Market trends

Agribusiness’ channel mix and production transforms amid COVID-19

AlphaSense

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May 5, 2020


Increase in products like red meat, grains, lemons.
Increase in products like red meat, grains, lemons.

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Agribusiness has seen and continues to see the second-order effects of COVID-19. Meat processing plants are being redesigned, demand for poultry is soaring, and government intervention enforces food processing plants to stay open.

Shelter in Place orders triggers an oversupply of fruits such as lemons, which saw demand falling more than 50% since mid-March. Now, concerns are mounting about a global shock to agribusiness supply chains, but companies say that’s unlikely–an oversupply is more probable. See our takeaways from market chatter below.

Takeaways:

  • On April 17, 2020, the USDA announced the Coronavirus Food Program, designed to provide $16 billion in direct support to farmers and ranchers based on agricultural losses.
  • Consumption of grain for food, fuel, and livestock feed is being negatively impacted by the economic constraints caused by the pandemic; thus, grain inventories are expected to increase in 2020
  • Many food suppliers are now citing a significant change in their channel mix: foodservice line demand is decreasing, and retail is increasing.
  • Meat processing plants are being transformed to comply with CDC guidelines, causing absenteeism, reduced production speeds, and selected idling of plants.

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Here are the highlights. [Note: We update this post and our compilation post to reflect the most recent commentary. Last updated 5/05]

Lancaster Colony Corp (10Q – 5/05)

Looking forward to our fiscal fourth quarter, our Foodservice segment sales will continue to be unfavorably influenced by the impact of the COVID-19 pandemic as the restaurant industry experiences steep sales declines due to restrictions on dine-in purchases and the imposition of stay-at-home orders. The full impact of these circumstances on our Foodservice segment sales and operating results are difficult to quantify based on the uncertainty surrounding the timeline for the resumption of full-service operations at U.S. restaurants, the lifting of stay-at-home orders, the overall pace of the U.S. economic recovery, and the willingness of consumers to return to away-from-home dining. Since the Foodservice segment accounted for 50% of our total net sales and approximately 65% of our total pounds produced in 2019, notable declines in our Foodservice segment sales will unfavorably impact the absorption of fixed manufacturing and overhead expenses. In addition, we have reduced costs resulting from the lower Foodservice segment demand, including voluntary furlough programs. We anticipate fiscal fourth-quarter Retail segment sales will continue to benefit from the shift in consumer purchases to retail stores due to the stay-at-home orders and other changes in consumer behavior attributed to COVID-19. Note that under the current environment, new product launches into the retail channel are subject to delay by some retailers as they focus their efforts on stocking shelves with existing items and, in some cases, forgo shelf resets to introduce new items.”

Ingredion (Q1 2020 Earnings call – 5/05)

“Moving to the Asia Pacific. Compared to the prior year, sales were down 7% due to volume decline, foreign currency, and unfavorable price/mix. In addition, with the early onset of COVID-19 in China and Korea, volumes in those countries were impacted by stay-at-home orders throughout the quarter. Operating income at $20 million was flat versus prior year impacted by weaker volumes, offset by favorable tapioca margins.”

AGCO Corp (8K – 5/05)

The COVID-19 pandemic is projected to have minimal impact on global crop production. Most farm operations, which are generally deemed essential, are working at normal levels. Soybeans and other crops are being harvested in the Southern Hemisphere, fields are being planted in the Northern Hemisphere, and farm equipment is being used intensively in most regions. However, the consumption of grain for food, fuel, and livestock feed is being negatively impacted by the economic constraints caused by the pandemic. As a result, grain inventories are expected to increase in 2020, and soft commodity prices have significantly lower in the first quarter.”

Ingredion (8K – 5/05)

“Due to the uncertainty of the effects of COVID-19, the Company has determined that its previous guidance for the full year 2020 EPS, cash flow from operations and net sales outlook is no longer applicable.”

The impact of COVID-19 in the first quarter was relatively modest. We saw higher volumes in more traditional channels as consumers stocked their pantries in anticipation of stay-at-home restrictions, and we expect these channels to continue to perform well. However, significant uncertainty exists in the foodservice sector as to when and at what pace consumer traffic begins to return.”

In South America, the pandemic is earlier, and we anticipate significant negative impacts to the foodservice, brewery, and confectionery sectors. In North America, we expect reduced demand in foodservice volumes, specifically in Mexico, depressed brewery volumes due to government-imposed COVID-19 mandates.”

In EMEA, we anticipate strong specialty sales in Europe, but weaker volumes in Pakistan. As restrictions are being lifted in Asia-Pacific, we are seeing relatively strong demand recovery. However, it is too early to determine if that recovery will be sustained.”

The Mosaic Co (8K – 5/05)

“Agriculture has been deemed an essential business in nearly all of Mosaic’s key markets, prioritizing logistics and support for agricultural inputs, including fertilizer, to ensure food security.”

