News RaboResearch
Higher costs largely on the farmer's plate
Supermarkets are and remain reluctant to raise consumer prices. The war in Ukraine is putting further upward pressure on many commodity prices. A large part of the cost increases threaten to be attributable to the chain: food producers and farmers. This is evident from research by RaboResearch.
"The war between Russia and Ukraine is hitting the Dutch economy hard. Judging by the fighting and heavy sanctions, trade with these countries will be disrupted for a long time. This has a negative impact on almost the entire Dutch food and agri sector, not just grain." writes Sebastiaan Schreijen, specialist consumer foods at RaboResearch Food & Agribusiness. In addition to grain, Ukraine is a major exporter of feed maize, sunflower oil and meal and fertilizers, mainly nitrogen and potash fertilizers. As a result of the conflict, the prices of these raw materials are rising rapidly. Costs in livestock farming and arable farming will rise further in the coming months due to more expensive animal feed and fertilizer.
Higher feed costs
The Netherlands annually obtains approximately 3,7 million tons of feed maize from Ukraine, approximately 60% of all feed maize that we import. Since the invasion, the price has increased by 14% to €304 per tonne. "The price may still be bridgeable, the question is whether there is supply. Feed costs determine 60% to 80% of the total costs, so the higher feed prices have a major impact on pig and poultry farmers. The poultry market is probably tight enough to to pass on part of the costs to buyers. Whether pig farmers will succeed in this is the question, given the current oversupply on the European market, which is already causing a lower selling price. For dairy farmers, the price increase mainly applies to concentrates. Feeding less concentrates is an option possibility, but it does depress milk production."
The situation with regard to fertilizers also remains uncertain, for example, the prices for nitrogen fertilizers in the Netherlands have more than doubled since August 2021 as a result of high natural gas prices. As long as the conflict in Ukraine continues, RaboResearch expects prices for all fertilizers to remain at current levels.
Grain price could double in prolonged war
Based on the fighting, the war rhetoric and the heavy economic sanctions, Schreijen assumes that trade with the aforementioned countries has been disrupted for a longer period of time. "The reliance on (Russian) gas in particular weighs heavily on our economy and inflation expectations." If the war unexpectedly lasts longer than six months, the sanctions prove effective and the Black Sea ports remain closed, the grain price could double compared to the price of last January to €550 per ton, according to Schreijen.
"This is because it can frustrate the coming summer harvest, and in the Northern Hemisphere it will take until the summer of 2023 before a supply response ensures greater availability of grain. Higher grain prices can also indirectly contribute to more expensive potatoes and (industrial) vegetables because these products compete for the same arable land."
Prices not yet passed on to consumers
The sector has been struggling with historically unprecedented cost price inflation since mid-2021 due to various factors, including the logistical disruptions caused by the corona pandemic and staff shortages. Producers indicated in October that they needed about 10% higher sales prices to cover the increased costs and since then raw material costs have only increased further, Schreijen says. "The higher cost base at the end of last year has certainly not yet been fully passed on to the consumer. Far from it. Due to the stiff (price) competition in the Dutch market, supermarkets have been reluctant to raise shelf prices."
Because the reason for the new round of price increases is so obvious, supermarkets may be a little more lenient, RaboResearch expects. "They then demand from suppliers that the price increase is reversed as soon as the raw material markets allow it."
Historically, high price increases hardly lead to higher supermarket sales, RaboResearch indicates. "Confronted with higher prices, consumers will trade down to cheaper channels or cheaper products, and in the worst case scenario, less food will be bought."
Linda van Eekeres
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