Graham Redman, The Andersons Centre - June 2020
Unlocking the Economics; the Ups and Downs of Agriculture
When a toilet roll is worth more than a barrel of crude oil and the Bank of England sells gilts with a negative yield to willing buyers (which has never happened before in its 320 year history), you know you should hold onto your hats. We have all lived through several decades, this year alone! Its June and another one begins.
Whilst farming has carried on (and had its own issues to deal with), a third of the economy was closed down and much of the rest of it sent home, with a view to reopening parts of it gradually at Government’s choosing. Government protection schemes cannot last for ever and when they end, we can expect bailouts, insolvencies, and business failures. Many have already started. I read only yesterday about Adelie Foods closing with 2,000 jobs going, Frankie and Bennie not reopening 120 of their venues, and others will follow, that’s for sure. Many of these, as per my two examples are direct customers of farming, and supply chains will have to readjust to match our supply with consumer’s demand once more. The exponential charts we will be examining next month will not be death rates but insolvencies; the number of businesses disappearing could be considerable. One reassuring thing about the food sector is that regardless how the supply chain is structured and who gets the food ultimately to the consumers, we all need our 2 or 3,000 calories a day, pandemic or no pandemic, job or no job. Whether we are worth billions or nothing, our food requirement is similar in volume and calories. And to the commodity producer, the purest part of agriculture, the ultimate financial value of the food at the point of consumption, makes relatively little difference as most value is added to it after the farm. Now, we could discuss the nuances in there of minced beef versus fillet steak all day, but you get my point I am sure.
All governments around the world, including ours, have be closing and reopening economies. We are about to see how easily an economy can be turned off then simply switched back on like a car engine or removed from a freezer as required like food. An economy is a complex network of relationships, trade, and consumption which is constantly changing so will inevitably incur lasting damage. Reconnecting those business links to facilitate that, may not be instant. And demand for some goods may have declined or switched to other solutions. In fact, the demand for food, will have changed less than some other sectors (as demonstrated by Easyjet tumbling out of the FTSE 100 in place of other, more lock-down proofed business which take its place in the list of the 100 highest market value companies in the UK).
Clearly, consumers are eating slightly different food whilst at home than when they are at the fast food outlets, pizza houses, fine dining restaurants for some or indeed dare I say, in their cars. But, whilst it seems our consumers are eating less, in fact it appears they are simply wasting less! That has to be championed despite the considerable cost it places on agriculture of course. More on that later. But other differences in what they eat might emerge as we realise we are becoming poorer again as the recession deepens. Usually, we head for value goods, choice becomes less important and the urge to feed our conscience becomes less affordable. High value foods with certain standards such as organic or other marks of production, tend to become less important when the basic needs of feeding the family are more costly.
The economic downturn may be bigger than most people, including investors in the stock markets have realised, and it will continue to affect everybody for a very long time. The fact that the FTSE100 and 250 have both recovered by over half of their losses incurred at the start of the pandemic, suggests many people think the worst might be over. But remember, furlough will close at the end of October and many might come out of it with no job to go back to. The discussion of whether the recession will be ‘V’ or ‘U’ shaped, might be misguided, with the potential for an agonising ‘L’ shape in some sectors for some time. Agriculture is not on this list of sectors, we can supply 3,000 calories per person a day, and will do. Such a flat and steady demand for farm goods is tough in times of rapid economic growth as sectors such as travel, holidays and other luxuries financially romp past the steadiness of agriculture, but when the proverbial Black Swan flies, farming keeps going. The Black Swan is the factor that is unforeseen, or not predicted. It is the event at the end of a long tail in a statistical curve, some might refer to as bell shaped curve. The thing that is unforeseen and seldom happens, but when it does, it makes a big impact, changes the way we act and think, and usually costs us dear. To most of us, Coronavirus was a Black Swan.
The Financial Crisis of 2007/08 and 09 triggered a 5% fall in GDP in the UK and took 5 years to return to 2007 economic levels. This March alone saw our economy shrink by more than that. Spanish Flu led to a 27% reduction in world GDP and took many years to get out of that one, this is comparable with the economic decline the Bank of England foresees for Britain. The Office of Budgetary Responsibility predicts a 35% reduction in GDP for the second quarter of 2020, a 300-year low.
The Government debt that will have built up since January will be enormous, certainly the highest since the last world war, perhaps much longer. The capitalist will largely pay for it, and that includes many farmers and rural entrepreneurs. It is clear the country has no appetite for austerity, and arguably, when the economy needs to grow rapidly, austerity would be the wrong policy anyway. There are 4 ways of reducing Government debt; Default, Economic Growth, Taxation, and Inflation.
Default: No country would opt willingly to default on its debt as it is good for nobody.
Growth: Rapid growth will help get people back into work. It will require softer business regulations and free market encouragement. For instance, brewers currently require licences to deliver beer to consumers rather than pubs which prevented many from operating during lockdown. Small business flexibility is required.
