COVID-19 is the black swan event that no-one saw coming. There is no precedent and so historical models tell us very little as to either the global health implications or the global economic implications. Much of the commentary we are reading is both facile and fallacious, often tailored to fit prior perspectives, and in other cases based on fundamental ignorance.
My own take on events is that the global outcomes are going to be major and that COVID-19 is going to be with us as a global black swan throughout all of this year. Export-focused agri-food will be less affected than most sectors.
For those not familiar with the term ‘black swan’, it is a random event, unable to be given a risk probability in advance, that changes many things. The associated hypothesis is that most of the mega-events that truly change the world are black swans.
The original black-swan notion goes back to a belief more than two thousand years ago in Rome that black swans were birds that did not exist – in those days no-one apart from Australian Aborigines knew that there really were black swans living in Australia, with these now released and established in many parts of the World. However, black-swan thinking has now morphed to being about low-probability unpredictable events, both good and bad, that change the world and are then rationalised with hindsight.
If we want to understand something about the COVID-19 black swan, then the starting point has to be the emerging epidemiology. From what we already know, this is a virus that behaves with fundamental differences to common influenza, with common influenza traversing the globe each year with mutating forms, low death rates, and infectivity following the path of winter seasonality. This COVID-19 virus is also fundamentally different in its epidemiology to SARS, despite belonging to the same broad category of corona viruses.
The key features of COVID-19 are that it is highly infective, and that transmission can occur before symptoms become evident. This early transmission is the reason why control is much more difficult than was the situation with SARS, for example.
At this stage it is difficult to estimate the true mortality rate for COVID-19. This is because deaths typically do not occur until at least two weeks after symptoms are evident. However, there is an emerging consensus it could end up around two percent, perhaps more. This is about 200 times greater than mortality rates for common influenza. This is serious stuff.
The epidemiology that I follow closely is for Singapore, Japan, and the specific situation of the Diamond Princess cruise ship. After that, I follow Chinese provinces such as Zhejiang and Guangdong which are telling their own story.
In relation to Wuhan and Hubei, I largely ignore them in terms of understanding the epidemiology, beyond recognising that there is a huge epidemic and that the authorities are overwhelmed. The authorities have now acknowledged that they themselves do not know the true level of infection.
As I write this, Singapore has 67 confirmed infections, with nearly all in clusters. The Singapore health authorities release detailed information daily for all relevant cases, including age, gender and the specific location within Singapore where they believe this person was infected, together with consequent high-risk contact situations. Very few other countries will be able to match this level of precision and transparency, but the confirmed cases are still growing each day.
So far there have been no deaths in Singapore, but 12 percent of the cases are in a critical condition. Other cases have not yet had time to get to that situation.
The virus appears to have got less of a head start in Japan than in Singapore. This increases the chance that Japan can close it down through strict quarantine.
In contrast, the situation on the Diamond Princess at Yokohama demonstrates how in a confined environment the virus runs rampant. It is all very well to restrict passengers to their cabins, but the disease is also circulating in the crew and not all crew can be confined.
I could write a lot more about the epidemiology, but the key message is that this virus is unlikely to be shut down without very high levels of quarantine. Also, the delay between infection and symptoms, combined with infectivity during this period, means that shutting the disease down will be a slow process with ongoing breakouts.
If quarantine and travel restrictions are relaxed prior to total eradication then the virus will fan out explosively as in Wuhan.
However, I do have modest confidence that a vaccine will become available in less than the oft-quoted minimum of one year. I think China will short-circuit the Stage 1 trials and that there will be no shortage of volunteers. The key impact of a vaccine, given to high-risk people not currently infected, will be to complement community-wide quarantining to reduce infectivity. It is unlikely to benefit those already infected.
So what does this all mean in terms of implications for economic activity?
My assessment is that global tourism is going to be greatly affected. For New Zealand, this will mean not only from China and elsewhere in Asia, but from Europe, with most of these tourists typically transiting through Asia. The cruise industry will grind to a total halt. I cannot see a rebound in less than one year. Similarly, the international education market will take a full year to recover.
I expect the forestry sector to suffer a major downturn but the rebound will come faster than for tourism. It will come when China can get its infrastructure development program up and running again. However, infrastructure development will only be a second-level priority for China.
China’s food production industries will be given priority and I am hearing from Chinese sources that this is already occurring. However, it is almost inevitable that there will be supply delays, with crop farmers struggling to get chemicals and animal farmers struggling to purchase feed. For example, nearly all of the big dairy farms purchase their feed from elsewhere including imports.
