The year of hunger. Possible product shortages on both sides of the front line?

With war at hand inevitably comes the problem with a broken supply chain, food inaccessibility, and product shortages in many categories. In Russia, this stems from unprecedented sanctions imposed against the aggressor. Mind has analyzed what is happening to provisions on the 20th day of full-scale war initiated by Russia against Ukraine and possible outcomes for the near future.

It should be noted right here that we leave aside the state of affairs in cities like Mariupol that are besieged and/or affected by ongoing active hostilities. The situation there has long gone beyond problems with provisions. It is a humanitarian crisis, and the whole world knows about it. We have delved into the food situation of regions that maintain or are trying to maintain their day-to-day functioning.  

The first and primary trend that has altered the Ukrainian food market is a drastic change of channels and volume of supplies in terms of regions. The significant conversion of consumers to the Western regions has compelled retail suppliers to adjust the logistics and decrease the supply in Northern and Southern directions, respectively. For example, according to expert assessments, less than 1.2 million people are left in Kyiv, half of the total number estimated before the war. In agglomeration, where the population totals over 7 million people, the outflow is even more considerable.

To the slightly good news now. The remaining storage capacity in the capital area with a declined number of consumers significantly exceeds the needs. Hence, even in the case of disruption in logistics or siege, the food reserve gives citizens a significant temporary leeway. Kyiv Mayor Vitali Klitschko says the city has at least a two-week food reserve.

The second trend is a calculated state policy regarding provisions. As is known, Ukraine produces more than needed for the domestic market. In some categories, it is a five to tenfold disparity. Although half of the agricultural marketing year is gone, and the grain export in July to December 2021 hit record high (over 30 mln tonnes), the remaining last year's harvest exceeds the demand. Especially given the number of people who have left the country. However, shortly after the hostilities began, the export embargo was placed on the primary food commodities such as cattle, sugar, buckwheat, rye, millet, oats, and salt. Export control licensing has also been introduced in the following categories: wheat, corn, sunflower oil, and poultry. It makes it possible to monitor the situation in real-time mode.

And in the third place comes huge humanitarian potential, with Ukraine being subject to aid from all over the world. Ten days into March, Ukraine has received 40,000 tonnes of humanitarian aid, and now the daily supply exceeds 7,000 tonnes.

The bottom line is that a temporary shortage in imported goods may be expected due to logistical challenges in the Ukrainian market. It mainly concerns expensive cheeses, alcohol, and even more so, fruits.

Russian kitchen

To the disappointment of many, even with the almost unanimous boycott of multinational companies and the known toxicity of the Russian market, widespread famine in Russia is unlikely to happen.

The domestic manufacture of essential commodities like grain, oil, sugar, etc., is sufficient to support the domestic market. External supplies in these categories are insignificant. So, according to the local Ministry of Agriculture, import content in the "grain" category is only 0.2%. Russia is a net exporter in the "meat" category, as it sells 3% more abroad than it imports.

The import content in the dairy segment is more prominent and reaches 20%. But here, too, the niche is likely to be covered by domestic production. Especially given that exports of these products from the Russian Federation are likely to fall. Third countries' ethical self-restrictions explain the latter (officially, food is not included in the sanctions package).

Again, it needs to be pointed out that essential general products are in question, and the country produces more than enough of those. An unexpected exception in this category may be potatoes, where the dependence on imported seed supply is at 90%. At the same time, the import content of ripe potatoes has been growing in recent years, and this product is among the ones that have risen the most in price. A quick project on potatoes selection conducted by the All-Russia Research Institute of Agricultural Biotechnology confirms that the problem is not contrived. Especially because it is forbidden to grow gene-edited plants in Russia.

But in terms of more complex goods, entire segments are shrinking. Again, we should not rejoice that coffee or baby food will disappear altogether in Russia. But their volumes will decrease significantly and increase accordingly even without adjusting to the current ruble exchange rate. Setting up production within the country is possible only at the cost of time, volume, and quality losses.

The crucial segment that first experienced the crisis was baby food. In early March, Nestle told retailers that the ingredients needed to produce Nan and Nestogen dry formula would suffice for a week and a half. The prospects for replenishment are unclear due to the supply chain disruption.

A week ago, Nutricia reported that some items are no longer available, and order processing time has significantly increased.

The dairy giant Danone has similar problems with ingredients.

In the first week of the war, demand for dry formula increased by 250%.

The problem expands beyond the mixtures: there is also a large share of imported raw materials in baby purees and fruit mixtures.

Vegetables and fruits. Their steady supply directly depends on the current status in the Black and Azov Seas and southern ports. Logistics and sanctions-related risks are reflected in the trading conditions, as suppliers require 100% advance payment. The fruit and berry segment is predicted to have an almost guaranteed shortage. Only a tiny part of these products grows in Russia, namely grapes, apricots, cherries, and the like.

Pet food. Manufacturers and distributors are already seeing a sharp decline in inventory from three to four months of sales to one to two. The feverish demand can be explained by the problems with logistics, delays in deliveries, and the ban of the Rosselkhoznadzor on importing certain types of feed. The highest unmet demand is for specialized and medical nutrition for animals, mainly containing imported raw materials.

Coffee. Here, the outcomes of sanctions and self-sanctions have overlapped with rising costs for raw materials caused by coffee crop failures in major producing countries. Due to the restrictions on banks, coffee bean importers cannot settle accounts with the producers for the already shipped consignment of goods. And the latter are raising selling prices by 20-25% out of thin air. Transocean shipping to Russia is impossible, so the goods come to Europe later to be delivered by road or rail. These routes may also be closed.

Paulig, the Finnish company, which had a plant in Tver and controlled 17% of the coffee market in Russia, was one of the first to withdraw from the Russian market.

Dairy products. As previously mentioned, the amount of dairy raw materials makes it possible to cover the lack of imports, albeit with less posh and familiar products.

But even here, the challenges arise with consumables and specific ingredients needed in production. One of them is hydrogen peroxide, now in shortage, which is necessary for processing packaging for ultra-pasteurized products.

The leading peroxide supplier, the French company Arkema, which works through an intermediary in St. Petersburg, has stopped deliveries to the Russian Federation. The risks are very high and go beyond mere ethics since hydrogen peroxide is a dual-use cargo. Supplying it to Russia equals potentially setting the hand to provide weapons for direct aggression against Ukraine. The company said it would not ship peroxide to either Russia or Belarus.

Since it is a hazardous cargo, a particular logistical infrastructure is required, so redirecting the supply chain on the fly seems impossible.

According to the Russian dairy industry representatives, there is a two-week reserve for peroxide.

Imported alcohol. When the world's largest brands announce they are leaving the Russian market, this does not always mean a closedown. Yes, the beer giant Carlsberg has cut off investments in local production and stopped the supply of export products. Still, the Baltika breweries will continue to operate. The real implication here is the lack of beer on the shelves produced outside of Russia. The supply of ingredients may also be banned, but it will affect the quality of the product, not its quantity.

Heineken has left Russia following a similar pattern. The high level of local manufacturing content will enable local brewing companies to continue to work. The actual consequences are the discontinuation of further investment and the prohibition of the export of Russian products.

The global alcohol giant Diageo, a premium drinks manufacturer (Johnnie Walker, Captain Morgan), took the most drastic measures, completely refusing to supply to Russia.

Weekly inflation in Russia rose to 2.2%, reaching the highest level since 1998.

Minister of Finance of the Russian Federation Anton Siluanov said that the administration keeps a close eye on price increases. And should something happen, "will take care of the senior citizens."