Laissez-faire free market economics will fill gaps in the economy, left by society when it bolted for safety. Adam Smith in his Wealth of Nations explained the concept of Spontaneous Order, whereby entrepreneurs find spaces in the economic network just as a river finds and fills low voids. Government and planned economies are less adept at this; no protectionist economy in the world was subsidising the manufacture of face masks. Protectionism might have a role, but politicians don’t know what to subsidise, nobody does for sure. What good are aircraft or car manufacturers at this time?
In this situation, manufacturing is a more robust way to regenerate an economy. Making physical things, that can be exported, and that will then generate secondary service industry business magnifies the benefit. Primary manufacturing generates more employment. It is often low paid but a primary objective has to be to get people back to work.
Sterling might prove too strong and fall in value which would encourage trade and exports. Farming would benefit from a weaker pound. Government policy will presumably refocus on the big economic issues for a while. The farming budget has probably travelled far enough not to have to turn back. But will HS2 survive? Surely not the extra Heathrow runway.
Taxation: Tax increases on the ‘have’s’ are inevitable. Farmers are generally in this cohort, by assets at least. Those with income may bear the brunt of higher taxes but also those with property, or other assets could face large tax bills. Wealth Taxes might appear. This is a tax on all assets that you have accrued, including investments, vehicles, businesses and so on. Whilst taxing the ‘haves’ is more fruitful than the ‘have nots’, it is unfortunate that such taxes penalise those who have been prudent and mindful of their future whilst somebody with similar incomes and an addiction to frivolous consumption would not.
Inflation: Regarding inflation, the only person who gains from inflation is the borrower. Inflation erodes debt as fast as it erodes assets. Assets that appreciate in line with or faster than inflation will also fair well from it. There are few of these. Land is not valued in line with its earning capacity so would not necessarily rise in value at the rate of inflation, that is, unless it is seen as a safe asset and many people try to secure their capital into farm land, knowing it will still be there in a few years’ time, something you cannot say for certainty about any business.
The farmer, as manufacturer of commodities is making one of the most inflation-proof assets. Commodities move in value faster than any other asset or consumable, moving daily when exchange rates between currencies shift and as costs rise, they tend to lead the way. As we all experience, there is plenty of noise though from changes to supply and demand fundamentals that push commodity prices off track very easily.
A very weak currency, massive quantitative easing and record low base rates especially when oil prices start rising are all inflationary. But high unemployment, reduced consumption and spare economic capacity are deflationary. The odds on which way it will go are currently even, but the stakes are very high. The Chancellor (of 4 months) has a fine line to call, and he sacked all his economic advisors only in February!
Read Adam Smith again. He points out that capital in business flows in 2 directions, to the labour force or the business owners. Government is looking after the worker but will not support the capitalists; it is they who will lose value in their shares when the dividends are cancelled again. Those with capital will suffer from inflation when it goes up and will pay more in tax. If you don’t consider yourself in any way part of the capitalist society, it is time to check your pension arrangements and what it is invested in.
Some wizened economists have, for some months now been suggesting that publicly listing companies for individuals to own shares of it, is perhaps dated and no longer viable as a capital structure. Companies are remaining private for longer if a return on capital remains strong. This coronavirus induced economic downturn will draw attention to this. Maybe this has little impact on farming, especially as many farmers’ pensions are what they farm on.
Gold and the World’s reserve currency, the US dollar are usually seen as the safe havens for capital to hide and it has been pouring onto these until dollars are in short supply. However, other safe havens are finite so precious metals and dominant currencies have been sharing their podium with unlikely partners as Microsoft and even Amazon shares. These firms are not only gigantic, seen (foolishly) as un-fail-able, but also necessary during corona-time. How will farmland fair? We do not know.
If the day of the capitalist is toughening, perhaps the day of the entrepreneur is about to dawn. Free trade is the best way to re-establish supply chains that are not so fragile. I will come back to that.
Innovative people have been using lockdown time being thoughtful and creative. Many more patents have been registered than usual since January. This might be because there is more time on people’s hands, but also possibly because the world has suddenly changed, and new ideas are required. Change creates threats, and opportunity. What you find depends which you look for. Very big parts of the economy were already in the process of radical transformation, and this epidemic shock will accelerate this.
The world will endeavour to recover from Coronavirus whilst undergoing the transition to non-fossil fuels. This will be one of the big issues of the 2020’s. The virus has helped; whilst in lockdown, fossil fuels have accounted for less than 15% of electricity generation in the UK. This is a scoop for the renewables sector of course. As we emerge from the pandemic we must simultaneously emerge from our addiction to fossil fuels, our love of the car, the plane and other green house gas emitters. Things like air conditioners are baddies on the fight against climate change (ironically), but also, it appears there are lots of things the food supply chain needs to take on board. If it is really going to become carbon neutral then massive adjustments are required, rather than adjustments to current systems and defending our current ways with new numbers.
