward a greater need for efficiency in production amidst the long-term realities of staff capacity shortages and an unpredictable regulatory environment. 
  • Consumer behavior has transitioned from demanding prepared food purchases consumed on-the-go, outside of the home, to individually packaged food products consumed at home. This has created a window of opportunity for plastics manufacturers but has reversed course on ridding the environment of single-use plastics.
  • The uncertainties of virus transmission have led many countries to adopt food protectionist policies, which has disrupted end-to-end supply chain continuity. It has increased the global price of food and beverage products and has made the global food supply more inaccessible. 
  • Reductions in passenger air travel have impacted air freight considerably, the method by which most perishable products are transported. Air freight capacity has declined over 80 percent on routes between Europe and Latin America.
  • In the short term, organizations operating in the industry must continue to adhere to local health measures, even at the cost of maximum efficiency, and work with risk monitoring tools to understand the impact of the outbreak on their supply chains. 
  • The pandemic has exposed the vulnerabilities of an industry historically reliant on manual labor. In the long-term, companies can introduce more automation and robotics technology in their supply chain to address labor shortages to mitigate the impact of future crises. 

Introduction

COVID-19 has impacted the entire food and beverage (F&B) supply chain, from farm field to consumer. It has upended the sector’s operational capacity in its entirety, including production, processing, packaging, and distribution. Though this is not the first global health pandemic to occur, it is taking place in a contemporary context marked by unprecedented increases in population size. As such, demand for large volumes of products has put enormous amounts of pressure on the F&B industry. 

COVID-19 has refined the pressures, shifting toward a greater need for efficiency in production amidst the long-term realities of staff capacity shortages and an unpredictable regulatory environment. This shift has exposed deficiencies in the resilience of the sector. It has highlighted the industry’s overreliance on manual labor and, as such, has supported the argument that the industry needs a higher prioritization on automation. 

Consumer and purchasing behaviors have been heavily influenced by the COVID-19 pandemic. Shifting trends in this space have led to unanticipated and unparalleled shocks in the industry. New operating procedures, often succeeding infection outbreaks, have led to plant closures and labor reductions. Limited production and output have been compounded by curtailed consumer spending, brought on by an impending global recession, increasing unemployment rates, and a general uncertainty of the sourcing landscape. At the same time, the shuttered restaurant industry has led to decreased demand for wholesale products. This, augmented by labor capacity shortages, has led to food losses, inefficiencies, and waste. Though food shortages have been largely avoided on a global scale throughout the crisis, systemic weaknesses in F&B supply chains have disclosed vulnerabilities for many companies operating in this sector. 

This Everstream Analytics Special Report highlights the impacts that have been experienced by the F&B industry during the COVID-19 pandemic thus far. It underlines the vulnerabilities of the industry that have been exposed as the result of the pandemic. This includes an overreliance on in-person, manual labor from farm harvest to food processing facilities. The report also calls attention to an inadequate focus on climate-controlled storage, transport, and preservative technologies. This, compounded by an increasing consumer demand for year-round access to fresh products, has led to a high dependency on expensive air freight, the cargo transport means most impacted by the virus. Like other industries, a tendency for companies operating in F&B to engage in single sourcing has disrupted business continuity during outbreaks. The COVID-19 pandemic has exposed the need for greater efficiency and adaptability vis-à-vis automation and diversified sourcing in the F&B industry. 

Consumer Behavior and Packaging Shifts

Prior to the pandemic, the F&B industry was tasked with adapting to the increasing number of in-transit consumers and the associated demand for prepared, ready-for-consumption products in spaces outside of the home. This aligned with broad global trends, such as a more urban, integrated workforce with a higher per-capita income. The subsequent shift to remote work and home lockdown orders have upended this trend. Though it is not clear whether this disruption has permanently reversed such behavioral trends, these ‘new norms’ are likely to remain for the foreseeable future. 

There is a simultaneous, consequential shift toward individually packaged F&B products, such as non-perishable, shelf-stable foods. These products frequently experience an uptick in consumption in times of crises. Aside from being long-lasting and providing a sense of stability in uncertain situations, their production and packaging processes are perceived as more sanitary. A higher volume of packaged foods during the COVID-19 pandemic has, however, led to a resurgence in single-use plastics. To reduce infection transmission, the F&B sector has regressed on its previous strides toward ensuring environmental sustainability. Starbucks, for example, reversed its initiative which encouraged customers to bring and refill their own cups. Popular U.S. grocery store chain, Trader Joes, banned its once-coveted reusable bags for the entirety of the pandemic. 

