The impact of COVID-19 on agricultural markets and GHG emissions

Macroeconomic assumptions

Following the COVID-19 pandemic, all countries are projected to experience a deep recession in 2020 followed by a slow and gradual recovery starting from 2021 (OECD, 2020[3]). Figure A A.1 shows the projected evolution of global GDP under the baseline, the upside and downside scenarios. Under the upside scenario, global GDP is projected to drop by 5.75% in 2020 compared to the 2019 level, and to be 8% below the pre-crisis projections for 20204 (i.e. the baseline). Following a gradual resumption of economic activity in the second half of 2020, the global economy is expected to grow by 5% in 2021, but to remain 6% below the baseline level. In the downside scenario, a larger drop in global GDP is projected, -7% in 2020 from the 2019 level, keeping global GDP 9.6% below the baseline projection. In 2021, the recovery will be less pronounced, with global GDP projected to rise by 3.5%, but to remain 9% below the baseline. In both scenarios, global GDP is not expected to return to baseline levels by 2029.

For the years 2020 and 2021, the evolution of global GDP under the upside and downside scenarios is based on country-level estimates from the OECD Economic Outlook (June 2020). For the countries for which estimates were not available in the OECD Economic Outlook5, projections from the World Economic Outlook of the IMF (April 2020) were used. To simulate the downside scenario, an additional 10% shock was added to the IMF projections. For the remaining years of the projection period, the baseline growth rates were applied to the revised 2021 values.6 The OECD and the IMF recently revised their macroeconomic projections.7 These most recent projections are in line with the upside scenario used in this analysis, while the downside scenario provides insights about a more pessimistic economic pathway.

 

Figure A A.1. Evolution of global GDP index under baseline, upside and downside scenarios (constant 2019 USD)

Note: Assumptions for GDP in 2020 and 2021 under the upside and downside scenarios based on OECD Economic Outlook (OECD, 2020), extended for projection period using baseline growth rates.

Source: OECD/FAO (2020), “OECD-FAO Agricultural Outlook”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-outl-data-en.

The COVID-19 pandemic also affected exchange rates. The US dollar continued to appreciate against almost all currencies, while the currencies of commodity exporters (e.g. Brazilian real), experienced significant depreciations. The devaluation of these commodity currencies reflects, to a certain degree, the sharp decline in commodity prices, notably those of petroleum, metals and energy and to a lesser extent those of agricultural products.

Under both scenarios, the exchange rates for the year 2020 are assumed to equal their current values (i.e. June 2020) and to remain stable in nominal terms over the projection period. However, for countries that experienced a devaluation above 5% in 2020 (i.e. Brazil and the Russian Federation ‒ hereafter “Russia”), additional adjustments were made to bring the exchange rate closer to the baseline values in the following years of the projection period, following the assumption that their currencies will bounce back. Figure A A.2 illustrates real exchange rate assumptions for selected countries under the baseline and the upside scenario. The exchange rate assumptions for the downside scenario are very similar to the ones of the upside scenario.

 

Figure A A.2. Real exchange rate assumptions for selected emerging and developed countries under baseline and upside scenario

Note: * For Russia, the real exchange rate is expressed as RUB/(10*USD)). LCU stands for local currency.

Source: OECD/FAO (2020), “OECD-FAO Agricultural Outlook”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-outl-data-en.

In early 2020, oil prices collapsed due to the slump in demand and the lack of agreement between Saudi Arabia and Russia on supply cuts. Under the upside scenario, the crude oil price is projected to average at around USD 40/barrel in 2020 and 2021, down from USD 64/barrel in 2019. Thereafter, the oil price is expected to gradually recover, and is assumed to match the baseline value from 2025 onwards. Under the downside scenario, the drop in the crude oil price is projected to be even larger, with the oil price averaging at USD 36/barrel in 2020 and USD 30/barrel in 2021.8 The oil price is also projected to recover after 2022 and reach the baseline value in 2025.

