One year on from Russia’s invasion of Ukraine, the world will be focused on whether a new, or extended Black Sea Grain Initiative can be brokered to keep food commodity prices from rising again.
Prices of food inputs – from wheat to maize, corn and sunflower oil – have come down to pre-war levels, as have fuel and energy costs, but still remain elevated in historical terms due to the hangover of supply disruptions linked to the pandemic.
More crucially, food commodity exports out of Ukraine, one of the world’s largest suppliers of wheat, barley and sunflower oil, have still not fully returned to levels in the months before Russia’s invasion on 24 February 2022 as the war rages on.
A new Black Sea Grain Initiative – struck in July last year and due to expire in March following an extension – will be equally crucial to keep the supply doors open. Talks on extending the Black Sea grain corridor out of three Ukrainian ports will begin in a week, the war-torn country’s deputy infrastructure minister Yuriy Vaskov said at a grain conference in Kyiv on Friday (17 February).
Extended in November for 120 days, the existing agreement covers key inputs for food manufacturers – corn, wheat, sunflower, barley, rapeseed and soya beans.
“The situation remains volatile – there is no end in sight to the conflict. This is what makes market participants very nervous,” Sara Girardello, the head of grains research at GlobalData-owned LMC International, tells Just Food.
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“The Ukrainian agricultural sector is still probably facing challenges related to the availability and price of inputs. Power outages are delaying operations at ports and logistical infrastructure. There is a high risk attached to grain supply from Ukraine.”
Global food security became a major concern in the days and weeks following Vladimir Putin’s military encroachment into Ukraine and it remains a major concern 12 months down the line, particularly as the world continues to grapple with the worst inflation in decades.
With no visible signs the year-long conflict is going to end anytime soon, the last thing rich and poor nations alike would want right now is further disruption to the trade in food commodities, just when bright spots are starting to emerge on the inflationary front.
As the annual financial reporting season winds down, commentary by food industry executives has been closely watched for a sense of how long the inflationary headwinds might play out in 2023.
Opinions differ but the consensus generally infers double-digit input-cost inflation for the first half of the year and then an element of slowing in the back half. Hain Celestial, the US-based food manufacturer, has even reservedly pointed to the prospect of deflation, although that prospect might still be beyond the 2023 horizon.
More likely is disinflation – a slowing in the rate of price increases – making it more difficult for manufacturers to pass on higher prices to retailers, and, bringing some welcome relief to the consumer.
“The prices of these commodities have come down to pre-war levels but they’re still high,” Girardello argues. “If you look back two years, prices are still very high, gas prices are still very high. There’s a lot of stickiness in the system for prices to come down. It takes some time.”
Taking up the commodity supply shortfall from Ukraine is not an easy option, she says, as there’s only so much arable land available for crop production in other countries. And then weather events can be another driver of price, Girardello adds.
A European Council report in December provided estimates of Ukraine’s crop production and exports, with the weight and constraints of the war evident.
“Russia’s unprovoked and unjustified aggression against Ukraine has caused significant human casualties and forced millions of people to flee their homes. The war has also had a significant and lasting impact on the global food market,” according to the policy body of the European Union.
Before the war broke out, Ukrainian farmers sowed 17 million hectares of spring crops in 2021, but that was down 22% the following year with 2.8m hectares of arable land remaining unsown, the EC said.
It estimates Ukraine will export 30m tonnes of grains in the 2022-23 growing season, compared to around 50m tonnes in 2021-22.
“As a leading exporter of grain, Ukraine has seen a dramatic drop in its exports, resulting in major food security concerns for millions of people around the world. However, food prices are still above 2021 levels and the outlook remains difficult,” the report concluded.
The impact of energy costs
French bakers came out in protest on the streets of Paris in January, warning the production of bread and croissants was under threat from surging electricity and raw material costs. Bakers are also reliant on gas to fire ovens.
Other food manufacturers around the world have not been immune either to the higher energy costs, largely as a result of the war in Ukraine and the depleted gas supply out of Russia.
However, measures food manufacturers could take to address or head off future shocks from energy prices are thin on the ground beyond actions they were already taking within their sustainability and efficiency agendas.
Nonetheless, some companies are looking for solutions. One stand-out has been Finnish food group Fazer, which as a result of the conflict and gas supply constraints, is exploring electrifying its bakeries and turning to solar energy.
Thijs Geijer, a senior economist at Dutch financial services firm ING, suggests the “importance of gas in the energy mix of food manufacturers” differs between countries – estimating the level being 60% in the Netherlands but less than 40% in Poland and Spain, for instance.
Fazer summed up the difficulties in its recent annual report: “Until 2022, Russia was the largest exporter of oil and natural gas to the European Union, and almost half of the gas consumed in the EU came from Russia. The food processing industry is energy-intensive, and the majority of thermal energy is provided by natural gas. The single largest use of electrical energy is used for refrigeration purposes.”
Last year, Fazer invested in energy back-up systems for some of its major production lines and “made back-up plans for production processes using natural gas in Finland and the Baltics to ensure business continuity”.
