Jill Stowe, PhD, associate professor in the University of Kentucky College of Agriculture, Food and Environment's Department of Agricultural Economics, presented at the UK Ag Equine Programs' monthly Equine Forum virtual meeting June 24 about the impact COVID-19 is having on equine markets.
She began by giving attendees a definition of a recession, which is a period in the business cycle where economic activity declines (often measured by declines in growth in Gross Domestic Product, or GDP). In the U.S., a recession is often defined by two consecutive quarters of declines in GDP.
According to Stowe, a recession results in an increase in unemployment, decrease in income, decrease in consumer spending, rising business failures and a falling stock market. Recessions have many different sources, including bursting of financial bubbles, credit crunches and, as we are experiencing, pandemics. These contractions are a normal part of the business cycle (there have been five recessions in the past 40 years as a reference), but they are normally short-lived; since the Great Depression, the longest recession lasted 18 months, from December 2007 through June 2009.
Stowe said that an “official” U.S. recession (characterized to two consecutive quarters of GDP declines) is likely if the coronavirus pandemic lasts longer than expected, but acknowledged that significant economic hardships are already being realized. For instance, in Kentucky (as of June 4), nearly 886,000 people had filed for unemployment, which is approximately 43 percent of Kentucky's eligible workforce.
Governments attempt to counteract economic contractions by getting people spending (consumer spending constitutes 70 percent of GDP) through lower interest rates and fiscal stimulus packages. Since interest rates are already near historic lows, for the current crisis, the government is relying on stimulus checks to encourage consumer spending.
She also noted that there are two types of “normal” economic goods, necessity and luxury. A normal good is one which experiences increasing demand when income rises. The rate of demand increase determines whether the normal good is a necessity or luxury good. When income increases, demand for luxury goods increases at an increasing rate; however, when income decreases (like during a recession), demand declines at an increasing rate. Consequently, industries involving luxury goods are more volatile than necessity goods. Relevant to the discussion at hand, she noted that from an economic perspective, horses are considered luxury goods.
Moreover, the equine industry is one of Kentucky's signature industries and constitutes one of the most important sectors in Kentucky's agricultural economy. In fact, the equine industry has been characterized as an economic cluster in Central Kentucky, which describes a network of geographically connected organizations and institutions.
Taken together, it is likely that Kentucky's equine industry will be hit harder than most by contractions in the economy. First, in an economic sense, equine markets act like markets for luxury goods and hence are more volatile. Second, due to the equine industry's organization as an economic cluster and its prominence in Kentucky's agricultural industry, the overall impact on Kentucky's economy is magnified and far-reaching.
Stowe considered it instructive to summarize lessons learned from the last recession in 2008-2009 in order to predict how equine markets might react to the current economic climate. Stowe said that nationwide, effects on equine markets included a decline in the number of mares bred and foals produced, a decline in organization memberships, a drop in sales prices and sales revenue, a small decline in competitions and increased animal welfare issues.
The immediate effects of the COVID-19 shutdown have been felt primarily by competitions and sales, and perhaps to a lesser extent boarding and training operations. The shutdown resulted in the cancellation or postponement of local, regional, national and international equine events, including the postponement of the 2020 Olympic Games and cancelation of more than 2,900 FEI competitions in the three-month span following implementation of COVID-19 restrictions. Losing these competitions has a number of negative consequences, including loss of regional economic development, lost income for individuals and lost revenue for organizations.
The shutdown has also resulted in “clogged” pipelines in the equine market as sales were canceled, postponed, or significantly decreased, she said. Getting the pipeline moving will be a key to recovery and noted that watching the first sales resuming in late June might provide an indication of what is to come for sales later this fall.
Boarding and training operations across the world have been faced with a variety of restrictions. In some areas, riding was prohibited and barns were closed to all but essential employees. Many equine professionals were, for a time, were unable to give lessons, clinics and coach at competitions.
At the onset of the COVID-19 restrictions, equine veterinary clinics delayed elective procedures for a time. As restrictions were gradually lifted and with human protections still in place, they are now able to operating close to normal. Hay and feed markets, which are actually more sensitive to weather variations, seem to be unaffected, but should labor shortages arise, availability issues and/or price increases may ensue.
According to Stowe, the long run outlook will depend on a number of factors. The longer the economic restrictions last, the larger the impact will be. In addition, whether the recovery follows a V-shape (quick recovery), a U-shape (a prolonged recovery), an L-shape (no recovery), or something in between. Going forward, unemployment, GDP and disposable income will all be important metrics for recovery in the equine industry.
Stowe and colleague Bob Coleman, PhD, PAS, Dip. ACAN, associate professor and equine extension specialist in UK's Department of Animal and Food Sciences, are launching a research project estimating the impacts from COVID-19 in Kentucky, specifically focusing on breeding, sales, competitions and boarding and training facilities. They will be distributing a series of surveys beginning this fall and expect to be able to share results in 2021.
Read more here.
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