How omicron could dramatically change commodity demand in China

Tianjin is launching a citywide testing campaign after detecting community-wide transmissions of the covid omicron variant and these cases have already spread to Henan province. China is now entering a new stage of the pandemic, and the omicron variant poses a serious threat to China’s ability to maintain its zero-covid policy.

This could lead to irreversible shifts in food-consumption trends and further disrupt global logistics, and these risks may not be fully appreciated by the market.

China has pursued a zero-covid policy since the beginning of the pandemic in early 2020 that involves lockdowns of communities when cases are found, city-wide mass testing, and extensive contact tracing.

However, with the omicron variant being more infectious but less fatal, it is uncertain whether China’s current approach towards the virus should be altered.

There would be major implications if China is to shift away from its zero-covid policy since most factories and ports in the country are operating normally under current circumstances while the global supply chain has faced serious disruptions.

Nevertheless, local lockdowns in Chinese port cities have previously delayed customs clearance and disrupted transportation. This impact could be wide-spread if China were to ease its zero-covid approach which would lead to more workers at factories and ports leaving their posts if infected.

How did we get here?

The first stage of the pandemic was from January 2020 through June 2021. The outbreak in Wuhan was severe and the entire country went into strict lockdown.

However, by March 2020, things were generally back to normal. Metrics such as consumer spending at restaurants and domestic flights began to show a steady recovery, and in some cases were higher than their pre-covid levels.

There were scattered outbreaks of covid cases across the country, but these were small, localized, and easily controlled.

Health officials were extremely good at getting these cases under control. Even when cases appeared in large cities, they could limit their testing and lockdowns to specific areas.

The second stage started when delta appeared in Guangdong province in June 2021. Local authorities had to rewrite their playbooks as this outbreak caused significantly more disruption and took much longer to control.

Since then, there have been significantly more outbreaks. Cases at the Nanjing airport led to outbreaks across the country and the present outbreak in Xi’an seems to be the worst since Wuhan.

This has changed consumer behavior in China with domestic flight volumes falling sharply and more consumers opting to stay close to their hometown, or simply staying home and going to restaurants less.

The third stage is starting now. Even if the cases in Tianjin are controlled, it is only a matter of time before more cases appear.

In order to understand why omicron could pose such a severe threat to China’s zero-covid policy, it is necessary to look at the changes in policy that happened as a result of the delta variant.

With the original variant, health officials were able to generally limit their contract tracing to immediate contacts, and this was usually around 330 people.

With delta being more infectious, contract tracing measures had to be exponentially expanded to include anywhere from 50,000 to 60,000 people.

The US CDC says the delta variant is two times more contagious than previous variants, and studies are now estimating omicron as being 2.7-3.7x more infectious than delta.

It is difficult to imagine how the contact tracing system still functions if a more infectious variant would require an even larger exponential increase in potential contacts who need to be tested and quarantined.

Additionally, China has a high vaccination rate which means symptoms are less severe and therefore harder to detect or be noticed.

In the Guangdong outbreak in June 2021, doctors reported it was more difficult to detect cases in the public because the majority did not have clear symptoms and they found checking body temperatures to be no longer useful as a tool to detect cases.

Omicron also appears to be less severe, adding an additional challenge to any contract tracing efforts.

These factors of higher infectiousness, less severe symptoms, and a high vaccination rate, mean omicron is going to pose a severe test to China’s ability to maintain its current zero-covid policy.

Although it is unclear what policy will come next, it would be unlikely that China will simply open up and adopt a laissez-faire approach that many other countries.

Behavioral implications

It is also important to note the difference in public perception of the disease.

Much of the world has moved to viewing covid as a disease to be lived with, but within China, most people still view this as a very serious disease to be avoided at all costs.

The number of cases in China has been small, but covid has been a part of peoples’ daily lives for two years. That includes wearing masks, showing health codes, getting tested, knowing people who have been quarantined, and seeing news reports of huge numbers of deaths outside of China.

If there is wider community transmission of omicron in China, and even if the number of deaths remains small, peoples’ perception of the virus, and their resulting behavior, is unlikely to change quickly. If there is wider community spread of omicron, consumers are likely to retrench.

This would mean less travel, less dining out, and more consumption taking place at home. This would accelerate many of the dietary shifts that have occurred over the past two years.

Consumers are likely to stay closer to home meaning less dining out at restaurants and therefore smaller food portions and less food waste. This also means a shift towards more starch-heavy diets in the form of instant noodles or pre-made ‘lazy economy’ type dishes.

Previous experience has shown that consumers are likely to stock up on staples such as wheat and rice, and flour prices have traditionally increased following worries about covid. Meat demand is typically weaker as previous studies have shown that consumers tend to consume less meat per meal when eating at home. China is entering a new stage of the pandemic, and this could pose a serious threat to its current zero-covid policy. If omicron takes hold in China it is likely bearish for meat consumption, and by extension, soybean demand while being supportive to wheat and rice demand.