During Singapore’s eight-week lockdown, for example, an additional 1,470 tons of plastic waste was generated from takeout packaging and food delivery alone. Bangkok alone consumed 62 percent more plastic in April 2020 than it did in the same month of 2019 – mostly comprised of non-recyclable, contaminated food packaging. Unfortunate as this may be, the reversion has led to a new opportunity for manufacturers of plastics products. Plastics producers were exempt from mandated factory closures, even at the height of the pandemic, as their products were deemed essential to the healthcare sector. This allowed many manufacturers to maintain normal, full operational capacity, allocated to other sectors such as F&B. LyondellBasell, one of the world’s largest producers of versatile plastic resins used for packaging, reported that consumer-based demand for packaged food had risen by approximately 30 percent. INEOS Styrolution, a global styrenics supplier for many daily packaging products, reported an increase in polystyrene foam products used for supermarket meat trays and egg cartons. Milan, located in Lombardy, the Italian region hardest hit by COVID-19, continued its innovative manufacturing of polyurethane throughout the pandemic. Cannon S.p.A, leading expert in plastics processing technologies, reported having no delays or negative impacts on production. Similarly, polyurethane machinery manufacturer Ekosystem s.r.l. reported experiencing no negative repercussions on operations. 

Plastic trends have all but assured business continuity for packaging suppliers during the pandemic. Thus, industries and companies which rely on packaging solutions to distribute their goods should have little concern for financial impact to this aspect of their supply chain operations. 

Plant Closures and Labor Reductions

Like other industries, F&B has also experienced operational disruptions from plant closures and reduced labor. Social distancing regulations and disease outbreaks in production, processing, or packaging facilities have decreased productivity, if not halted output altogether. 

Fruit packing or meat processing plants, for example, typically require workers to operate in close quarters to achieve maximum operational efficiency. Meat processing, much more labor intensive and less automated work, experienced considerable disruption to its supply chain from COVID-19. In the U.S., meatpacking and poultry processing plants became hotspots for virus transmission, leading to a panic over relative meat shortages. Prolonged working hours, generally 12-hour shifts, and frequent community contact among workers in the industry contributed to this. In the U.S., as is the case in many other countries, seasonal workers operating in these facilities reside in congregate housing for the job duration. For many of the undocumented migrants, congregate housing arranged by the company is the only option. As of May 31, 23 U.S. states reported COVID-19 outbreaks in meat and poultry processing facilities, totaling 16,233 cases across 239 facilities since March. The Centers for Disease Control and Prevention (CDC) reported that, during the same time period, 9 percent of workers at meat and poultry processing facilities in the U.S. had tested positive for the virus. 

In June, in the span of just one month, 11,000 positive COVID-19 cases were reportedly tied to three companies: Tyson Foods, Smithfield Foods, and JBS. Tyson Foods, the largest meat processor in the U.S., has since implemented strict operational protocols to prevent another wave of virus transmission. These regulatory measures, however, require that a considerable portion of the labor force remain at home. Despite the immense amount of effort and investment in safeguarding workers at these facilities, outbreaks continue across the U.S. and elsewhere. 

Meat supplies in U.S. grocery stores are expected to shrink by as much as 35 percent, with prices spiking as much as 20 percent, at the end of 2020. Grocery stores have largely prevented a significant food shortage up until this point. However, that is due to meat and other food surpluses already in the supply chain at the start of the pandemic. With an anticipated uptick in cases this winter season, coinciding with flu season, it is expected that current production rates will be insufficient to meet the demand. This is especially concerning as U.S. states and other countries begin reopening businesses, including restaurants, that will demand wholesale F&B products. 

Plant closures have reverberating effects on agricultural economies. Farmers who supply plants have had a surplus of products, but no company able to purchase and process them. The U.S. National Pork Producers Council estimates that current reduced plant capacities have led to a pork backlog of 170,000 hogs per day. Many products are perishable if not processed and packaged in an appropriate timeframe, leading to immense financial losses for farmers. Without temperature-controlled storage or other advanced food preservation techniques, the quality of the products quickly deteriorates. Though hogs are not considered perishable, when they remain on farms for too long, they become too large to be processed by harvest facilities. It is estimated that up to 10,069,000 market hogs will need to be euthanized because of production deficiencies from the pandemic. Farmers are a critical link in global food supply chains; without their products, the entire network collapses. After a harvest is lost, many farmers, particularly those in developing countries, are unable to recover from their losses. 

Food Protectionism Trade Policies

Restricted food trade policies are another consequence of the COVID-19 pandemic that has hurt not only farmers, but the entire global food supply chain. The uncertainties of virus transmission at the onset of the pandemic led many countries to promptly adopt food protectionist policies. On the one hand, restricted export policies were abruptly passed as a mechanism to ensure domestic food supplies and prop up domestic farming at once. On the other hand, fears of transmission vis-à-vis imported food and beverage items led to isolationist policies which all but cut off certain aspects of the global food supply chain.