To date, there have been no material impacts to Mosaic’s operating facilities, employees, supply chain, and logistics due to COVID-19.”

“The impact of COVID-19 in North America has pushed Mosaic’s customers to accelerate deliveries where possible, but otherwise, the season is playing out like many other standard springs. In the back half of 2020, there is a risk to global shipment volumes if the negative impact of COVID-19 on biofuel and related crop prices continues. However, farmers are receiving substantial governmental support globally, which could mitigate the potential adverse effects on fertilizer demand.

Tyson (Q2 2020 Earnings call – 5/04)

“Now, let’s talk about the current operating environment. The COVID-19 pandemic in the United States has significantly impacted our channel mix with increased retail and plummeting foodservice demand. From a supply chain perspective, our facilities have adapted to new product mixes, which has enabled us to ship millions of pounds per week between channels and has set us apart from many of our competitors. Foodservice customers have also reacted with high levels of innovation and adaptation, focusing on takeout and delivery. As a result, some have only seen minimal volume loss. In addition, supermarkets and club stores have been trying to meet heavy demand, and we’ve been able to convert several production lines from food service to retail to help meet those consumer needs. The direct impacts of the virus have created operational challenges, including absenteeism, reduced production speeds, and selected idling of plants. However, the scope of our operations continues to provide us with flexibility and redundancy. This is a clear benefit to our Company’s scale.”

“Historically, approximately 45% of our total company sales were retail, 40% foodservice, and 15% international. During early Q3, we saw our retail sales move to approximately 2/3 of our total company sales. However, while we successfully shifted some of our products from foodservice to retail, not all facilities can do so. As a result, the volume increases in retail have not been sufficient to offset the losses in foodservice. And as a result, we expect negative year-over-year volumes in the second half of fiscal 2020.”

“Operationally, we have faced two meaningful challenges: slowdown resulting from team member shortages or choices to ensure operational safety and temporary closures related to COVID-19 infections. We have continued to pay team members during these slowdowns and closures since maintaining the health, and continued employment of our team members is important for our longer-term success. As a result, we’ve experienced lower productivity levels and higher production costs. This will likely continue in the short term until local infection rates decrease.”

“That was in the prepared remarks. Based on what we see right now in the marketplace, as I mentioned in an earlier question, we are expecting an increase in protein supplies through the balance of this at least fiscal year, likely calendar year. And with that, there will likely be, as there has been an oversupply of poultry in the market in the last few months. The total number of animals available has not changed at this point. So whether it’s beef, pork, or chicken, we’re looking at an increased supply. So most recently, in the market, throughout the last couple of weeks, there have been some shortages in some specific categories. However, as we go into Q4, we expect supplies to increase and therefore not any pricing recovery.”

“Well, Ken, as I mentioned, probably close to a year ago, we started investing fairly heavily in technology, automation. And that hasn’t changed. We continue to invest. In that segment, I do think that over time, that the amount of automation will continue to increase, particularly in some of the more difficult jobs and positions. I can tell you that we, as an example, we’ve invested a significant amount of money, I would say, in our attempt to minimize any foreign objects where we’re using vision technologies to try and identify any — we’re working in the debone area within poultry. We have several initiatives within beef and pork. So I believe not only us as a company, I think the industry will continue to look for solutions through automation. So I think it will probably — it will likely accelerate from this point.

Toro Co (PR – 4/30)

“As such, it is prudent for us to take additional proactive actions now to help mitigate anticipated impacts of the COVID-19 pandemic on our business and financial performance. The additional actions we take today will enable us to effectively manage this challenging environment with agility and position us well for the recovery.

Pilgrims Pride Co (Q1 2020 Earnings call – 4/30)

Q: “One is what are the costs associated with the COVID-19 in your plants? Second, what is the actual impact you think from the beef and pork cycles on chicken prices of late? ”

A: “Yes. Ken, regarding the costs, I’ll tell you, they’re fairly minimal, call it, non-impactful across the enterprise. One of the higher costs, I would say, would be that we installed and built over 10,000 barriers inside of our facilities. So our engineering teams, our maintenance teams did a great job in a short period across all of our facilities to build these barriers where there may be 6-foot or less distance between our team members. Again, they built 10,000 of these within 30 days and did a great job. One of the other costs, we did offer a gratitude payment to our team members and just a thank you for doing what they’re doing in the U.S., which was one of the higher incentives that we gave for gratitude. And that will be a $10 million payment, and we’ll do that. We’ll realize that and recognize that in Q2.”

“Look, we’re seeing less availability of other proteins. That’s hitting the markets today. Cutbacks in the chicken industry, we’ve talked about those. They’re now at double digits below pre-COVID numbers. We talked about this: ground beef and pork at the retail levels are 20%, 25% higher year-over-year. And the chicken right now, it’s the value option for many households where the budgets are strapped. So these factors what we’re seeing is an increase in the cutout. It’s been driving through the breast meat markets. That market has improved 25% just over the last week, and we know that’s a major driver in the value of the cutout. And I think people are looking right now for healthy foods, and I think foods add to their well-being. And I think chicken right now falls directly into that category.

