Europe’s food and agribusinesses will be significantly impacted bythe war in Ukraine

Both Ukraine and Russia are global powerhouses within the grains and oilseeds’ sectors. However, the issue of commodity exports from these countries is complicated by the fact that they are both large consumers of food in their own right.

Geijer further explained; “Because of the war, many international food companies in Ukraine have temporarily closed their operations while some have also suspended exports to Russia.

“If the security situation allows it, there will be pressure to reopen facilities in Ukraine as food is a basic need.

“But, for western companies in particular, the question of their future presence in Ukraine and/or Russia is on the table.

“Companies will have to decide whether to keep operating in the region, decrease operations or leave the market completely.

“Their course of action will depend on multiple things including the development of the conflict and the safety situation, the importance of these markets in terms of supply or demand and reputational considerations.”

He added:“For foreign food manufacturers and traders with operations in Russia, the situation is complex but on a different level.

“On the one hand, these companies are facing the impact of sanctions and a deteriorating economic situation. On the other, there is increased demand for products sourced from or produced in Russia because food imports have decreased.”

International food companies entered 2022 on the back of a wave of higher commodity prices, not least for grains and oilseeds, and this trend hasn’t abated.

Input costs for tillage farmers are also increasing as sanctions against Belarus and Russia have a big impact on fertiliser supply chains.

The importance of the Black Sea region for grains and oilseeds production and the disruptions in trade flows drive up prices for food companies that don’t trade directly with Russia or Ukraine.

Together these things make it very difficult to predict crop prices going forward which also leads to more market volatility.

Geijer commented:“A further rise in grain, vegetable oil and fertiliser prices leads to even more cost inflation in food supply chains and buying decisions get more complicated due to more market volatility.

“The impact of higher prices will mainly be felt by companies in the feed industry, the baking industry, brewers and producers of vegetable oils and spreads due to their heavy reliance on grains and oilseeds.

“Once their current procurement contracts terminate, companies don’t have many other options than to pay higher prices and try to pass them on to their customers. Passing on costs will be necessary given the narrow margins in the sector, but it can be difficult nevertheless because food companies already had such conversations with their customers over the last couple of months.

“In some cases, companies will look to possibly reformulate products by substituting sunflower oil with palm oil to be able to keep up production.”

Geijer believes that higher energy prices are an indirect effect, which is especially relevant for European food manufacturers.

Data for the Netherlands shows that, on average, energy costs make up 1-3% of total costs in food manufacturing. But those figures are from 2019 and it is reasonable to assume that the current share is higher as wholesale energy prices have increased sharply since that time.

On top of that, higher energy prices will also trickle down to food manufacturers through higher fuel costs and through their procurement.

This is because they buy a relatively large share of their inputs from more energy-intensive sectors, such as agriculture and the packaging industry.

He concluded:“In the short term, food manufacturers will try to pass on higher energy costs. For companies that are relatively dependent on gas, it can be useful to prepare for a scenario in which Russia’s energy supply to Europe is cut off.

“The surge in energy prices might eventually make investments in energy efficiency more attractive and stimulate companies to move from gas-powered production processes to other energy sources.

“This will also depend on whether governments will react with more supportive policies and subsidies.”

Geijer also believes that the impact of the war in Ukraine on European farming will be felt for a significant period of time.

He further explained:“There will be five major consequences for European farming and food, linked to the war in Ukraine.

“These will mostly impact on food processors and traders.

“Farmers are dealing mostly with the indirect effects. And these are the impacts on commodity prices and fertiliser.”

Geijer added:“We have seen quite drastic increases in the price of grains and oilseeds over recent weeks. For now, it is really hard to say how this issue will develop moving forward.

“This is because there are so many inter-dependencies in terms of how supply will develop in the future.

“There will be a reaction in the market. This is because there is so much supply that was supposed to go to the market and is now somewhere. And this is the big uncertainty.”

According to Geijer, other regions of the world will adapt their food production policies in light of what is happening in Ukraine.

He commented:“This could include an increased production of grains and oilseeds, in order to alleviate the pressure on world markets.”

Geijer confirmed that Ukraine has stopped all exports of grain and oilseeds.

“At first, logistical reasons had come into play in this regard. But, afterwards, the government in Ukraine introduced legislation, which prohibited the export of certain food commodities,” he said.

“This was a case of ensuring the food supplies in the country remained there.”