These measures are not limited to the early days of the pandemic. In September, China banned seafood imports from Indonesian exporter PT Putri Indah after discovering traces of virus particles on the packaging for frozen hairtail. In October, China implemented restrictions on seafood imports from Russia for the same reason. China also suspended seafood landings from two Russian vessels, fishing trawler Vladimir Starzhinsky, operated by Kamchatka-based Roliz, a member of Norebo Group, and transport vessel Chrystal Africa, owned by Vladivostok-based Trans Wind Flot. China accounts for 60 percent of Russia’s seafood exports. In 2019, this accounted for USD 3.27 billion (EUR 2.77 billion). Many anticipate that disruptions to the normal global food supply chain will amplify the initial shock of the pandemic for domestic economies. Food policy experts at the World Bank Group believe that, all things constant, the global export supply of food will decrease between 6 to 20 percent and global food prices will increase by 2 to 6 percent because of the pandemic. When factoring in import and export restrictions, the impact factor increases by 3, with global food prices expected to increase by 18 percent. 

Food protectionism policies implemented during the COVID-19 pandemic has prompted many companies to consider a more flexible, multisource approach to F&B supply chains. Much like the pre-pandemic move to question the risks of overreliance on single suppliers in industries like manufacturing and high-tech, so too is the F&B industry now beginning to measure the vulnerabilities of single sourcing. If a company’s sole supplier suddenly experiences a virus outbreak in their facility, the company will be faced with total loss of product. If, on the other hand, a company disperses its activity amongst several suppliers in different parts of the world, it will be less vulnerable to unpredictable shocks, such as virus outbreaks or health regulations to prevent an outbreak. 

This shift will coincide with, and be heightened in importance by, an increased consumer demand for product traceability. This has been an increasing trend in the F&B sector pre-pandemic, brought on by a shift toward wellness and ethical consumption in many parts of the developed world. With the onset of the pandemic, many consumers demand increased transparency about which regions their F&B products were sourced from, processed, and packaged. Though COVID-19 transmission through ingestion has not been proven definitively, consumers are less likely to purchase a product that originated in a region marked by high virus transmission, so called ‘hotspots.’ For example, over 40 percent of Americans reportedly will not purchase products from China after the pandemic due to the country being the origin of the outbreak. Though the U.S. is a hotspot itself, the perception that some Americans have of China as responsible for the pandemic will influence their future purchasing habits toward other countries of origin. Companies can avoid losing this customer base by pointing to alternative sourcing locations. In doing so, products will be better perceived and trusted by fearful consumers, no matter how unjustified the fears may be. 

Transportation and Logistics Impacts

Though not unique to F&B, COVID-19 has generated widespread complications in freight transportation that have impacted the sector immensely. Food products are transported by three main methods. This includes bulk shipping on ships and barges, container shipping on boats, rails, and trucks, and air freight. 

The logistics impact of the pandemic varies considerably based on product. For example, a product like cereal is often shipped in bulk while meat and dairy products are typically shipped in refrigerated containers. The Organisation for Economic Cooperation and Development (OECD) has reported that bulk shipments have experienced little to no reportable disruption from the pandemic. Container shipments, per the OECD, are down 8 percent from this time last year. Air freight has been upended entirely, with capacity declines of over 80 percent on routes between Europe and Latin America. Air cargo represents less than 1 percent of all cargo shipped annually. However, the value of goods shipped by air represents 35 percent of the value of all goods shipped annually.

Food products shipped by air are those deemed highly perishable. Prior to the pandemic, consumer demand had shifted toward accessing all products, in all seasons. This behavioral shift had increased the need for international air freight, as the availability of certain products varies by region, climate, and season. Miami-based freight shipping company, Hellmann Perishable Logistics, reported that exports of Scottish salmon to the U.S., and exports of U.S. cherries to the UK are two of the most in-demand year-round trends. Seafood exports moving from Scotland to Asia have risen more than 400 percent since 2007. From developing countries, the main exports shipped by air tend to be products like fresh fruits and vegetables. Delta Cargo has reported similar trends of year-round demand for South American exports of asparagus from Mexico and Peru and blueberries from Peru and Chile. 

Given the perishable nature of these products, COVID-19 disruptions to transportation continuity have resulted in unprecedented product losses. Between 45 and 50 percent of air cargo travels in the bellies of passenger aircraft. At the onset of the pandemic, most international passenger flights were grounded to prevent the spread of the virus. Belly capacity for international air cargo shrank by 75 percent in April compared to the year prior. By June, more than 1 million flights had been canceled. Many cargo flights had replaced their normal load of perishables with medical supplies such as personnel protective equipment (PPE) and ventilator machines to fill the inventory gaps in the most overwhelmed health facilities. Though it continues recovering at a slow pace, air freight remains at 22 percent below this time last year. 