Almost certainly, China will give port priority to food imports. As one related example. I am advised that China has given high-level guarantees that New Zealand cattle shipments currently on the water will be given absolute priority on arrival.
Similarly, I expect that milk-powder imports will be given high priority. However, the meat logistics are more complex. At least in the short term, a lot might depend on the status of Dalian Port and the convoluted internal meat-processing supply chain. Fingers crossed on that one.
Another reason why agricultural export returns will be buffered over time is that I expect to see the New Zealand foreign exchange rate decline. This is because, as an export and import focused economy, we will be affected more than Europe and the US. We will earn more New Zealand dollars for our exports but New Zealand imports will become more expensive. This will impact inflation.
One of the remarkable features of the global COVID-19 black swan event to date is that global stock markets have been barely affected. I think this is because those markets have been unable to price the risk. It may also reflect the lack of alternatives that investors face. Trying to predict share markets is an art well beyond my capabilities, but I do express some surprise at the resilience of those markets.
The combined effects economy-wide of tourism, forestry and international-education downturns would seem particularly relevant for New Zealand. Substantial loss of jobs would seem inevitable.
*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. Previous article on Fonterra’s challenges can be found at https://keithwoodford.wordpress.com/category/fonterra. You can contact him directly here.
90 Comments
Gold to $800 could happen but as always X Oz of gold will buy the same object a hundred years ago as it will buy today.
What you are calling is major deflation of FIAT currancy.
To keep pumping stock markets with money created out of thin air devalues the existing potancy of that denomonation.
There are a lot of people who have been calling that this will happen and that FIAT currancy needs a reset and this event would be the ideal time to swing it into action.
Buy gold as it's purchacing power will be the same after the 'shift' as it will buy now but a $100k is savings will have the buying power of $50k.
I mostly agree but the fact is that you would have to sell your gold to realize its purchasing power (e.g. to pay of debt). Gold is an inflation hedge, not a deflation hedge.
Are you entirely debt-free? Sure buy some gold. But it is an insurance, not an investment.
If the markets aren't propped up, it all gets bad really fast. Can they keep endless dollars flowing to pump the system without it creating a massive event like inflation / deflation. PM prices exploding and the US reserve currency going broke..
Life will go on but it maybe different for a while amd maybe ever. Not the first time and won't be the last. Some will win, some will loose and some will die but life will go on.
We can dream of recovery but reality may be it will never be the same.
As an example, distance education may play a bigger part in International Ed and the number of bottoms on seats could take years to recover.
The Universities are looking at this option I believe as half their international students cannot turn up.
Thanks Keith. Your clarity was needed. We have had a lot of potential black swans its difficult to really believe its one when you see one.
Please keep us updated with what you know. When you are sitting on a lot of fat stock with a drought up your jacksy and a falling ...no a plunging schedule ahead, any enlightenment is appreciated.
Oh yeah diversify. How many times have I heard that word. Not many farmers survive that word Frazz. So what on earth do you mean by permaculture? And exactly how is that going to help in a situation as this? Easy to put a name on something....hey you drongo do permaculture, that will fix everything. Ffs.
The whole north island needs rain. I am lucky I supply local trade which is still moving but with export hitting the shops here prices are dropping. But thats not the end of the world cos I can buy replacements very cheap. Sell for less but buy for less. But still I want to know whats happening. Do I hold out for a few weeks, if the meat starts clearing off the wharves. Just because you ask questions doesnt mean your system is broken. Permaculture...??
Have you suggested permaculture to the tourism businesses running out of tourists. It would be just as useful.
No I didnt think so. Nothing like telling a farmer they are doing it wrong. Just get on the bandwagon.
We are probably not that far apart in our thinking Frazz. The mbovis thing is a fools errand. Stupid waste of time, money and animals. But then I dont remember getting to vote on it.
The tiny amount of money deemed drought assistance goes to a rural welfare outfit. They help coordinate feed supplies. If you can prove you have no equity and no money they might hook you up with a benefit. No more than anyone who has been made redundant will get.
I am looking at regenerative agriculture, all I've done so far is spend a lot of money with not much to show.I am thinking that my soils can be alot better at holding water and I have seen some impressive crops in the States. The problem is, once you buy a tractor you start spending and it just goes on and on. Low cost systems have been the winner in the past, but I like the mixed species pasture and I know rye grass is not the best dominate pasture for livestock or even the most productive. So I'm back spending money on seed and contractors in one very difficult year.
