This article is taken from IEG Policy platform dated 28/04/20.

The EU's agri-food sector has so far responded "remarkably well" to the challenges presented by the novel coronavirus, the European Commission has concluded.

The COVID-19 pandemic is presenting unprecedented challenges for EU agri-food producers, including in the form of rapidly evolving demand for food products, logistical disruptions and labour shortages.

But the sector is responding and adapting to these new circumstances "with efficiency", the European Commission wrote in its latest short-term outlook report for EU agricultural markets published on April 20.

The closure of restaurants, bars and hotels as part of the confinement measures implemented around the world has redirected food supplies towards retail for direct purchases by consumers stuck at home. This is having a "direct impact" on agri-food producers and presents challenges due to differences in consumption patterns and packaging, the Commission says.

For instance, staple food such as flour, pasta, canned fruit and vegetables, and rice have been in higher demand, while higher-value products such as quality meat cuts, wine and speciality cheeses - which are usually more consumed outside - are seeing a significant decrease in consumption.

But thanks to the sustained demand for food, EU agriculture has also suffered relatively less damage from the lockdown measures than other parts of the economy, the Commission observed.

However, it said some sectors have been hit more severely than others, while an economic recession is expected to have further significant impacts on food demand, in particular for higher-value products.

Situation by product

In the report, the Commission presents a detailed overview of the prospects for each agri-food sector:

• For grains and oilseeds, abundant stocks and a sizeable 2019/2020 harvest foreseen in the EU and neighbouring countries should ensure sufficient supplies for the coming months. However, the anticipated 12-year low in EU rapeseed production and lower demand for oilseeds - linked to a decline in demand for biofuels due to plummeting oil prices - could lead to an overall reduced supply of proteins.
• For sugar, very low energy prices and lower demand for gasoline are pushing ethanol production down and trigger more production of white sugar. With higher global supply than anticipated and a slight drop in consumption due to the lockdowns, world sugar prices have fallen.
• The overall availability of olive oil should remain high as average production is expected and there are significant stocks. Stockpiling has caused an increase in retail sales and could lead to some recovery in demand in the main EU producing countries, yet consumption outside of the EU is likely to decrease.
• A lack of seasonal labour could negatively impact the harvests of some fruits and vegetables, but no major COVID-19 related disruptions are expected for apples and oranges in the current marketing year, as the demand for these products has increased.
• On the wine market, the COVID-19 challenges come on top of the US Airbus tariffs imposed in October last year and are expected to cause a 14% drop in exports in 2019/20. The closure of restaurants and bars are leading to a strong reduction in EU wine consumption, especially for sparkling and high-value wines, of 8% below the latest five-year average.
• For the dairy sector, the pandemic put strong downward pressure on prices as it coincided with the yearly spring peak in EU milk collection. This could favour the production of more storable and less labour-intensive dairy products such as milk powders over fresh products.
• The closure of food services and outdoor markets also negatively affects some high value-added products such as PDO/PGI cheeses. Meanwhile, other dairy products could benefit from increased retail sales.
• In the meat market, the switch to home consumption and retail may particularly influence beef and sheep meat in a negative way. EU beef producers face lower demand and are unable to sell their high-value cuts to restaurants, while the sheep and goat sector saw their seasonal peak in demand during Easter and Ramadan go up into flames.
• Poultry production continues to grow as it benefits from increased consumer demand as a replacement for more expensive meat, but the sector will still be impacted by the closure of restaurants for certain varieties such as pigs and pigeons.
• Pigmeat is not expected to be significantly affected by the pandemic. Production is likely to grow slightly this year with sustained demand from Asia, due to the impact of African Swine Fever on the continent and especially in China. EU exports are expected to grow by another 12%, after already realising a 17% increase in 2019.
• The flower sector suffers a "particularly severe impact" from the COVID-19 crisis, the Commission notes, as most outlets are closed, Easter is traditionally one of the three demand peaks in the year, and air freight has been halted.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.