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Food industry in crisis mode

31 May 2022

Uncertainty as a price driver before real shortages

Rarely have times been as challenging for the economy in general and the food industry in particular as they are at present. The Federation of the German Food and Drink Industries (BVE), the economic policy umbrella organisation of the German food industry and at the same time the conceptual sponsor of Anuga, which will be held in the halls of Koelnmesse from 7 to 11 October 2023, speaks of the greatest raw materials crisis since the Second World War. Exhibitors and visitors to the world's largest trade fair for the food and nutrition industry will then have more than three years of crisis behind them. No one dares to estimate today what the situation will be like in October 2023.

What is certain, however, is that at present - in early summer 2022 - there is great economic and political uncertainty, which is reflected in the ifo business climate index, which fell to minus 15.1 points in March 2022. The downward trend in consumer sentiment also continued in March according to the GfK Consumer Climate, both in terms of economic and income expectations as well as propensity to buy. Overall, this is a development that is hardly surprising, given that the inflation rate in Germany was 7.4 per cent in April 2022 and 7.5 per cent across Europe. At the same time, both food prices and general consumer prices rose by 5.1 percent year-on-year. Many consumers already have to tighten their belts considerably.

Agricultural production, Copyrights Shutterstock

Agricultural production, Copyrights Shutterstock

The background for the price increases is the fact that already before and even more so with the Corona pandemic, agricultural commodities, packaging and energy, and as a consequence also transport, have become massively more expensive. Compared to 2020, the prices of commodities increased by 32.6 percent in 2021, natural gas by 397.1 percent, freight containers by 226 percent (12/2020 to 12/2021) and wooden packaging materials by 52.2 percent. In March 2022 alone, energy prices increased by 40 per cent compared to the same month last year. At the same time, the food industry is very energy-intensive: products have to be heated or cooled, ground, pressed or mixed. Around 80 percent of agricultural production in Germany is processed using more or less energy-intensive methods. In addition, agricultural raw material costs are one of the biggest cost factors for food production. Rising energy and raw material costs thus represent an additional burden for businesses and will have an impact on consumer prices in the medium term.

The Ukraine war drastically accelerates the trend of rising food prices, which already increased before due to higher energy costs, climate change, political requirements such as animal welfare and other factors. Nevertheless, there are no supply gaps at this point in time. Experts believe that uncertainty is currently driving prices more than real shortages. War-related cost increases have not yet reached the end consumer. Due to long-term supply contracts between producers and manufacturers, they are probably still mainly in the supply chains. In the same way, empty supermarket shelves, e.g. for cooking oil and flour, are currently mainly due to the fear of food shortages on the consumer side.

But at the same time it is a fact that Ukraine is the breadbasket of Europe. 36 per cent of the grain and 16 per cent of the oilseeds imported into the EU come from there. Russia and Ukraine account for 29 per cent of global wheat exports, 19 per cent of maize exports and 78 per cent of sunflower oil exports. Ukraine is also an important supplier of feed maize to the EU and China. Nevertheless, food security in the EU is not at risk, according to experts. Its member countries are able to supply themselves with food. Hunger, on the other hand, threatens already poor countries, especially in the Middle East and North Africa. The situation is made more difficult by the week-long lockdown of the deep-sea port in Shanghai and the blockade of grain shipments in Ukraine by Russia. In addition, it is almost certain that the next harvest in Ukraine will be significantly smaller due to a lack of seeds, destroyed or mined agricultural land, etc. In this respect, it can be assumed that there will be a significant drop in the harvest. In this respect, it can be assumed that the end of the price spiral has not yet been reached.

Despite all the problems that the food industry and food trade are currently facing, the situation also offers an opportunity, albeit one that will take time. Namely, the opportunity to build up greater production competence again within Europe. Consumer awareness of regionality has risen once again. There is an urge for self-sufficient food supply. Regionalisation in food purchasing is one of the major consumer trends of our time. The German food industry is also intensively addressing the current challenges and offering alternatives.

Interview with the Federation of German Food and Drink Industries (BVE): "The market will remain tight".

This is what Managing Director of the Federation of German Food and Drink Industries (BVE) Christoph Minhoff says. In an interview with Anuga he points out the consequences of the current crisis situation for the food industry and at the same time gives an outlook on alternative solutions the industry is dealing with.

Christoph Minhoff, Copyrights BVE, Matthias Martin

Christoph Minhoff, Copyrights BVE, Matthias Martin

Mr Minhoff, what concrete consequences must the German, but also the European food industry expect if the prices of raw materials and energy continue to shoot up?

Christoph Minhoff: We have never had a crisis situation like the one we are currently facing: massive cost increases for raw materials, energy and logistics. Shortages of certain raw materials such as vegetable oil or animal feed, but also of packaging materials such as paper, cardboard, glass, plastic and aluminium. From autumn onwards, the minimum wage will rise, which will have a further significant impact on all lower wage groups. Therefore, it is no wonder that 80% of German food producers are planning to raise their prices in the next two months.

Of course, the food industry is doing everything in its power to ensure the usual security of supply. But we must all be aware that some companies are fighting for their existence. 90 per cent of the German food industry are small and medium-sized enterprises. The enormous cost increases as a result of the war threaten these very companies and thus the diversity of our industry. Both large and small companies are faced with the challenge that they should be investing in their future viability right now but can hardly calculate the running costs.

On the other hand, we cannot afford a backlog of investment and innovation. This applies to Germany as well as to Europe. The concrete consequences will depend on how pragmatically and solution-oriented all actors and decision-makers deal with the situation.

What alternative solutions are available to the food industry for production?

Christoph Minhoff: Food producers are full of ideas and work in a solution-oriented way. Therefore, alternatives are being sought, found and used in many areas, be it alternatives for ingredients such as rapeseed or palm oil for sunflower oil, alternatives for certain packaging materials or alternatives for energy supply through gas. The problem is that numerous companies and industries worldwide have to change over at short notice. This also makes the alternative raw materials more expensive. Moreover, in the case of gas energy supply, companies cannot use another energy source from one day to the next. The changeover costs time and money, both of which are sometimes in short supply. When using other ingredients, it is necessary to check to what extent the properties are suitable. Olive oil, for example, is not neutral in taste. At the same time, there are difficulties with labelling on the packaging produced in advance. When it comes to packaging, not every material is suitable; after all, the safety of the food must not be jeopardised. Nevertheless, the situation is not hopeless. It only shows what we have been demanding for years: We need strong international trade, diversified supply chains and political regulations that give those responsible in companies enough leeway to be able to react appropriately to such situations.

What measures can the EU take to ease tensions in the market?

Christoph Minhoff: As long as the Corona pandemic and the war in Europe continue worldwide, the market will also remain tense. But the EU can certainly do something: We must strengthen the resilience of food production both in Germany and in Europe. This includes open markets worldwide and easier market access in times of crisis to cushion supply bottlenecks in the short term. The measures of the Green Deal must therefore be reviewed in view of the historical challenges. And this also means that all the food we do not produce in Germany and Europe increases prices on the world market and leads to more hunger in emerging and developing countries. All sustainability goals can only be achieved if producers survive economically. Otherwise, we are just shifting the problems abroad.