This year we have had very high temperatures and I've been told that if cereals don't cool off below 27 degrees at night they will die, if that's true then I have a lot of dead grass on the farm, we had daytime highs in the low 40's and at night lows of 30 degrees. Now the wind is blowing from the Nth West, the colours are fantastic but going to go grey very soon and not much left to eat. I see J Swap trucking going down the road full of PKE and PGG tell me there are tonnes of sheep pellets being sold daily.
I posted this on the weekend page but it's more relevant here.
what we do know is that China is shutting down. I talked to a mate and his brother drives a forklift in Sydney port, he has been laid off as no ships or a lot less are coming in from China.
We know meat is being stored in NZ and Aust, we know the wool industry is slowing fast as has forestry with forestry workers laid off all over the country.
We know that milk sales have declined and China obviously has reserves so no rushing back into the market. We can deduct from this that our export receipts are being shot to hell.
'Preventative action taken by Australian and NZ exporters
In the last week, many beef and sheepmeat exporters in both Australia and New Zealand had adopted similar preventative steps to minimise the oversupply problem in China in the hope to create some breathing space to help China’s market to recover.
Some of these steps included:
Chinese buyers asking exporters to push back shipments to late February and early March
Packers have looked to sell their product away to alternate markets
Packers are holding product in outside cold storages in both Australia and New Zealand.
In areas where rain has not been abundant, some packers in both NZ and Australia had slowed production down deliberately to take the pressure off from shipping to China.
One of the key underlying concerns was credit, Mr Quilty said, with some exporters still nervously waiting for payments on product that has arrived in China, while others spoke of deposits now starting to flow into their bank accounts after the CNY holiday period.
Many packers reiterated the need to be vigilant on payments and watching closely their creditors’ lists.'
https://www.beefcentral.com/trade/coronavirus-impact-stalls-imported-bee...
I would say that another month of this is going to really bite,
https://worldmaritimenews.com/archives/290140/xchange-empty-containers-p...
https://www.newstarget.com/2020-02-09-coronavirus-disrupting-chinas-shi…
I would suggest that now is a great time to ' buckle up'. Even if China gets back to normal soon it's going to take time to clear the backlog, they won't be eating twice as much for two months to catch up.
https://mymaritimeblog.wordpress.com/2020/02/13/coronavirus-delays-creat...
For a while I looked at pictures of empty supermarket shelves in Wuhan, and the reports of commentators.
Supplies of toilet paper, vegetables, rice, were scarce but hoarded.
Never saw yoghurt , milk or meat mentioned at all.
The Chinese will stick to essentials until they have replenished their savings.
Could take a while.
Keith, this is a good site regards China. HT Henry Tull
This is a great piece. So much better than the flimsy garbage put out by the bank economists. It's hard to know whether they really do think the impacts will be moderate, or they are showing their vested interest colors once again.
One criticism - he should really be referencing Taleb when he talks about black swans.
If you are going to reference anyone (and there is no need to reference anyone) it would be this guy.
'The phrase "black swan" derives from a Latin expression; its oldest known occurrence is from the 2nd-century Roman poet Juvenal's characterization of something being "rara avis in terris nigroque simillima cygno" ("a rare bird in the lands and very much like a black swan.' https://en.wikipedia.org/wiki/Black_swan_theory
It is interesting the different takes on the effect and duration of this thing. Trump has said covid19 will be gone by april "when the weather warms up" hahaha. This is one time I agree with Trump. Or is it that I prefer to not think of severe consequences. I have been trying hard to find some good property to buy at a good price but cant. If Covid19 can free up a few vendors and get them negotiable on price, then I will be happy.
Tourism NZ could pivot and concentrate all efforts on West Coast USA. ( all states on Pacific coast ).
Message being, escape the madness for a marvellous month - autumn in Arrowtown.
Let the West Coaster take a break from the toxic CNN v FoxNews, the Demoract/Republican warfare.
This is really bad, much worse than is being reported in mainstream media. Some really nasty stuff circulating on youtube. Make of it what you will. https://www.youtube.com/watch?v=anU42cc0b54&feature=youtu.be
Keith
We only recently had a measles epidemic, readily contained in NZ but rampart in Samoa.
The 1918 Influenza epidemic hit NZ hard with 9000 deaths.
We recently had Mycoplasma Bovis in some our dairy herds.
A few years before that we had Psa hitting our kiwifruit industry hard.
And prior to that we had a potentially damaging foreign moth causing major panic in Auckland.
What conclusion do you draw from these facts regarding imported diseases irrespective of whether they affect humans or domestic animals or plants? Is there a common thread here?