In fact, according to the Economist, despite half of the world population in lockdown of some kind at one point, the demand for coal fell by (only) 8% and 5% for oil. The International Energy Agency estimates global emissions will fall by 8% y/y which is surprisingly small all things considered taking us back to 2010 levels. Is that enough? Not really.
And whilst this is taking place, we still remember Brexit is heading in a direction that Gvt is perhaps happy with, but most in the farming community did not think it voted for.
Recent business innovations and new ways of working are providing a platform for growth and innovative ways of operating. A pandemic 10 or even 5 years ago would have been much different as the technologies to run video meetings and the broadband for most to make the connections would not have been possible. Today, blockchain supply networks, artificial intelligence, and machine learning, may revolutionise supply chains, including ours. The Internet of Things could change all aspects of life and reach farming too, with tractors informing maintenance teams they need attention, or silos informing feed suppliers they need filling and so on. Farming will not be first to this market but will catch up and we have major challenges from innovation as an industry to face. Biochemists have learnt how to manufacture meats and milks, without the need for animals and will be trying to roll this technology out to the market in the coming few years. This could solve many of farming’s problems such as animal diseases, animal welfare, greenhouse gas emissions, and insufficient land, but would not necessarily be good for farming!
If we think, for a moment about trade, we see an upsurge of protectionism is inevitable. It has already happening with the US, Chinese spat, which as we speak is becoming uncomfortably intense. This does not help us. We put up tariffs, we find ourselves becoming self-sufficient in things we are less good at producing rather than buying stuff we can’t produce well and focussing on our strengths. Rather we should focus on getting better at producing stuff so we can compete more readily. But more locally, irrational protective actions are also taking place. We should remember, that whilst it is good to provide business to local firms, becoming self-sufficient would in fact lower our food security. The optimal food security needs to be calculated and the market allowed to achieve it.
Clearly during a food crisis like a pandemic, People become inward looking. Non-villagers using the village shop because it has a supply of good food have been scorned at. But that is trade in its most local sense. Should a village want food self-sufficiency? No, of course, the local supermarket is also required. If we are thinking about food security, the last thing we should do is struggle to produce everything ourselves because local plague or drought do hit sometimes, and then we would be stuck. Singapore produces no food itself but has some of the most secure food supply in the world.
Of course we can expect supply chains to change, partly to slalom round any failed businesses but also to make them more dynamic. Will they get shorter? And does that mean fewer links or shorter physical distances between them? This could suggest more production from home, but then the Europeans that we sell to might also think the same.
Waste and Environment
And thinking about the consumer again, in the short term, what is emerging as potentially the biggest adverse effect on agriculture from the lockdown is one to be celebrated: It appears from The Grocer and other sources that food waste in the house has fallen by over a quarter. In the case of dairy, it might even have fallen by more than the total decrease of consumption, suggesting that the decline in demand is solely because we are being more careful with food. It would cost the food and farming industry a lot of money, but waste reduction is a good thing, a considerable achievement whilst the country spends 3 months reining in our frivolous habits, including on food. The same is apparently true for other sectors such as bread. And restaurants are wasting nothing it seems! But people have short memories and long-standing wasteful habits will probably soon at least partially be reinstated to provide food and farming with the demand of previous levels.
On a broader scale, the economy might not need to make as much as before; we have learned to operate with less. Most offices have fewer people operating in their buildings, we are driving fewer miles for many of us to do the same work. People do not buy a new shirt for a Zoom call, (cotton farmers are already feeling this) and we have managed with fewer new things (and only what the delivery driver can supply). Again, the world is eager to start travelling and consuming again: The streets of Chinese cities are more congested than this time last year. It would be an environmental boon though, if society could learn at least a few small lessons of constraining unnecessary consumption.
I guess one thing, whilst we are discussing environmental issues, that might once again become socially accepted is the fabulous uses for plastic. It has become the standard packaging for food delivery, and with its properties of keeping food fresh for a longer time, might have a useful resurgence for a while. Let’s dispose if it wisely.
This piece has not been about the virus, as the world will remember this episode for its economic impact more than the illness. Countries, businesses and supply chains will be noted in history for their actions and survival. Each physical death is, of course, a tragedy, which medics with their medicines are trying to minimise. But the insolvencies will continue long after the doctors left the headlines. I admire the work of medics, but they are primarily for helping the sick, not keeping people healthy. For our health, I thank the food supply chain, the farmers, processors, hauliers, retailers and yes, the person who delivers the food unfailingly to my door. All that, and so often on the living wage. That is who I applaud for keeping me safe and well.
One other small potential opportunity for some farmers since coronavirus, is that the demand for puppies has shot up, with the resulting price for some varieties, having more than doubled in some cases. Since we have been told not to go out, we have all sought ways to get out-doors more. But remember, a puppy is for life, not just for lockdown!
The Andersons Centre
07968 762 390
5 June 2020