Between inflation, supply chain issues and energy prices, it seems price rises are never-ending. And sadly, the brewing conflict between Russia and Ukraine is signalling yet more price increases for their primary exports: wheat, gas, and fertiliser.
Over the past year commodity prices have soared, driving UK consumer price inflation over 5%. There were hopes that the price of metal, energy and food would begin to plateau in the early half of 2022, with analysts at Mintec suggesting that inflation or commodities could “reach their highest point around spring”. However, with Russian troops descending on the border of Ukraine, it seems that the commodity markets are once again being thrown into fresh turmoil. And rightly so – Russia, the world’s largest exporter of fertiliser, gas, and wheat, is encroaching on the nutrient rich soil of Ukraine, who is in itself the world’s third ranked wheat supplier and a major supplier of both maize and sunflower oil.
The impact of wheat on a global scale
According to the US Department of Agriculture, Russia and Ukraine currently make up 23% of global wheat exports. Their combined weight in the market has already pushed US and EU futures up by 7% and 6% in January, and as tensions continue to simmer, traders are now looking for alternative sources for wheat and maize. Arab nations are seeking out supply from Australia and Argentina, who currently have increased seasonal supplies. Although, even with the success of Australia and Argentina’s harvest, the 30% increase in global wheat price last year is likely to have repercussions on the prices of wheat this year, leading to further price inflation for the commodity.
What does this mean for the UK?
The good news is that the UK grows around 80% of the wheat it needs, sourcing the remainder primarily from the EU – so shortages shouldn’t be an issue. However, we aren’t shielded from global price fluctuations, so it is likely that we too will shoulder the brunt of increased prices.
The Food Foundation has already tracked an influx of consumer price for ‘starchy staples’, with prices 3.5% higher on average in December compared to January 2021, pasta also tracks this trend with an increase of over 26%. Analysts fear that if Ukraine’s Black Sea ports are blockaded or Russian aggression leads to reduced Ukrainian output, wheat prices could see increases between 10-30%. The bottom line is we are most likely going to face yet another increase in wheat prices.
The real issue for the UK food markets: Gas & Fertiliser
Europe, including the UK, is heavily reliant on Russia for natural gas, meaning we are vulnerable to price increases incurred by Russian aggression. The Russian-Ukrainian stand-off has already exacerbated volatility in global energy markets, causing the prices of oil to soar. The European Commission recently accused Russia of weaponizing energy, as reliance on Russia, especially in the cold winter months, means any potential sanctions could have a far worse effect on Europe than on the intended target – Russia. So, it seems that any sanctions imposed will be scant, as economic ties between Western powers and Russia – from Germany’s energy to London’s real-estate – remain a cause for hesitation.
Sanctions or not, gas prices are expected to rise as we remain at the whim of Russia, which will no doubt have an impact on the cost of fertilisers, the supply chain, and of course – food commodities. Russia and China have already imposed restriction on fertiliser exports, which has caused farmers all over the world to struggle with increasing fertiliser costs and reduced supply. Fears are heightening over whether Russian exports will face further restrictions due to ongoing tensions with Ukraine. Any limitations on an already shaky fertiliser market will spill over into the food market, and we will inevitably end up paying for these heightened production costs.
The future remains murky and there is still much uncertainty as to how conflict in Eastern Europe will play out, but it doesn’t look good. As we all hold our breath to see what happens, it seems the food and drink sector should prepare for more volatile costs. All this comes on top of the impact of Omicron wiping-out crucial December trading, staffing issues and uncertainty as to how the Government will help the ravaged hospitality sector bounce back in 2022. Hopefully, the easing of restrictions across the UK will help counter the negatives the sector continues to face.
Key insights and facts from The Grocer 4/2/22.