Geijer went on to point out that both Austraia and India have just enjoyed record grain harvests.

“So, in the short term, countries that would normally be dependent on grain supply from Ukraine at this time of the year could turn to either India or Australia,” he commented.

“Every shipping slot from Australia has been booked for quite some months ahead.”

“But the difficult question to answer right now is this: can these countries make up for a shortfall in Ukrainian grain supply, should this become a reality?”

Commenting on the prospects of grains and oilseeds being rationed for livestock production purposes later in the year, Geijer said that the issue is very current.

“This matter was discussed in recent days by operators within the international grain supply chains.

“As these events unfold, people will get a better sense of what is happening. In a sense, the countries that have these supplies, a lot will depend on them.”

He added:“Will they decide to keep trade flows open? This matter has been discussed by members of the G7 over recent days.

“Potential exporting countries will want to ensure that their own food consumption needs are met. They will not want to import food inflation.”

But the ING economist also feels that price in the market place could become a ‘de facto’ rationing mechanism, where grains and oilseeds are concerned.

“He added:“It is conceivable that commodity prices will rise to such an extent that farmers will not be able to use them on an economic basis.”

Meanwhile, Irish man Jim McCarthy farms in Romania, 60km from the border with Ukraine.

“We are really immersed in helping the refugees coming across the border from Ukraine at the present time,” he confirmed.

“There are a number of buses within the business to help transport refugees at the present time.

“But we are also making apartments and houses on the farm available to mothers with young babies.”

McCarthy added:“On our organic farm, we have a number of dormitories. These too are being made available to 26 refugees who need dependent living facilities. These people may well live out the war with us.”

McCarthy also confirmed that other farm families and communities across Romania are putting in a huge effort to help the many refugees from Ukraine coming into the country.

While Bulgaria and Hungary have introduced a ban on food exports, Romania has not.

Jim McCarthy again:“Last year was a really good year in Romania. Farmers here are rewarded for holding on to their stock for as long as possible.

“Romanian farmers have been investing heavily in storage over recent years. And this has been needed to keep up with the improved grain yields that are now being achieved.

“As a consequence farmers get paid for holding their produce.”

He further explained:“There was a lot of grain and corn in stock when the crisis in Ukraine broke out. But we have seen a tremendous surge in price over recent weeks. So there is no problem in selling.

“Over the last five years, our average corn price was €140/t. Last week, we sold a shipment for €310.

“The price of oil crops is on fire. Not that long ago, we were taking €265 for sunflowers. The forward price for delivery in October 2022 is at €650.”

According to McCarthy, grain and oilseed growers in western Ukraine will start cropping for 2022 in the very near future. He explained:“The stores in that region have opened their doors to sell crop inputs. Ukraine accounts for 50% of the global trade in sunflowers.

“Palm oil and sunflower oil compete on the same markets. Those involved in the palm oil business are having severe problems as a result of dry weather at the present time. Covid has also had a major impact on that sector,”

He continued;“The oilseed rape industry is also booming at the present time. Prices have gone up by €100/t in the space of a week.

“There’s bits of trade being done for rape in Romania at the moment for €700/t.”

McCarthy farms 20,000ha in Romania. The grain that he produces is taken by truck and train to the port city of Constanta.

He further explained:“Our organic produce goes north by truck to Germany, Austria and Switzerland. A lot of our wheat goes into the local trade.”

There are large stocks of grain in Ukraine at the present time. Given the impact of the Russian invasion, McCarthy is of the view that Constanta could be used as an export centre by Ukrainian grain business over the coming weeks.

He further explained:“The Ukrainian government has banned exports just for the moment. This is to make sure that they have enough food going forward.

“But that will change shortly. A number of the farming businesses in Western Ukraine have started seeding their crops for 2022. They are also putting fertiliser in store.”

McCarthy also confirmed that all of southern Europe has just experienced one of the driest winters in living memory. And this factor may have just as strong an impact on future yields as will the price and availability of fertiliser.

Commenting specifically on the availability of fertiliser in Eastern Europe, McCarthy said that his own business has all its requirements now in store.

He added:“As a matter of policy we start buying in late July and August in preparation for the year ahead.

“We need a very good source of phosphorous for the rape and wheat in the autumn. Winter crops account for about a quarter of our total output.

“We will be planting out 12,000ha of land over the coming weeks. First-off is sugar beet: the other spring crops will then follow.”