16 April 2020

Peter Holmes is a Reader in Economics at the University of Sussex and Fellow of the UK Trade Policy Observatory.

At the time of writing the UK is seeing food supplies returning to normal. It is worth asking what the experience of the first three weeks of lockdown can tell us about the causes of the apparent shortages and the implications for the future.

There is a hope that now everyone’s spare rooms are full of toilet rolls and cans of beans and the supermarkets are fuller, stocks will get back to normal. But it may not be quite as simple. Are shortages just due to excessive stockpiling or real supply constraints? And if the latter how does trade fit in?

The COVID-19 shock is clearly both a supply and a demand shock to the economic system.  Production is being cut back across the economy overall and people are cutting back spending partly because of falling incomes and partly because of lack of access to goods and services. However, while overall spending may have declined, spending in supermarkets has increased. Kantar data suggests that household spending in the top 7 supermarkets rose 19% in March 2020 compared to March 2019.

Panic buying: the demand side

Overall the scale of hoarding/panic buying alone does not entirely explain the shortages, but it has played a major role. A worldwide survey conducted by the market research consultancy Kantar concludes that “Ultimately we need to look at the empirical evidence and it tells us that temporary shortages are being caused by people adding just a few extra items and shopping more often – behaviour that consumers wouldn’t necessarily think of as stockpiling.  People will also be eating in more as a result of social distancing and increased working from home”. Similarly, The Grocer magazine (30/3/20202) reported that shortages in the UK in March were probably mostly, if not wholly, due to the demand increase.

In the food and supermarket sector, it seems that at first sight there should be no reason for long term scarcity for most products, and there has been redirection of supplies which would have been destined to restaurants to supermarkets. And it is no doubt a relief to have reports that supermarkets appear to be pretty much fully stocked now. But as Sam Roscoe’s blog points out and as Prof Erik Millstone has told the Independent supermarkets are faced with shocks from the pattern of consumer demand. Domestically, we have seen an unprecedented shift away from purchases being made in cafes, restaurants and office canteens to purchases for home use. This puts great strains on the distribution networks and storage capacity. As Prof Millstone points out, stock levels in relation to regular supplies have been seriously reduced in order to implement “just in time” systems. A higher throughput to shops requires more deliveries and risks bottlenecks because they are running on lower inventories. In addition, with labour shortages for production and distribution, even meeting existing demand may be problematic. The extent of this will vary across products depending on where they are produced and the complexity of the supply chain and also on underlying stock levels.

Supply-side issues and future availability of goods

Changes in the patterns and level of demand are clearly part of the story. However, this does not mean that things can settle back to where they were once household stock-building ends. This is because given the tightness of supply chains and inventory management a small and not wholly irrational increase in household demand can help create shortages. This may then be compounded by supply side problems. These can be divided into short term and long term, and distributional vs production problems, and domestic vs trade issues.

The widespread lockdown across countries has had a major impact on production activity and on the availability of supplies. This is an immediate short-run impact, which will have long term consequences which are still unclear. For example, the increased demand for cheap chicken meat is not only running into staffing problems including difficulties of maintaining distance in factories, but also the risk that bringing forward slaughter of birds will create scarcity in a few weeks’ time (FT March 30 2020).

Barriers at border crossings are being erected all over Europe, but in principle they apply more to people than goods. The European Commission has issued “guidelines” to create “Green Lanes” at road borders so that freight can cross with no more than 15 minutes delay. The guidelines appear to be strictly voluntary and the Freight Transport Association has appealed to EU member states to implement them. The Port of Dover and DFDS ferries have been reporting normal traffic for services still running  across the Channel/North Sea, though some routes have been suspended (Newcastle-Amsterdam and Copenhagen-Oslo suspended). Meanwhile in Italy Euractiv reports that Italian food supplies have not been affected by border measures; “All the necessary activities related to the smooth functioning of the food supply chain, including transports, remain open,” said Italy’s agriculture minister Teresa Bellanova. Eurotunnel has been running the same number of shuttles but there have been delays of up to 2 hours for checks and social distancing at Calais, and there is some evidence of truck shortages, trucks returning from the UK empty, hauliers being reluctant to go to certain area, rules being applied inconsistently, and concerns over the ability of drivers to continue moving freely and being able to return home. As international passenger flights are curtailed there is lower capacity and rising prices of airfreight as well as scarcity of “Reefer” refrigerated shipping containers.^[1]

If there are shortages of imported food, fresh fruit and vegetables may become harder to source in the UK due to labour shortages in the spring. The changes in demand and supply may not only impact on availability but also on prices. Currently, there is little real time data on the price effects. The UK ONS has produced experimental price data on “High demand products” (HDPs) which suggests that for all food items surveyed prices rose 0.4% in the period March 16 to April 5th, while all HDPs rose 2.6%. It’s not clear what one makes of this, whether it is a one-off shock or a rising trend. However, experience from the 2008 financial crisis does suggest that prices of some goods and commodities could rise substantially.

Food for thought

How can we summarise the picture?  The shortages that appeared in UK supermarkets as the lock-down was instituted were probably caused by a combination of an increased need for households to buy food for use at home rather than eating out, and some panic buying. The shifts in demand have exacerbated supply constraints as the distribution networks were not set up to handle the new pattern of demand. Low levels of stocks created choke points that then cleared. In the EU trade in goods has continued to flow but controls on the movement of people created some border delays and created problems for lorry drivers and the road transport sector. The European Commission is seeking to alleviate problems with its “Green Lane” plan, but this is only advisory. For the future, the UK may also find food supplies being affected by agricultural labour shortages. In fact, it is not only the UK that is restricting inflow of migrant workers. Central European workers are less able to work in Germany and Moroccan workers in Spain.

The role of trade in the future is uncertain. The very purpose of trade is to allow scarcity in one place to be offset by abundance elsewhere. Sourcing from many suppliers in different places is a way to reduce risk. This is stressed by a recent ECIPE paper. In the short run international trade will be important for smoothing availability and dampening down price fluctuations. It is, therefore, important that governments do not introduce protectionist measures but facilitate as much as possible the free flow of goods. In the longer term, it is also clear that the vulnerability of supply chains and the need for security monitoring is going to create pressures to ensure that supply chains are more robust, which might mean the shortening of supply chains or making them more flexible.  A recent House of Commons research paper on food security summed up the dilemma neatly: “a completely self-sufficient country would be vulnerable to events at home like adverse weather. Equally too much reliance on a few specific imports can leave a country exposed to international disruption.”

Footnotes

^[1] Rates for Air Cargo are reported to have gone up in March, (Bloomberg  Supply Lines March 30, 2020) , as have Refrigerated container (“Reefer” ) rates. This indicates trade is till moving as of  late March https://www.reuters.com/article/health-coronavirus-china-supplychain/rpt-chinas-port-jam-eases-but-refrigerated-container-rates-soar-idUSL4N2B706F

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