Also, what's your opinion on the Royal Mail ship "Niagara", in 1918, with a large number of flu-infected passengers on board prematurely docking at Auckland instead of waiting at anchor in quarantine out in the gulf only because it had the NZ Prime Minister and Deputy Prime Minister of the day on board. Timewise, the flu then snowballed throughout NZ. So do you think that this action alone accounted for the flu epidemic spreading throughout NZ?
Finally, intuition suggests that our food commodity prices should increase if China sees that we haven't as yet had a single case of Covid-19 and we have a track record of providing high-quality food.
Streetwise
In a nutshell, that bio-security is extremely important but also challenging. Different diseases have different vectors. As a short term measure, I would like to see consideration given to tightening up on air travel from all of Asia. But the Government will be very reluctant to do this. At the very least, all inward passengers from Asia, and also anywhere else where it becomes evident that COVID-19 is circulating within communities without known source traces, should be required to keep a diary of location and activity for the first 14 days in NZ, with this emailed each day to the relevant authorities so that contacts can be traced should someone prove to be a carrier. However, I do not expect this to happen. Those who do not understand the risks would consider this excessive.
KeithW
A severe global pandemic seems unavoidable now.
Another 67 infections aboard the Diamond Princess reported on 15 Feb, which implies the quarantine is not working.
This journal preprint from researchers from the Los Alamos National Laboratory suggests the R0 is a staggering 4.7 to 6.7. That would be somewhat consistent with the Chinese PLA journal preprint which claimed an R0 of 4.0 and case fatality rate of 6.5%. Pretty bleak stuff. Perhaps this video sums it up.
I switch etween this isn't going to be that bad to yep she's going to be rpugh.
The media reports are all over the place and hard to get a grip what is real and what is pie in the sky BS click bait.
I look at the figures of Japan and other cucountries that have nembers riseing quite fast and it shows that even developed countrues can not contain it fast enoigh. Then we have India and Cambodia that do not have anywhere near the capabilities of containmemt but are now free of cases...
Luck? Warmth? PR machine?.
Luck.. India, someine not passing it on in a very bussling place with close contact. Not a chance.
Warmth start the ship in Japan up and sail Sth.
PR.. Keep this quiet and hope that a solution is found before the masses find out...
Good reasons to hope it won't be so bad in NZ: Less intensive population. Less lung-health compromised than majority heavy smoking chinese men. Sunnier (UV and dry air kills it). Wealthier and far less public transport so maintaining self quarantine easier. Europeans have less of the ACE2 receptors that virus binds to than Asians. We still have to be vigilant, but likely to be far slower spreading in NZ than china.
It only takes one:
https://www.theguardian.com/world/2020/feb/10/super-spreader-brought-co…
Just seen this story. Not sure if true. Only time will tell.
Read that overseas students are about $170mn in revenues to the tertiary sector. Even a loss of 30-50% of this amount in revenues is money that tertiary institutions will not have to pay their large fixed operating costs such as staff, so that is likely to result in cash operating losses. The tertiary institutions may not have the funds available, and may need loans to meet the short fall. Where would they possibly get loans? the banks? the central government?
"The director of Universities New Zealand, Chris Whelan, said the ban had disrupted the lives of the affected students and if it was not lifted the universities could lose about $170 million in fees."
https://www.rnz.co.nz/news/national/409672/coronavirus-universities-see…
Then if those students don't start their courses, what about those businesses that rely on those students? such as rental accommodation, retail such as supermarkets, bakeries, cafes, bars, etc
Measles, ebola, swine flu, avian flu, SARS, MERS - some of the recent outbreaks of highly infectious and potentially deadly diseases around the world. SARS was transmitted internationally across continents.
Watch the efforts of groups of medical professionals in monitoring, early detection and prevention of these outbreaks in this documentary series just recently released on Netflix. https://m.imdb.com/title/tt11497904/?ref_=fn_al_tt_3
1918 Black Plague was another outbreak.
Outbreaks are increasingly common with large numbers of travellers on aircraft. It only takes one:
https://www.theguardian.com/world/2020/feb/10/super-spreader-brought-co…
One of the things that scares people is that those who are infected and contagious may not show any symptoms, as the story above illustrates.
The other thing is that there is no known effective vaccination currently available for this.
The massive global build up of debt is the sword of damocles hanging over the worlds economy. A lot of commentators believe it can be controlled and managed, but it creates fragility in the system. It can be held together for a while with articically low rates and QE, but eventually an event (such as this) is all it will take to trigger the house of cards to topple.
Will this be the event? Impossible to say. Will it happen in the next 6 months, year or 5? hard to say. But something is going to correct the massive imbalances that have built up in the system. And it could get uglier than peole think.
