Agrifood sector risk report

The domino effect of the invasion of Ukraine: Russia is the world's largest supplier of natural gas and is responsible for 33% of the world’s fertilizer production, being a key producer of ammonia and NPK (nitrogen, phosphorus, and potash). As a result, the trade sanctions imposed on Russia have tightened the supply of fertilizers globally. In parallel, other key fertilizer-producing countries, such as Germany, have been forced to reduce production due to high energy costs (as a consequence of the cut in natural gas previously supplied by Russia). The aftermath of all this has been an unprecedented increase in the price of fertilizers, highly used by farmers. As companies in the upstream sub-sector have huge pricing power, they have been allowed to sell their crops at higher prices (and even to strengthen their profits), which is why prices for food commodities have risen sharply throughout 2022 (especially for grains, of which Russia and Ukraine were major exporters as well).

The agri-commodities price increases are being and will continue to be passed on throughout the entire production chain until they reach the final consumer, who will have to pay much more for any product. However, margins growth will differ by sub-sector as the level of pricing power is uneven within each link of the chain, depending on market positioning, product-mix and the geographical footprint of each company.

Generally speaking, companies in the downstream segment are the ones that will face a greater challenge ahead. On the one hand, packaged-food firms keep on struggling with still-high energy and transportation costs that retailing outlets obstinately refuse to take as their charge. Only big packaged-food players with a strong market positioning in the food & beverage industry have been able to use their brand power and large distribution scale to pass on price increases to consumers, while seeing little pushback in demand. On the other hand, food distribution stores are seeing changes in consumption patterns as people are favoring cheaper products (regardless of quality), which further increases the already high price-competition between retailers at the same time that online distribution channels are gaining popularity among final consumers. The only way to keep the customer base in periods of lower purchasing power is through discounts and promotions, which results in deteriorated margins and even in losses for some players.