Other assumptions9

As a result of the pandemic, substantial increases in final consumer prices have been witnessed, despite the fact that prices of bulk commodities remained low.10 In this scenario, this effect is incorporated by assuming a 2% increase in the producer-consumer price margin in 2020 and 2021 compared to the baseline, under both the upside and double hit scenarios. From 2022 onwards, the food system is assumed to adapt to the new situation and hence the margin returns to baseline levels.

Travel restrictions, border closures, and additional regulations and documentation requirements have formed an important part of the policy response to the COVID-19 pandemic, and these measures have significantly affected international trade. As long as these restrictions remain in place, they are likely to lead to a substantial increase in trade costs (WTO, 2020[5]). In this scenario, this effect is accounted for by assuming that trade costs increase by 2% of the export value in 2020 and 2021 compared to the baseline, and by 1% for the remainder of the projection period.

Impact on calorie demand

The lower incomes following the COVID-19 outbreak are expected to reduce gross calorie demand despite lower agricultural prices (see below). Under the upside scenario gross calorie demand per capita is projected to be 0.85% below baseline level in 2020-21 and 0.7% below baseline level in 2029.11 Gross calorie demand is projected to drop by an additional 0.3 percentage points throughout the projection period under the downside scenario.

Moreover, the impact on gross calorie demand is expected to be significantly stronger in least developed countries (LDCs) than in OECD countries. Under the two COVID scenarios, the projected percentage decline in gross calorie demand in LDCs is about two times higher than in OECD countries in 2020-21 and this effect is expected to be maintained over the medium term. The relatively larger drop in calorie demand in LDCs compared to OECD countries reflects the fact that households in LDCs spend a higher share of their income on food. Therefore, a drop in household income due to the economic downturn has a larger effect on food consumption in LDCs than in OECD countries.

While the average impact on calorie demand appears low, the impacts within countries are likely to be substantially larger, especially in those characterised by important income inequalities. Since the poorest segments of the population are expected to be at higher risk, it will be crucial that additional efforts are made to reach global food security by 2030, as targeted by the Sustainable Development Goals. Declining incomes will also make nutritious food (e.g. fruits and vegetables, dairy) less affordable, especially for the poor, suggesting a deterioration in the quality of diets (Schmidhuber, Pound and Qiao, 2020[6]).

Impact on agricultural production

The drop in demand for agricultural commodities and subsequent decline in prices will lead to a reduction in agricultural production. The impact on overall production is expected to be relatively small in the short term as it takes time for agricultural producers to respond to lower consumer demand. In the medium term, larger declines in total agricultural output are expected. By 2029, total production is projected to be 0.9% and 1.2% below baseline levels under the upside and downside scenarios, respectively. The production reaction is more pronounced in the downside scenario, as demand will be more affected if economic recovery is slower. Overall, the average impact on the production of commodities covered by the Outlook is expected to be limited.12 However, the supply of other agricultural products (e.g. fruits and vegetables) has been affected to a greater degree.

Moreover, as consumer demand is expected to fall more substantially for high-value livestock products than for staple foods, the decline in animal production is expected to be stronger compared to cereal production. Cereal production is even projected to slightly increase in 2020-21 compared to the baseline, as lockdown measures trigger additional demand for staple foods. In the following years, cereal production will fall to match lower demand, and in particular lower feed demand due to a decline in animal production. Animal production is projected to fall by 1.1% and 1.3% in 2020-21 under the upside and the downside scenarios, respectively. In the following years, animal production is projected to drop even further, albeit at a lower rate.

Impact on greenhouse gas emissions (GHG)

The decline in agricultural production under the COVID-19 scenarios is expected to lead to a reduction in direct GHG emissions from agriculture. In 2020-21, these emissions are projected to fall by 53 Mt CO2-e and 65 Mt CO2-e below the baseline levels in the upside and downside scenarios, respectively. Since agricultural output under these two scenarios is projected to keep declining over the medium term, a larger drop in GHG emissions is expected in 2029 compared to the baseline. In 2029, GHG emissions are projected to fall by 60 Mt-CO2-e and 81 Mt-CO2-e under the upside and downside scenarios, respectively.