Correct. At some point overshoot becomes a Seneca event. Just what the trigger is/will be, is not the point. The point is that the overshot mode has been what our self-described sapient species has been in for 50 years or more.
Most are totally incapable of seeing it - short-term linear thinking is by far the norm. Hence the negative reaction to the permaculture suggestion up-thread. The opposite of permaculture is impermaculture, which is how I describe fossil-fuel-dependent monocultural agriculture. It has zero chance of lasting in as-is form. So we have to do something different. And the biggest problem is the need to service debt - which can be seen as the unsustainable system thwarting change.
Whicn is why many of us have done our own. Oddly enough, you end up with permaculture, starting from first principles. It's the only thing which fits. Where we go wrong, is conflating 'making the right choice' with 'turning a buck'. And that magnifies the gross mistake of our whole society - which assumed (arrogantly) that it was above the Laws of Physics and above such things as Ecology. Bit stupid - given the apparent need to still eat, sleep, procreate, defecate........
https://youtu.be/IwTmBCCC2k0
I don't think they can keep this ponzi system going for that much longer.
I used to work on cruise ships. If a crew member got GI then they were quarantined to their cabin for 48 hours. I'd imagine it's the same regarding COVID-19 on the Diamond Princess but for 2 weeks. Also, we used to get sick more often on ships than on land likely due to the recirculating air.
That's a bit of a mixed metaphor.
Irrespective of money, they had a stock of energy and are reducing same. At the same time, they're using more and more internally. And the getting of what's left, is taking ever-more energy too. So their available surplus energy is getting less and less. More and more nations are turning from being net exporters, to net importers. When the last one flips, all bets are off.
Who cares what the dollar numbers were, and where, at that point? The bets will be irredeemable. So many folk seem to think the present state of affairs is going to continue, ad infinitum. T'aint.
It's mid-winter in Chyna and two months already since Covid 19 was first discovered, 1500 deaths in a country the size of china is next to none, so to speak. The death rate on the quarantine ship marooned in Japan is zero percent so far even though quite a few came down with symptoms. On a lighter note, someone on board the ship ordered champayne to be delivered to the state room which got dropped off by drone lol. I still think that this virus is a fizzer and those in china have overreacted badly.
Yes there is a lot of hysteria at work within this crisis. It reminds me of the early days of AIDS when we were told we were all going to die from it and that practically everyone in Africa and India had it. AIDS turned out to be a fizzer for all normal people and is hardly mentioned these days.
Covid 19 appears to be just a new cold that can progress to pneumonia in mostly elderly people. Many colds are a variant of the corona virus.
Freddie died almost thirty years ago complicated by being over prescribed AZT and 80% of AIDS orphans still have one parent alive according to Wikipedia. Normal just means people who don't expose themselves to obvious risk factors like illicit intravenous drug use etc. It is not "culling us", I don't know anyone who died from it since around 1990. AIDS was touted as a 'Black Swan' type of event but it wasn't.
This does not meet the definition of a Black Swan event, they have been making disaster movies about pandemics for years.
The only thing that hasn't happened yet is no one has turned into a Zombie.
Even the Chinese response has been pretty good, which only a dictatorship can react so quickly too.
We know for example that NZ is going to be struck with a super quake, but we act like it will be a Black Swan with our unpreparedness. Compare our post-earthquake resilience preparedness to the Japanese for example.
Not foreseeing the obvious is more ignorance than Black Swan.
That's the whole point DS - the whole world economy cannot/should not/unable to acknowledge these foreseeing obvious difficult questions to answer because it's only involving a non-profit cost based preparation to face it. A lot easier to announce something to watch that sidelining the real/obvious facts.
The crunch will be in 4 to 6 weeks time when the cashflow dries up and the sheds and coolstores are full. Talking to a Fonterra friend and the stores are bulging out now - time to start storing it in containers next week or so. This is rippling through all sectors as things cant get out of China either. I think the banks and Government are seriously underestimating the flow on affects to NZ. Factories in China are only going back to work this week or next and many staff are being quarantined. There's a backlog of inventory in but on the bright side lots of demand out the other end. It will take time to work through the inventory and cashflow will be the killer for many in the next 2 to 4 months.
Black swan or Not? when you give it to Chinese, after 3 days of smoke baking session.. you'll still enjoy the marvel taste of this duck a like family.. youm. But sadly, the reality of this little Covid-19 disruption, will cause the world to think eventually - would it be safe to put our production source from just one basket producer? tik tok
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