The impact of COVID-19 on the food sector in China
The spread of COVID-19 in China has caused significant disruption to food consumption, production and trade since late January. More positively, as the number of new cases in China continues to fall, China is getting back to work. This week, China’s economic capacity utilisation rate has already recovered to 78% pre-COVID-19 levels. We expect the impact of Covid-19 to linger into June but recovery will be well under-way by the second half of 2020.
In February, the biggest challenge for incoming goods is the logistical challenges beyond the ports. Local governments imposed policies to tighten up control of inter-city and inter-province traffic. In many cases, truck drivers must accept 14 days quarantine if they cross the city border, leading to a severe shortage of trucking services and restricted movement of goods along the supply chain.
Reports over the last week have noted a steady return to 2019 rates of shipping movement from China – however while the outbound level of container vessels may be slowly moving upwards, this resurgence will be impacted on by the slowing international demand and entry restrictions being implemented by other countries.
China has already been experiencing a meat short as a result of African Swine Fever and Covid-19 has exasperated this shortage. Many hog producers are delaying the construction of feedlots and restocking for several months. Rabobank estimates that Chinese pork production will fall by a further 15-20% this year.
Factories that have reopened have done so with a greatly reduced workforce—with estimates that between one-third to a half of workers have returned. However, the situation is improving day by day, as more workers return, and we expect a large proportion of operations to return to full speed over the coming weeks.
The foodservice sector came under enormous pressure after forced closures were enforced nationwide on January 24th. In February, most restaurants were restricted to meal delivery only. But as of this week, close to 90% of restaurants have resumed “normal service”, though demand remains muted—anything but normal. A survey by the Chinese catering industry association revealed that 49% of restaurant owners believe it will take three months after COVID-19 has stabilised for demand to fully recover, with another 46% thinking it would take up to six months.
Fast food chains have been the fastest to recover. McDonald’s has announced that 95% of its Chinese outlets have reopened. Full service and hot pot restaurants will remain under pressure for longer. Local governments are starting to implement various schemes (coupons/cash) to spur consumption. Restaurants themselves are offering discounts to attract customers.
This will significantly reduce short-term demand for beef, sheep meat, seafood, and cheese, which are all heavily reliant on the foodservice channel. Most of this consumption loss cannot be made up later, even when the segment recovers—the meals have been eaten.
Though physical foodservice has struggled, sales for ready-to-cook instant dishes has skyrocketed online. Large restaurant chains, many of whom already offer ready to cook brands, are expanding their manufacturing capacity. From February 1 to February 17, sales of CP’s ready-to-cook products increased 664% on a yearly basis.
Food retail has been the least affected channel, as people shift from eating out to cooking at home. Some retailers are even thriving. With many companies working from home and enforced 14-day quarantine for returning workers there has been a boost in demand for home delivery. Alibaba’s Hippofresh and other “new retail” operators—those capable of home delivery—have seen a surge in orders. Food sales through ecommerce are also booming. JD.com’s sales of meat and eggs grew 4 times year on year between 20th Jan and 13th Feb.
Demand for pork is believed to be the least affected of the animal proteins. Many consumers are more skilled at cooking pork at home—less so with beef, seafood and lamb. Liquid milk consumption has fallen. Rabobank estimates that every 30 days impacted could reduce consumption by 2-4% for the full calendar year.
In the event of an economic slowdown or slower income growth, demand may fall for these more expensive proteins. This is balanced, though, by reduced domestic supply.
 Trivium China, 23rd March 2020