Understand the impact of the pandemic on our food supply chain, how this adjusts trips to the grocery store, and the new "normal" for the next visit to a restaurant.
- Jennifer Rohen, CLA Principal, WOTC Practice Leader
- Eric Beenken, CLA Principal, Agriculture
- Brendan Kurvers, CLA Manager, M&D
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Jen Rohen: Hello CLA family, friends, colleagues, and community partners. Welcome back to our livestream series. We sincerely hope that you are continuing to stay safe and healthy at this time.
Today, we have Brendan Kurvers and Eric Beenken here to talk to us about how economic relief provisions are affecting us each at a very personal level through the food and beverage industry. We got a glimpse of this last week with Brendan, and today we’ll dive deeper into the economic impact that could touch us all – and at what cost? We also have Jack Rybicki back to discuss the new interim final rule (IFR) issued last night providing guidance on refinance of Economic Injury Disaster Loans (EIDL) with Paycheck Protection Program (PPP) loan proceeds and lender remittance of EIDL refinance proceeds to the Small Business Administration (SBA).
We also would like to direct you to our COVID-19 landing page at wpbeijing.com for up to date information about all these programs, tools, and ways to contact us for more specific consultation.
I’d like to start today’s conversation with Eric Beenken, a Principal in agribusiness and cooperatives and CLA’s Leader in the livestock industries.
Eric Beenken: Keeping the ultimate consumer in mind with the July 4th holiday around the corner, let’s talk about the traditional livestock meats that we all love to grill; I’m talking about your favorite cuts of steak, brats, hot dogs, ribs, burgers, and anything wrapped in bacon. By the way, if you’re not “good” at grilling steak, try grilling a frozen steak … I highly recommend it.
Rohen: I never knew that! When I prepare food, I usually don’t think about the US farmer as I’m focused on the meal for my family. Eric can you tell us how the US livestock producer has fared so far in 2020?
Beenken: I know what exactly what you mean Jen, I do the same. For the livestock producers, the 2020 commodity markets have been something close to a hibernating polar bear: frigid and unable to rise. What was a down market due to normal trade disputes, tariffs, and political posturing in global trade, really came to a crash when coronavirus disrupted the US supply chain in April and May.
Rohen: I remember seeing the headlines on COVID-19 outbreaks in meat packing plants. What impact did that have on the US producers?
Beenken: The food supply chain is a well-timed machine, from farm to retail. When many of the plants temporarily closed or slowed chain speeds in April and May, a severe bottleneck occurred on the farm. The producer had little to no options to deliver loads of market-ready animals. Further compounding the problem was as producers scrambled to find buyers, the animals continued to eat! Continued to grow! To no fault of their own, animals are biologically designed to eat when hungry. To stop feeding an animal is in many forms animal cruelty, so the producers continued to care for the livestock well beyond the point at which they were intended to be harvested. Not only was there a backlog from a head count perspective, but the animals are much heavier than ideal from the additional days on feed, which actually discounts the value of the pig while the producer incurred greater cost to feed and care for the animal.
You add the fact that female gestation period is consistent, and it created a real problem for producers. Weaning and weaned animals coming into the farm system, while the market animals weren’t leaving the system. Producers had to fill barns beyond capacity to house the animals, which is not healthy for the animals. Almost all producers considered depopulation of the herd. Some did in fact have to depopulate. Very difficult and emotional time for many US producers.
Rohen: What a difficult situation for the US producers to be in. There was no favorable option for the producer to choose. So fast forward to today; what has transpired since the initial COVID-19 outbreaks?
Beenken: President Trump used the Defense Production Act to identify meat packing and processing plants as critical to US infrastructure. This forced meat packing plants to stay open, and ultimately forced plant management to work with local government officials to create a safe work environment for the employees and the communities in which they are located. The latest USDA report has pork and cattle harvest at, or exceeding, prior year actual on head count with many of the animals going to harvest are 5-10% heavier than normal. Increased harvest count plus heavier carcasses equals more meat coming into the supply chain.
A backlog remains in most US producers’ operations, as it will take many, many months to catch up to what was lost as plants continue to ramp up chain speed and run six days a week instead of five. Livestock markets continue to hibernate, which is not expected to change in 2020 based on current futures markets. Although 2020’s Independence Day holiday will surely be different in comparison to recent years, your favorite grilling meats should be available at your local grocer.