In percentage terms, agricultural emissions are projected to drop more substantially than total production both in the short and medium terms. This projected decline in emission intensity of the sector is underpinned by the larger fall in demand for livestock products, which are more emission intensive than crop products. This compositional change (i.e. reduction in the share of animal production in total production) can therefore explain the larger drop in GHG emissions compared to agricultural production.

Impact on agricultural prices

As discussed above, the economic slowdown and surge in unemployment caused by the COVID-19 pandemic are projected to weaken global demand for agricultural commodities. Supply-side reactions to this lower demand will be delayed as production decisions (e.g. sowing of crops) were made prior to the onset of the COVID-19 pandemic. This will lead to a relative oversupply of agricultural commodities—at least in the short term—causing agricultural prices to decline. In response, stocks of agricultural commodities are expected to increase, causing commodity prices to fall further until normal levels of consumer demand resume.

Scenario results also illustrate the expected evolution of the FAO Food Price Index (FPI), a weighted average of world prices for cereals, vegetable oils, sugar, dairy and meat, under the baseline, the upside and the downside scenarios for the period 2000-29.13 While this index gives a good overview of the general evolution of agricultural prices, the impact on prices will vary across specific commodities.

Under the COVID-19 scenarios, agricultural commodity prices are projected to drop by more than 10% below baseline level in 2020-21. This projected decline is more pronounced than that witnessed during the first half of 2020 partly because the model assumes that the effect is evenly distributed across the year and not monthly or staged by countries. Since the macro-economic impact on food demand is expected to be delayed, the largest impact on prices will be witnessed in 2022. After 2022, commodity prices are projected to gradually recover but they are not expected to return to baseline levels. Price recovery will not be complete since global GDP is also projected not to completely recover over the medium term. As explained above, a relatively lower global GDP and hence reduced level of consumer income translates into a subdued demand for agricultural commodities, but is assumed not to affect agricultural supply directly, which puts downward pressure on prices.14 Relatively larger drops in prices are expected under the downside scenario, with the FAO FPI projected to be 4% lower than under the upside scenario in 2022, and 2% lower in 2029.

Impact on farm revenues

The decline in agricultural prices resulting from the pandemic is expected to put downward pressure on farm revenues. In 2020-21, agricultural revenues are projected to be 8.8% and 10.4% below baseline levels under the upside and downside scenarios, respectively. This negative impact on revenues is expected to be maintained over the medium term, with agricultural revenues in 2029 projected to be 7.3% and 8.8% below the baseline in these scenarios. Lower prices and consequently declining agricultural revenues could spur increased protectionist policies and higher government support that can then further reduce international prices.

Impact on agricultural exports

The COVID-19 outbreak seriously disrupted agricultural trade (OECD, 2020[7]). Lockdowns and limits on the mobility of people reduced the movement of goods domestically and internationally. Lockdowns also reduced the availability of labour at ports to unload ships and conduct a variety of trade processes, such as physical inspections, testing and certifications. At the same time, many countries changed protocols determining access to ports, leading to disruptions from port closures and requirements for additional documentation and quarantine measures. In addition, some countries introduced temporary export restrictions, which reduced international trade even further. At the time of writing, lockdowns and movement restrictions have been lifted in several countries, but are assumed to be (re-)introduced in countries where the virus has started the (re-)emerge.

As a result of these disruptions and the decline in demand, global agricultural exports in 2020-21 are projected to drop by over 1% in USD value terms under both scenarios compared to the baseline. These global averages mask differences between countries, some of which will experience stronger decreases in agricultural exports than others. From 2022 onwards, agricultural trade is expected to pick up again and grow at similar rates as before the COVID-19 outbreak, but like the GDP recovery path, agricultural trade is not expected to completely return to baseline levels. By 2029, world agricultural exports under the upside and downside scenarios are projected to be around USD 3 billion and USD 4 billion (in constant 2004-06 terms) below baseline levels, respectively.