In response to low air passenger demand, many airlines have begun transporting cargo in the aircraft cabins, using passenger aircraft for cargo only flights. Etihad Airways Cargo, for example, has dedicated a fleet of Boeing 777 freighters to ensuring the continuity of vital imports into the UAE including fruits, vegetables, and meat. Each trip allows for 12 lower deck pallets and four containers, carrying up to 45 tons of payload per flight. Similarly, in March American Airlines operated its first cargo-only flight since the 1980s, completing two round trips between Dallas Fort Worth International Airport and Frankfurt Airport. 

Looking Forward

Generally, the global food supply chain has shown resilience in the face of unanticipated challenges. However, farming labor shortages, continued plant closures in the food processing and meatpacking sectors, and air freight capacity declines will continue to present obstacles for the F&B industry. Food processing and packing facilities must adapt working processes to maintain the health of the workers, even at the forfeiture of maximum efficiency. Disregarding safety precautions established by global health experts is likely to do more harm than good for production. Governments must avoid implementing food protectionist policies that will only increase domestic prices and deplete domestic supply. Experience shows that an open international trading environment ensures stability in times of crises. In this case, ensuring the free flow of food and beverage products is critical in avoiding further economic turmoil. 

The F&B supply chain must also meet contemporary challenges with innovative solutions. Leveraging advancements in technology to improve productivity, product quality, and perhaps most important in this context, shelf-life, will be critical moving forward. Advanced sterilization processes and storage technologies will allow farmers and processing facilities to maintain the quality of their inventory longer while capacity shortages subsist. Operational automation within facilities is also a critical link to enhancing supply chain resilience during crises. While many other industries were able to transition to a remote work environment during the pandemic, F&B was not. There is no business deemed more essential during a global crisis than that of F&B. However, COVID-19 spreads just as rapidly and dangerously, no matter how essential an industry, company, or factory may be. This reality has made urgent the prospects of factory floor automation. 

For any sector that deals with manufacturing, automation will lead to lower operating costs and a faster return on investment (ROI) vis-à-vis production efficiency and consistency. For F&B, the benefits are elevated, given what we know about the level of human integration that the industry currently necessitates. Given the labor shortages triggered by COVID-19, automation has the potential to fill capacity gaps and ensure production continuity during periods of virus outbreaks.  Further, production stoppages resulting from workplace accidents would diminish as the result of automation. As many as 3,450 annual workplace fatalities could be avoided with increased automation by 2030. In the rapidly changing regulatory environment brought on by the pandemic, automation can more easily monitor compliance requirements on a local, federal, and international level. It can also assist in tracking and tracing, which has become increasingly important since virus particles were found on imported food packaging in China. The ability to more easily understand where products were sourced, mixed, and distributed will be critical for ongoing efforts to contain the spread of the virus. Integrating automation techniques will enhance each of these areas, leading to a more trusted brand reputation for companies operating in a highly uncertain purchasing environment. 

Recommendations

Short-term

  1. Adhere to the regulatory mandates of health professionals, including reduced staff and social distancing guidelines, even at the cost of maximum efficiency. Disregarding the precautions established by global health professionals will increase the likelihood of facility outbreaks. In the long run, if a facility must shut down production altogether due to a virus outbreak, the financial losses will be much more considerable than those incurred from reduced capacity and efficiency. Companies with production facilities in countries with high virus transmission should take all necessary precautions to prevent outbreaks.
  2. Take advantage of intelligence monitoring tools to stay abreast of new virus outbreaks and associated local regulations. Real-time updates on reports of new and reoccurring virus outbreaks will help supply chain managers prepare for impending production halts and reduced capacities. Having early access to information about virus transmission rates can enable companies with interests in vulnerable areas consider alternative options. Virus data mapping in conjunction with supply chain mapping is an effective way to get ahead of the curve in adopting operational changes which will minimize the business costs of localized virus outbreaks. 

Long-term

  1. Consider diversified sourcing as a long-term business strategy. Though the COVID-19 pandemic has been global in scale, intensified regional impacts have been felt at varying times. For example, while E.U. transmission rates had largely plateaued around mid-summer, Latin America cases were trending upward. Dispersing operations in different parts of the world allows companies to quickly react to notifications of new outbreaks, shifting resources and operations to less-impacted parts of the world. 
  2. Adapt to shifting consumer behaviors and packaging demands. Acknowledge the consumer shift in demand toward individually packaged products and adjust packaging processes as such. This can include identifying additional suppliers of packaging solutions and adapting factory floor processes to cater to this evolving demand.
  3. Prioritize a higher degree of automation in factory floor operations. Automation will lead to lower operating costs in the long-term. It can also be a cost-effective solution to staff shortages during the pandemic and beyond, essentially eliminating the risk of labor-oriented disruptions.
  4. Invest in technologies that will enhance the longevity of food and beverage products. Leveraging technology can improve the shelf-life of products through advanced sterilization, storage, and other preservation techniques. This is especially important so long as processing capacities are reduced. 

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