Archer Daniels Midland (Q1 2020 Earnings call – 4/30)

So I don’t think that the Q1 is an excellent quarter for us to go into a lot of analysis into the future because, again, we have all these economies. A lot of Southeast Asia is still impacted by coronavirus. There is China that is coming back. There is Brazil that hasn’t been impacted. There is Mexico that is being impacted right now. There is North America that is more impacted. So I think that the second quarter will give us a better time to make this analysis. But the business will continue to improve. Of course, we are revisiting the synergy numbers after we achieved the EUR 50 million target that we set for ourselves. So we’re still — there will still be growth rate, positive growth rate. There’s still going to be an increasing EBITDA margin on sales. It’s just that the market is too fluid to develop the algorithm right now.”

FMC Corp (Annual Shareholders meeting – 4/28)

“Thank you for this question. We had a compensation committee yesterday, and the compensation committee with the compensation adviser took a look at executive compensation impact by the current situation with COVID-19. We also took a look at what has been done by other companies in our markets and outside of our market. So this question will be on the agenda again for the compensation committee of July.”

CAT9 Group (10K – 4/27)

“The negative effect of COVID-19 on our operations are no longer hypothetical scenarios, and during the quarantine period in early 2020, our sales declined as a result.

Limoneira (8K – 4/23)

The coronavirus disease 2019 (“COVID-19”) pandemic has hurt the industries and markets in which the Company conducts business. In particular, the United States lemon market has seen a significant decline in volume, with lemon demand falling more than 50% since widespread shelter in place orders were issued in mid-March, resulting in a significant market oversupply. The export market for the fresh product has also significantly declined due to COVID-19 impacts. These market and industries pressures are causing, and are likely to continue to cause, adverse impacts on our business, financial position, and liquidity. The proceeds from the PPP Loan described in Item 1.01 above will be used for certain qualifying payroll costs under the CARES Act, and, as a result of receiving the PPP Loan, the Company expects to be able to retain 100% of its workforce.”

Intrepid Potash (PR – 4/16)

In light of the unprecedented COVID-19 pandemic and its impact on the economy, Intrepid has acted early and proactively to adjust capital plans for the remainder of 2020. As a result, the Company expects to invest approximately $10 million for sustaining capital in 2020, while opportunity capital will be approximately $5-10 million for the full year. This is a $13 million or 43% decrease from the $30 million mid-point of original total capital guidance. In addition, the Company is reviewing its 2020 water sales guidance as oil and gas operators re-evaluate their capital programs for the remainder of the year.”

Arts-Way Manufacturing (10Q – 4/14)

“In our Agricultural Products segment, we have not experienced order cancellations, and our backlog as of April 6, 2020, remains approximately 33% higher than a year ago. We have noticed a decrease in sales call activity over the past two weeks but are not yet able to predict any impact on future orders. We believe that farm operations will remain mostly unaffected by COVID-19, and the food supply will remain in high demand. However, as our suppliers experience decreases in their workforce, we expect disruptions in our supply chain that could affect scheduled deliveries of our products and the efficiency of our workforce.

“Based on the limited data we have at this point, we predict decreased revenue across our segments compared to fiscal 2019 and our initial fiscal 2020 expectations due to inability to meet production demand due to decreased workforce and supply chain disruptions over the second quarter of fiscal 2020. However, we will continue to operate as long as allowed by government authorities and as long as the health of our employees is not compromised.”

Arts-Way Manufacturing (8K – 4/13)

Our outlook for the year has until recently been positive, but at this time, we have lowered our expectations as the impact of COVID-19 has brought new challenges to our business and leaves us uncertain as to what to expect from a demand perspective for the balance of the year. As a result, we are taking conservative actions to manage expenses and liquidity to manage our way through the crisis while also making decisions that support our Art’s Way family.”

Itronic Inc (PR – 4/9)

“March GOLD’n GRO fertilizer sales growth was reduced against forecast due to cool, rainy weather in our markets, delaying those sales into the second quarter. Additionally, uncertainties created by the Covid-19 virus pandemic may negatively affect sales to an unknown degree.”

Lindsay Corp (Q2 2020 Earnings call – 4/7)

“Lastly, I’d like to address the impact COVID-19 had on our second-quarter results and the associated forward view. In our second quarter, COVID-19 impacted product flow in some cases related to scheduled shipments to and from the affected areas. In addition, our plant in China was temporarily shut down, aligned to the country’s mandate. At the end of the quarter, this plant resumed operations and is fully operational. Overall, the disruption in quarter 2 was not material to our overall results.”

Now, when we evaluate whether to keep a plant running, we look at three key questions: Is there — is the — what’s the current demand level; is the business classified as a business essential, and are the safety guidelines in place being followed? And then that determines whether we continue to operate that plant.”

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