This Chain is part of a series on how the COVID-19 crisis is affecting agricultural markets and investor flows.
The global food chain continues to see major disruptions as a result of the global outbreak of COVID-19. One of the main factors behind disrupted supply chains is workers falling ill with COVID-19, forcing companies to reduce productivity or shut down plants. Nowhere is this more prevalent than in the meat industry, where significant outbreaks are happening at slaughterhouses around the world. The United States has seen a particularly large number of cases at meat facilities, while European countries and Canada have also had to deal with a similar situation. In Brazil, the world’s largest exporter, major meatpackers that are already contending with various ESG issues, including reputation risks from exposure to deforestation, are at the center of disruptions to the meat industry.
The current situation reflects the ESG dilemma that the industry is now facing. If slaughterhouses need to close due to workers falling ill because of COVID-19, there are large disruptions throughout the supply chain: Animals cleared at farms amid no off-take on one end of the chain and empty supermarket shelves on the other end. But if facilities are kept open to avoid these disruptions, the health and safety of workers are put at risk, leading to widespread ramifications for companies, their employees, and consumers. At the same time, outbreaks at meat facilities are causing supply chain disruptions, the alternative meat industry is growing and seeing reduced costs. These trends expose systemic and industry-wide risks. Investors may lose confidence in the industry amid questions about the long-term feasibility of industrialized and international meat supply chains. Consumers may meanwhile reduce their consumption of meat because of both sustainability and availability concerns. Governments may also become more cautious of supporting the meat industry.
Pressure on the meat industry will likely grow given its role in contributing to deforestation (a factor behind zoonotic diseases) and its vulnerability to outbreaks at its plants. COVID-19 was likely triggered by wet markets in Asia and, amid the spread of the pandemic, there has been a growing understanding of how zoonotic diseases are linked to deforestation and habitat destruction.
Impact in Brazil
In Brazil, major meatpackers such as JBS SA and BRF have faced outbreaks as the number of cases of COVID-19 has increased sharply as of late. In its latest quarterly investor call, JBS SA warned of business risks and higher costs from COVID-19 hurting the company’s financials throughout the rest of the year. Both JBS SA and BRF have had to temporarily close facilities in order to stop the spread of the virus. Amid the rise in the number of COVID-19 cases among industry workers, JBS SA has donated 700 million reals (USD 120 million), which is equal to 3 percent of its EBITDA for the last 12 months, for initiatives to help contain the virus, of which more than half is targeted to programs in Brazil. Minerva SA has made workers stand two meters apart. There is pressure for the meat industry to keep producing, for both profit and to meet consumer needs, which makes workers vulnerable to contracting the virus and companies more exposed to reputation risks if they do not take adequate precautions. Companies in Brazil, the world’s largest beef exporter, are looking to fill shortfalls in other markets, such as the United States and China. But with the number of COVID-19 cases on the rise in Brazil, which is now seeing the sharpest increase in the world, more meat facilities there may have to temporarily close.
With COVID-19, companies are under greater scrutiny to take precautions to enhance worker safety. Meatpacking has a long history of having dangerous conditions with workers positioned close to each other, hazardous equipment, the need for adequate personal protective equipment (PPE), and meat being prone to contamination. A growing number of investors have increased their ESG concerns during COVID-19 pandemic as they look to build more resilient portfolios to guard against exposure to economic fallout from future crises, such as climate change. But investors’ main ESG concerns since the outbreak have been paid time off policies, health care coverage, and the ability to ensure safe working conditions for employees.
While companies focus on reducing their workers’ exposure to COVID-19 and keeping operations moving as close to full capacity as possible, sustainability efforts may take a hit. For Brazilian meatpackers, they are linked to deforestation in the Amazon, and their risks are likely to rise during the summer months when the fire season happens. CRR’s recent report on the fires in 2019 shows that deforestation for agricultural commodities drove a portion of the fires. The implications of supply chain disruptions, outbreaks at meatpacker facilities, and reputation risks for the industry and its investors could endure for years.