COVID-19 price tag estimated in trillions

Depreciation in U.S. dollar value to boost agricultural trade and offset losses.

September 9, 2020

6 Min Read
COVID-19 face mask FDS.jpeg
Texas A&M AgriLife Research

The COVID-19 pandemic is expected to reduce the U.S. gross domestic product (GDP) by $2.5 trillion and employment by 19 million full-time equivalent jobs over the next year, according to a study coordinated by Texas A&M AgriLife.

This spring, the U.S. Department of Homeland Security's Center of Excellence Cross-Border Threat Screening & Supply Chain Defense (CBTS) at Texas A&M teamed up with Arizona State University’s DHS Center of Excellence, the Center for Accelerating Operational Efficiency and researchers at Victoria University in Melbourne, Australia, to examine the economic impacts of COVID-19 on U.S. agriculture sectors.

While certain that the pandemic will have a significant impact on the U.S. economy, Dr. Greg Pompelli, the Texas A&M CBTS director, said the researchers used this project to gain a clearer picture of the pandemic’s shorter- and longer-term impacts on the U.S. food and agriculture sectors in comparison to other critical sectors.

“This analysis gives us a critical and realistic evaluation of how the pandemic has and will  continue to impact our nation’s and the world’s food supply,” said Dr. Patrick Stover, vice chancellor of Texas A&M AgriLife, dean of the College of Agriculture & Life Sciences and director of Texas A&M AgriLife Research. “It will be critical that we work together to elevate food system concerns and develop solutions that address the economic consequences to serve as a foundation for lasting recovery.”

To help understand these impacts, researchers utilized a model of the U.S. economy that included a special emphasis on the major food and agriculture sectors. The team used quarterly economic data in their model of the U.S. economy to determine the effects of the pandemic and the impacts of related policy responses on the U.S. economy and agriculture sectors.

In July, the researchers completed their initial quarterly economic projections of the immediate impacts and recovery that the U.S. economy and agriculture sectors may experience between March 2020 and February 2022.

“As we all witnessed, COVID-19 and measures taken to slow disease spread harmed lives as well as the economic prospects of businesses and communities worldwide,” Pompelli said.

Their findings estimate that COVID-19 will reduce U.S. GDP year by 11.9%, or $2.5 trillion, over the next and reduce employment by 12.2%, or the equivalent of 19 million full-time jobs.

However, the report concluded that compared to most other sectors such as tourism, air transport, education, restaurants and lodging, the U.S. food and agriculture sectors will experience smaller economic impacts because they were not subject to shutdowns and reductions in aggregate consumer spending brought on by job losses.

“The resulting recession had a relatively small impact on the overall demand for farm products,” Pompelli said. “Still, COVID-19 caused income declines in all food and agricultural sectors.”

COVID-19 impact on agriculture sectors

Significant effects for agriculture early on in the pandemic included supply chain disruptions, such as the closure of some meat processing facilities, mismatches between supplies of some goods and demand caused by school/restaurant closures, transportation problems and farm labor shortages.

Some producers lost access to traditional marketing channels, and consumers discovered that they periodically could not find desired goods. These challenges led to unusual situations where retail prices increased, but prices paid to producers declined -- or, worse, producers could not find a channel to sell their livestock or produce. In some areas, these problems forced producers to destroy or dispose of their agricultural products.  

While some of these could not be fully captured by initial modeling efforts, Pompelli said, based on their estimates, the researchers expect a 5.2% decrease in real U.S. farm income this year and project a 0.76% decrease in 2021. However, the U.S. Department of Agriculture’s latest estimate for real farm income – the "Farm Sector Income Forecast – September 2020" – shows an increase of 3.6% to $102.7 billion, the highest level since 2014.

The primary difference is that direct federal government payments -- which are a combination of commodity program payments and special assistance aimed at offsetting impacts of trade and COVID-19-related events -- to farmers increased 64% in 2020 to $37.7 billion. Without that support, real farm income would have been substantially lower in 2020.

The researchers also found that the economic impacts of COVID-19 were not uniform across agriculture. The team estimated that livestock operations will experience more negative effects, and in fact, USDA’s latest figures show that animal product receipts in 2020 are down just more than 8.1%. However, for crops, cash receipts are expected to increase 6.9%.

As noted, the federal government attempted to offset the COVID-19 disruptions through the Coronavirus Food Assistance Program, which was designed to provide up to $16 billion in direct payments to farmers and ranchers affected by the coronavirus pandemic, although only about half of this amount has been distributed to date. In addition, USDA’s Farmers to Families Food Box program purchased $3 billion in fresh produce, dairy and meat to help Americans in need. Charitable organizations, local, state and other federal efforts were initiated to support hunger relief efforts as the pandemic increased the number of people who had to rely on food banks.

Recession's impact on global food security

The U.S. is not alone in facing difficult economic times, according to the authors of the report, including Pompelli; Victoria University Centre of Policy Studies director Dr. Peter Dixon and professor Dr. Maureen Rimmer, and Dr. Ross Maciejewski, director of the Center for Accelerating Operational Efficiency, a DHS Center of Excellence at Arizona State University.

According to the "Global Economic Prospects Report, June 2020," World Bank predicted that COVID-19 has created a global recession considered to be the sharpest contraction in our lifetimes and that has affected the economies of more countries than were harmed by the Great Depression of the late 1920s.

“Sadly, the COVID-19 recession will have important humanitarian and food insecurity implications and, through reduced global consumer incomes, could affect U.S. agricultural trade prospects, which will be critical to the recovery of major U.S. agricultural sectors,” the report stated.

What’s next?

While the researchers cannot predict if a second wave of the COVID-19 pandemic will hit the U.S., their current projections align with other forecasts about the likely path an economic recovery in the U.S. will take.

The researchers found that, although the U.S. economy will steadily recover, GDP and employment going into 2022 will remain about 5% below where they would have been in the absence of COVID-19.

Their simulations also show a real depreciation in the value of the U.S. dollar, which is a bit of a silver lining for the recovery of export-oriented U.S. agriculture sectors, such as grains and oilseeds. Early evidence suggests that their simulations are correct, as the dollar has depreciated about 10% against a market basket of six international currencies since March. In addition, since May, the dollar has depreciated almost 4.5% against the Chinese yuan and a little more than 8.3% against the Brazilian real.

Pompelli said a weaker dollar means U.S.-produced goods are cheaper on international markets, and that helps U.S. exports, even if many countries are still in a recession.

USDA’s most recent export estimates from the "Outlook for U.S. Agricultural Trade,” released Aug. 26, project a $5.5 billion increase in U.S. exports in fiscal 2021, reversing the slight decline experienced this year. Given that the Federal Reserve Bank’s low interest rates are designed to help stimulate the economy, most observers expect these policies to remain in place for several years.

In the next few months, the research team will recalculate its estimates of the economic impacts of COVID-19 by updating the influence of policy actions. They will also work with the University of Missouri's Food & Agricultural Policy Research Institute to examine the impacts the pandemic has had and is expected to have on major U.S. agricultural commodities and trade.

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