Rohen: Thanks, Eric, that’s such good insight and can really help us understand what’s happening at a different level. We’re going to pivot to Brendan Kurvers’s discussion for food and beverage production. Brendan comes to us from Minneapolis, Minnesota, where he leads the manufacturing and distribution industry group. He serves a variety of manufacturing and distribution companies but has a deep passion and concentration of clients that are food and beverage manufacturers and distributors.
Kurvers: Thanks Jen! Eric, Thanks for the detailed information on what we can expect from the livestock and meat production perspective. Based on the findings you provided earlier, we expect food production in livestock and meat production sector to feel at least some pricing impacts, which will be passed on to retail outlets, and ultimately, to the end consumer – we will get to this a bit later.
So, the next phase of our journey will take us from the farm to the food production floor. As many of you have seen on the news, it is hard to go a day without hearing about another mass breakout of COVID cases impacting a major food producer. In fact, some food producers are scaling down, or were even temporarily shut down, due to the harsh reality of containment measures. However, as Eric mentioned, the supply chain has proven to be resilient. In fact, meat production is up around 95% capacity vs. prior year in June due to the Defense Production Act and backlog stemming from late April and May. So, we expect that the days of meat shortages are in the rearview, at least for the time being.
Rohen: So, Brendan, with the new normal starting to become the reality for food and beverage manufacturers, what are some key strategies that we are seeing in the industry, and how does this translate to what consumers will end up seeing in terms of prices of food?
Kurvers: Great question, Jen. We are seeing a variety of strategies being implemented across all varieties of food production, some of these strategies include:
1. Creating contingency plans
2. Reinvesting in supply chain visibility or sometimes first-time investment in supply chain visibility
3. Exploring omnichannel solutions and diversified retail capabilities
So, why is this so important to the consumer?
- Many food producers had to make go-to-market pivots – Food producers that typically sold to restaurants may have had to make a pivot to e-commerce. As a result, consumers will likely see price impacts based on this changeover and also may have to find loved products through online outlets.
- Most had to invest in enhanced employee safety/building security – This is most likely preventative, but is required by OSHA standards. However, these changes tend to be costly and, depending on systems in place pre-COVID-19, tend to be quite disruptive. On the positive note, this should give you some comfort around the safety of the food you are eating.
- Capital expenditures around tech stack infrastructure – Lot tracking is becoming more and more important after multiple foodborne illness outbreaks in 2019. Many food processors made significant technology investments to be prepared for Food Safety Modernization Act regulation. Additionally, real-time feedback in the supply chain is a major reinvestment opportunity that is being deployed to increase supply chain visibility and understand omnichannel capabilities.
Rohen: Brendan, with all of this uncertainty, what have consumers embraced as they head to the grocery store or other retail outlets?
Kurvers: Sure, Jen, I had the luxury of speaking with one of our grocery professionals at CLA, Brian Baumgart. He provided us with some key information that we will share with you now:
- In April, the price of groceries rose 2.6%, according to the Bureau of Labor Statistics, resulting in the biggest one-month increase in grocery prices since 1974.
- Even more alarming is the increase in egg prices, which shot up 16.1% on average.
- But even more eye-popping: In some areas of the country, the increases were larger. For example, the price of ground beef in the Dallas-Fort Worth area increased by 14.5%, the price of chicken breast in Los Angeles skyrocketed by more than 26%, and the price of orange juice is up 14.6%, according to Nielsen data exclusively obtained by NBC News.
- From the restaurant perspective, it can really be hit or miss depending on level of COVID restrictions in place which can really depend based on the region, state, and – in some cases – even city. We have even seen significant price fluctuations from restaurants that can be a mere mile apart.
Rohen: Brendan, it sounds like there are many moving pieces flowing through the food and beverage supply chain; with all of this uncertainty, what can consumers expect when they head to the grocery store or other retail outlets during the upcoming 4th of July Holiday?
Kurvers: As Eric laid out for us before, we don’t expect to see meat shortages over the 4th of July Holiday. However, we have been hearing many food brands scaling back on SKU’s counts in retailers, in an effort to optimize the food supply chain. So, you have to settle for plain Oreo’s instead of coconut cream pie or maple bacon Oreo’s, for the time being. Additionally, you may feel a slight price increase across all food products that are you buying, but we do expect these prices to normalize for the most part by the time you are buying your food stuffs for your 4th of July festivities. Eric, what are you seeing from pricing in the livestock and meat markets?
