Producers, suppliers, distributors: how will the food industry be affected by the Ukrainian crisis?

The war in Ukraine will have consequences on the agri-food sector. The “Ukraine” taskforce, which brings together Belgian agri-food players, the Minister of the Economy and the Minister for the Self-Employed, SMEs and Agriculture, met on Tuesday to assess the impact of the conflict in Ukraine on the agri-food sectors. The increase in production costs was already felt before Russia invaded Ukraine. It is now becoming more pronounced.

The sector must also adapt to the risk of shortages of certain ingredients. Russia and Ukraine account for 30% of the world’s grain production, especially wheat. 50% of the sunflower oil produced in the world is produced in Ukraine. Some experts expect food prices to rise by as much as 20% by the end of the year.

This increase will reflect rising costs for producers, suppliers and distributors. However, between these links in the agri-food chain, negotiations will be tense in order to share the cost increase.

Producers, suppliers, distributors: what is the weight of each in the price of a food product?

Consider a “semi-industrial” food product. It differs from highly industrial products, such as ready meals, which require more packaging and more manufacturing processes. Industrial bread is a typical example of a “semi-industrial” food product.

In “semi-industrial” food products, “on a loaf of bread, the farmer will earn between 4 and 5%”, estimates Pierre-Alexandre Billiet, marketing expert at Gondola. Still on a “semi-industrial” product, the distribution sector, which intervenes at the end of the chain, “will take 30 to 40% of the price of the product”, estimates Pierre-Alexandre Billiet.

Between the farmer and the distributor, the suppliers, i.e. the factories or workshops where the product is manufactured, account for about 55% of the price. In this area, “there is about 15% for marketing, 10% for sales and 40% for production itself, i.e. the purchase of raw materials and processing”, explains Pierre-Alexandre Billiet.

The rest, about a third, is mainly for logistics and company operations. In “highly industrial” food products, the share of the product’s selling price that goes to the processing companies is somewhat higher.

However, the increase in raw material and energy prices is weighing on supplier margins, in a context where these margins were already under pressure.

Costs, margins… A sensitive subject: the example of milk

It is not easy to measure the margin of maneuver of the various links in the agri-food chain. Figures on costs and margins are not easily communicated, due to industrial and commercial secrets.

Take milk, for example, one of the most talked about products in recent years. At the beginning of the chain, there are farmers who regularly make it known that the price at which they sell their milk does not cover their costs, denouncing, at the other end of the chain, distributors who put downward pressure on prices.

Between the two, dairies are between a rock and a hard place. Before the war in Ukraine, farmers estimated that the price at which milk should have been sold to dairies to cover production costs was around 45 or 46 cents per liter, while milk was sold to dairies for a long time around 35 cents per liter. By the end of 2021, milk producers have already experienced cost increases, partially offset by an increase in the selling price of milk.

Farmers have achieved milk prices of about 45 cents per liter. But now the war in the Ukraine is again putting a strain on the farmers’ production costs. The figures are not yet known in Belgium. They are calculated quarterly and will fall soon.

“The three cost items that have the greatest impact are cattle feed, fodder that must be purchased or feed supplements that are not produced on the farm, fertilizers and seeds to produce the fodder on the farm, and energy,” explains Benoît Haag. The latter estimates these production costs at about 29 or 30 cents.

These costs, with the consequences of the war in Ukraine, are likely to rise sharply. The European Milk Board, a European association of milk producers, explains that in Denmark, milk farmers have already made an estimate. Compared to the costs in autumn 2021, the cost of electricity has doubled. The cost of diesel has also doubled.

Fertilizers have risen from 34 cents per kilo to 67 cents per kilo. The price of fodder is also rising. In short, all indications are that milk producers will need to obtain higher selling prices, probably in the order of a ten cent increase per liter of milk sold. Second link in the milk production chain, the dairies.

They are the ones who buy the milk. And there too, there is concern about soaring costs. “It’s clear. There is especially energy, gas. There are some packaging materials, for example plastic, that have a relationship with energy. There are the salaries,” explains Renaat Debergh, Managing Director of CBL, the Belgian Confederation of the Dairy Industry.

“We estimate the cost increase for a liter of milk to be at least 8 cents, excluding the price paid to the farmer,” adds Renaat Debergh. The dairy industry is now looking to the retail sector, the third link in the chain, to buy milk at a slightly higher price.

“The problem is that prices were negotiated in September-October, before the increase in gas prices and before the war,” explains Renaat Debergh of CBL. According to him, the answer given by the distribution sector is “ah no, you have a contract and a contract is a contract. You didn’t see that there would be a war, that’s bad luck for you”, summarizes Renaat Debergh.

However, the Belgian Confederation of the Dairy Industry will not tell us at what price the dairies sell the milk to the supermarket. “This is confidential information,” says Renaat Debergh. In short, with the ten cents per liter of milk that farmers would need and the eight cents increase in costs calculated by the dairy industry, the price of a carton of milk sold at around 65 cents, first price, should ideally rise by 18 cents … Unless each link in the chain, including large retailers, agrees to take part of the increase.

Agribusiness industry asks to renegotiate prices

The food industry is very energy-intensive, uses a lot of freezers and ovens, and consumes a lot of cereals and oil. It is particularly concerned by the increase in production costs. “There are a lot of companies telling us that their production is no longer profitable,” says Carole Dembour, an economist at FEVIA, the food industry federation, as cost increases put pressure on already low margins.

“The operating margin on sales, for the sector, we would be in 2021, based on projections around 2.8%, which is almost a historical minimum,” explains Carole Dembour. For her, “in the whole chain, we can’t say that farmers and food producers have much margin”.

So, for the agri-food sector, it should also be possible to increase prices. “What is needed is for the final price to increase, for retailers to take on some of the costs,” says Carole Dembour. “This will be passed on to the consumer. Everyone is under pressure. No link can be spared,” she adds. The difficulty for companies in the agri-food sector is that, as we saw above for milk, they have to be able to renegotiate annual contracts already concluded with the distribution sector,” explains Carole Dembour, of the FEVIA.

The Food Industry Federation has also surveyed its members who have attempted to renegotiate a contract with the retailer. “40% did not get a response. 30% were refused. For the remaining 30%, a marginal increase has been granted”, notes the FEVIA economist. In its defence, the Belgian retail sector is also under pressure from a Dutch competitor that is increasingly establishing itself in Belgium.

The Dutch competitor is gaining an increasing foothold in Belgium and is using its commercial strength in the Netherlands to put pressure on prices in Belgium. On Tuesday, we asked Comeos, the Belgian federation of the distribution sector, to measure the impact of cost increases on the sector’s margins since the beginning of the war in Ukraine. We have not yet received an answer.