The armed conflict in Ukraine will not only have a lasting impact on consumers and food security, especially in poorer countries, but also on the global food industry. Food manufacturers around the world are facing rising production costs due to price increases for both food commodities and for energy and overall rising production costs. Consequently, they will have to invest in modifying the composition of their food products to remain competitive. Especially small and medium-sized enterprises (SMEs) in developing countries might face more difficulties in adapting their products. Meanwhile, opportunities are opening up for developing countries’ local food industries to modify the composition of their food products towards higher nutritious values and more sustainable production with higher local content. This, however, may only be achieved with substantial investment, public support and assistance through the international community.
Disruptions in world food markets
Many countries are heavily dependent on direct food imports from Ukraine and the Russian Federation. Countries in Africa, the Middle East, Europe and Asia import a significant share of their wheat, barley, corn or vegetable oils from these two countries (see figure below). In 2019, Ukraine alone accounted for 23 per cent and 20 per cent of African wheat and maize imports, respectively; 28 per cent of European maize imports; 12.5 per cent of Asian cereal imports, and 55 per cent of crude rape oil imports in the Middle East.
Food prices around the world are on the rise (see figure below). Reduced supply and higher production costs are giving food prices a double blow, given the tradability and substitution dynamics across commodity markets. The increase in food prices comes at a time when global food and energy prices have already been soaring due to the COVID-19 pandemic and transport costs, supply chain disruptions and demand for food commodities are rising. FAO’s Food Price Index reached an all-time high in March 2022. The index subsequently declined slightly but in May was still 23 per cent above its value in the corresponding month last year.1
These challenges are exacerbating adverse dynamics in less developed countries, whose economies are already in debt distress as a result of COVID-19-related measures and inflation. A hunger crisis was looming in Africa even before the armed conflict in Ukraine broke out and countries that are heavily dependent on grain imports, such as Egypt, Ethiopia, Somalia and Sudan, will be severely impacted, while many poorer countries will be subjected to a negative terms of trade shock. The effects of worsening food price inflation will hit vulnerable groups such as women and children particularly hard.
The food and beverage industry is a major contributor to value addition and employment, especially in low-income developing counties (see figure below) and has the biggest potential among low-tech industries to foster sustained growth, even as income levels rise2. The current increases in food commodity and energy price will cause a wider price increases throughout the whole food industry, which in turn has the potential to undermine the nascent food and beverage industry, especially in least developed countries (LDCs).
Outlook for the global food industry
Around the globe, multiple policy measures have already been directed at addressing commodity shortages and rising food prices, such as measures to increase self-sufficiency, subsidies for production, as well as export bans and fixed import options from trade partners. Such protective measures have the potential to further intensify food insecurity, as would efforts to increase the production of biofuels.
Measures that would improve the situation on the food markets include the provision of incentives (in addition to the given price effect) to producers of grains and oilseeds. The approach to food and energy security needs to be holistically redefined looking at reshaping food systems to become more resilient by diversifying food imports, establishing secure supply routes with partner countries, as well as expanding and diversifying the local content in foods.
The food industry sectors processing grains and oilseeds will be hit hardest by the consequences of armed conflict in Ukraine, but higher prices will spill over into the entire food industry. Indeed, food manufacturers have seen their production hit by both shortages in supplies of all types of food commodities, as well as higher energy costs.
Due to decreasing purchasing power of consumers, there will be higher demand for cheaper foods and reduced demand for more pricy, healthy and sustainably produced foods.
The food industry—at least in parts—will respond to changing demand for cheaper foods and address rising commodity prices and production costs by substituting inputs and altering the content of ingredients in food products3. FAO4 simulations indicate that shortfalls arising from lower grain and sunflower seed exports from Ukraine and Russia might be partially compensated by alternative sources during the 2022/23 marketing season. This, however, will not bring down prices, but will change certain consumption patterns and the nutritional value of foods.
The more developed global food industry will most probably develop and test new recipes and apply new formulas for food products that allow more optimal use of alternative (cheaper) ingredients (food commodities).
Will food industries in less developed countries be able to compete in the product and innovation race? SMEs in the food and beverage sector might miss the opportunity, not least because of underinvestment in product development, R&D and innovation in the sector. Meanwhile global players (including their local branches in developing countries) are going to benefit from their financial and technical capabilities. If opportunities for reorientation of food industries in developing countries are not taken, global food industry players may extend their influence over the “still-limited” food-processing capacities of less developed countries.
The current high prices for grain and oilseeds commodities provide a one-time opportunity to invest in increasing productivity in crop production and its use in local food diets. This would have positive effects on food security and nutrition, reduce biodiversity loss, improve sustainability of farming practices, and improve income and employment of rural and vulnerable communities.
Policy considerations in support of local food industries
While in the short term, government measures will aim at protecting consumers, in the medium- and long-term, the focus of government support will need to aim to re-orientate production in line with the country’s food security policy. This implies a refocusing of production to be less dependent on international markets and more resilient to market shocks, thereby ensuring higher local content. Developing countries may consider the below measures that can be subject to international financial and technical assistance by the United Nations, including the United Nations Industrial Development Organization (UNIDO).
Sensitization of consumers and industries about further expected prices increases as well as about the need for a stronger focus on local sourcing of foods with high nutritional values.
Donors and governments can support industries in less developed countries to diversify and substitute supplies and develop adjusted formulas for food products. Such support may include grants, loans and tax exemptions for product development and innovation, but should include safeguards for nutritional values in promoted food products.
Food industries can be given support to increase local content in foods. Such support can include tax reductions on locally produced primary foods and the development of fundable business models. Value chain specific development and R&D should be part of such support.
The food industry would also benefit from a formalization of the marketing of locally produced food commodities. Here it is important to establish local commodity exchanges, introduce grading schemes, develop norms, establish quality control schemes, and ensure market transparency and early payment of farmers.
The development of sustainable supply chain management frameworks will help food processors and consumers to redirect to foods that are produced more sustainably along the different tiers in the value chain. Criteria for sustainability should not only include labour rights, carbon emissions, and other adverse effects but in particular resilience and local content.
The development of supplier (farmer) networks can ensure adequate support and pre-finance of production of local food commodities. Producers would need to be supported – also by use of effective agricultural advisory services – to apply sustainable production models while accessing necessary inputs and know-how. The development of post-harvest storage and logistics schemes would ensure the effective transportations from production to food manufacturers and markets.
This piece benefited from inputs provided by Charles Arthur, Michele Clara, Tsung Ping Chung, Jacek Cukwroski, Hiroshi Kuniyoshi, Solomiya Omelyan, Niki Rodousakis, Dejene Tezera, and Natascha Weisert.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
- FAO (2022). World Food Situation.
- UNIDO (2013). Industrial Development Report 2013. Sustaining Employment Growth: The Role of Manufacturing and Structural Change.
- European Parliament (2022). Russia's war on Ukraine: EU food policy implications.
- FAO (2022). Cereal Supply and Demand Brief.