Beenken: The latest USDA retail reports suggests meat prices are in a bullwhip: inflated prices due to low supply. Retail prices usually have a two-week lag in response to the current posture of the supply chain. It is expected that grocer retail prices will deflate over the next two weeks, right in time for your BBQ cookout.
Rohen: Thanks so much to you both for this solid update on the impact to the food and beverage industry. We also have Jack back for more discussion on PPP forgiveness and to discuss the new IFR from last night. Welcome back, Jack! I’d like to start by having you provide us with the timing of the application for forgiveness.
Rybicki: As expected, the SBA has provided guidance that confirms a borrower may apply for forgiveness before the end of the 24-week covered period, if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.
We received very little guidance on how this mid-period forgiveness will work. The guidance the SBA did provide was limited to the application of the wage reduction test, in the event a borrower applies for forgiveness early, and the answer is not particularly favorable. Specifically, if the borrower has reduced any employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction for the full 24-week covered period, regardless of the actual period being used for the forgiveness calculation. I guess the moral of that story is restore all wage reductions before filing for forgiveness, so you don’t have to consider the wage reduction test! The guidance notably did not address FTE reduction test related matters, which to me signals that the SBA doesn’t expect many borrowers to be impacted by this test given the new safe harbors provided.
Rohen: Thanks, Jack. I know there’s a good example related to the alterative payroll covered period. Can you talk about that a bit?
Rybicki: The IFR provides a nice example for Alternative Payroll Cover Period (APCP) and again reiterates that anything paid during the CP or APCP is eligible for forgiveness, plus anything incurred during the CP or APCP, and paid on, or before, the first regular payroll date occurring after end of APCP or CP are also eligible for forgiveness. This seems to again reinforce the conclusion that you will be able to include more than eight weeks of payroll in the original eight-week covered period, as the first payment you make in either the CP or the APCP will likely be for a period that includes some time incurred outside of the period.
Rohen: That’s going to be super helpful for borrowers that are trying to use the original eight-week covered period. Let’s also talk about the owner-employee definition and what clarity came for that.
Rybicki: The IFR specifically mentions that the definition of owner-employee includes C Corp owners. Previous guidance on owner-employees had only referenced owner-employees of S Corps, so there was some question as to whether or not C Corp owners were included in the scope of owner-employee reporting. The IFR clarifies that C Corp owners are capped by the amount of their 2019 employee cash compensation and the employer retirement and health insurance contributions made on their behalf. While this language causes a bit of confusion regarding whether the cap of $20,833 for 24 weeks or $15,385 for 8 weeks applies to all three components or just the cash component. We believe the cap only applies to the cash comp, and that retirement and health insurance contributions can be included.
The IFR also addresses owner-employees for S Corps, Schedule C filers and general partners in a manner consistent with guidance found in the applications. To reiterate, S Corporation owners are capped by the amount of the 2019 employee cash compensation and the employer retirement contribution made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation. Again, we believe the cap only applies to the cash compensation and that retirement contributions can be included (limited to 8/52nds or 2.5 months of 2019 contribution per application) as well.
Rohen: Anything else worth discussing about limitations on owner’s compensation for forgiveness?
Rybicki: The only additional comment, which was consistent with previous guidance but is worth repeating, is that for owners that are included on the PPP applications for multiple companies, the limitation on owners’ compensation eligible for forgiveness to $15,385 or $20,833 applies per owner in total across all businesses that owner is part.
Rohen: So, this new safe harbor about a borrower’s level of business activity seems to be very important to forgiveness calculations. Can you share anything with us on that topic?
Rybicki: It appears that the new safe harbor, that eliminates the FTE reduction test if a borrower had a reduction in business activity during the covered period, will eliminate concerns around the FTE reduction test for a significant percentage of borrowers. If a borrower experienced a reduction in business activity during the covered period that stemmed directly or indirectly from compliance with COVID-19 requirements or guidance, they will be exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. You’ll need to have appropriate documentation which must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records. The SBA has said it will consider both direct and indirect compliance with COVID-19 requirements or guidance since much of the reduction in business activity resulted from state and local government shutdown orders that are based in part on guidance from the three federal agencies.
Rohen: Unfortunately, that’s all we have time for today. Thank you to our guests today, to you for your questions, and to our moderators for all the support, great information, and answers.
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