Gas – “no quick alternative”
In Belgium, raw materials and labour costs are a bigger area of concern for biscuits and snacks maker Lotus Bakeries.
“We have gas ovens and gas ovens need gas. There’s no quick alternative,” Lotus finance chief Mike Cuvelier tells Just Food. “Energy for us is of course a cost but it's not high on the list of primary costs or direct costs. We first have our raw materials, we have our labour, we have our transport, we have packaging.
Cuvelier says having a factory in the US – opened in 2019 – was a natural hedge against rising energy costs.
“We’ve seen energy increases in Europe. We have not seen that in the US. So, that's another reason why we are of course happy to have made the decision to move to the US. It also hedges you against those regional differences or changes in the environment,” he explains
Meati Foods, meanwhile in the US, emphasised the benefits of being a plant-based business producing animal-free proteins from mycelium, when asked by Just Food what countermeasures it has taken.
The start-up “consciously electrified as many systems as possible” at its so-called mega ranch in Colorado, “in order to leverage renewable energy sources”.
Meati added: “Simplicity in ingredients somewhat translates to less energy demand. Same as it relates to the simplicity of growth, harvest, production, and packaging all being done in-house under one roof. This is the ‘supply chain solution’ theme, with the idea that the more complex the supply chain, the more energy required to make it all run (transportation, facilities, workers) and the more vulnerable it becomes to total failure due to one piece of it failing.”
The importance of managing procurement risks
An observation made by Cyrille Filott, a global strategist for consumer foods, packaging and logistics at Dutch investment bank Rabobank, is how the parameters around purchasing by food manufacturers have taken on more significance. Not just because of the war in Ukraine, but Covid, too.
He argues the use of solar or wind-driven energy sources has “become more important” within their sustainability agendas.
“Before Covid, companies would be looking at price, quality and availability, or PQA, of any product, whether that be energy prices, commodities, agri-commodities or packaging materials. Through the Covid crisis and supply chain issues that were related to that, but also energy price volatility, those three parameters are more critical than ever,” Filott explains.
Risk management around price and price volatility is also playing a more important part in the thinking of packaged food makers.
“Those three PQA parameters are very much key and would be run in the past by the procurement function. What I’ve seen in terms of change, especially for larger companies, not necessarily smaller companies, are rethinking how to do this,” he says.
“’Should this be left to procurement or is there a much broader important supply chain role that needs to be managed from a board level?’ They are now appointing people at higher levels, whether it’s the management team or just one level below, but really at higher levels to have a holistic view on the supply chain.”
Turning to renewable energy sources such as solar, wind, water and geo-thermal resources might be a solution to address costs and supply, whether it be reasons associated with sustainability or a by-product of the war in Ukraine.
However, ING’s Geijer suggests an environmental misnomer as he observes some food manufacturers have switched to coal as an alternative energy source, or oil, to replace gas.
In a more drastic example, he notes the decision by Netherlands-based pulses and vegetables producer Hak to close its manufacturing plant for six weeks to save on energy costs.
Energy costs triple
Switching production priorities is another example, Geijer says. “Some companies took the opportunity to make smarter use of different sites. Directing more production to the most efficient site or the one with the most favourable energy contract.”
So what might food makers, particularly in Europe, have learnt from the energy crisis? “That it can’t be taken for granted that energy costs are just a small part of the total costs,” Geijer asserts.
“In 2019, energy amounted to just 2% of total costs for EU food manufacturers. In 2022, there were big differences between companies, but it was probably more in the range of 7.5 to 10%, without price caps or compensation. Investing in [your] own energy production is a way to reduce some of that risk.”
The role of hedging
Hedging has been a price risk management tactic employed by food manufacturers for years, and companies in other industries, too. But as commodity prices come down, some are locked into contracts, explaining to a certain degree why inflation is not expected to ease until the latter half of 2023.
Nestlé CEO Mark Schneider presented just that scenario last week as he discussed the company’s financial results for 2022, a year when the group raised prices by 8.2% to counter elevated input costs.
“In some cases, you have forward contracting that then creates cost pressures going forward. In other cases, you still have catching up to do because, on a full year-over-year basis, even though the price may have eased a little bit over the last few weeks and months, you’re still north of where we were a year ago,” Schneider explained.
A new Black Sea supply deal or an extended version of the existing agreement will no doubt ease fears over a bout of resurgent inflation, but the ultimate decision rests with Putin. As the world prepares to mark one year since the invasion, it’s anyone’s guess as to how long the conflict will last from here.
For now, with Ukraine poultry and grains producer MHP Group securing a European loan only last week to support sunflower oil exports, the future for Ukraine’s agricultural output looks uncertain. And for world food prices.
UK-based analyst Martin Deboo at US investment bank Jefferies, presented a number of inflationary scenarios for 2023 in a recent report, including deflation, but with a caveat. He noted the “uncertain and challenging climate with an understandable bias to caution”.