The lowdown on Ukraine

The Ukraine situation

The war in Ukraine is a humanitarian catastrophe, and yet the NFU also has to view it through the lens of its impact on agriculture. If you're not sure what that means for farmers, NFU Agrifood Policy Delivery Manager Jack Watts looks at the situation as of 12 April 2022.

What is the current situation?

The onset of the war in Ukraine led to huge volatility in grain prices with Black Sea exports essentially cut o from the world. During the past 25 years, the Black Sea region has become a dominant source of grain for the world, with Russia and Ukraine accounting for 30% of world wheat exports and Ukraine 15% of maize exports. Huge uncertainty remains about how much grain Ukraine will produce and export from the 2022 harvest.

It is important to consider, though, that grain prices haven’t experienced the same levels of infl ation as gas or fertiliser. The war itself and resulting sanctions placed upon Russia have clearly driven infl ation in energy markets alongside huge volatility. Yearon-year, gas prices have increased by 500%, with a 40% increase since the beginning of the war. In early March, gas markets saw a huge surge with prices increasing by almost 200% in two weeks. Whilst things are a little

Gas prices have increased by 40% since the beginning of the war

calmer now, markets remain uncertain and vulnerable to unfolding events.

The volatility and uncertainty in gas prices is spilling over into fertiliser prices and it is evident now that both cost and availability are going to be real issues for any remaining 2022 needs and those of 2023. The UK is reliant on fertiliser imports from Europe to complement domestic production, but there is huge uncertainty as to when European capacity will come back online at scale.

Feed raw material markets also remain on edge, not least also because we are into the Northern Hemisphere growing season, on top of all the uncertainty about what level of production Ukraine will deliver in 2022.

What should businesses be thinking about?

Agriculture’s cost base is clearly in new territory and it’s important for businesses to consider carefully what this means to manage the elevated risk to working capital tied up in production. Key to this is identifying where previously marginal production has become uneconomic

and making proportionate adjustments to production scale and systems.

What is the NFU doing?

The NFU successfully lobbied for and is a contributor to the Market Monitoring Core Group. The NFU’s main ask was a better government understanding and insight in the agriculture and food sector in response to the Ukraine crisis. This group of industry professionals will work with government o cials to proactively identify risks and scenarios facing the industry, such as fuel, fertiliser, labour, and feed pricing issues.

Under the Agriculture Act, there is a mandate for Defra to monitor markets, which it is doing and also Ministers are also given the power to intervene in markets in the Act. Although there is power to intervene, there is no obligation to do so.

NFU members play an important role in supporting this work as we will need to periodically ask members how input availability/price, weather and market conditions are shaping general production decisions.

Other asks of government include:

1We have asked Defra to convene a specifi c group to focus on fertiliser. Defra hosted the fi rst round table meeting with industry on 31 March.

2Further calls on pragmatism around the interpretation of Farming Rules for

Water have been made and recent announcements from Defra have been positive news (see page 16).

3Ahead of a Westminster Hall debate on food security on 31 March, we

briefed MPs and peers from the main parties on the challenges that the sector is facing.

4We want government to be fully aware of the gas needs of the food

industry and consider it to be a priority area of critical national infrastructure for prioritisation

IMPACTS ACROSS OUR SECTORS

Such is the magnitude of the Ukraine confl ict and the resultant infl ation that no sector is immune to its impacts.

The NFU is continuing to speak with members to understand what this means for the industry’s production capacity. It is critical that NFU continues to inform government of the risks facing food production.

Horticulture:

There have been numerous examples of glasshouses being unused in the UK and northern Europe, largely due to high gas and electricity prices.

Combinable crops:

Attention is focused on the risks facing harvest 2023. The main concern is the outright availability of fertiliser for next year’s crops, as well as the sheer amount of working capital required. This is expected to impact both crop areas planted this autumn and yields.

Sugar:

Similar to combinable crops, fertiliser is a major concern in the sugar sector. Another is the huge increase in gas costs for processing and what that might mean for the 2022/23 campaign.

Poultry:

A combination of escalating feed, gas, and labour costs on top of the ongoing AI challenge is likely to mean a scale back in production until economic conditions improve.

Dairy:

Impacts vary by system, but feed and forage availability are expected to be among the key issues next winter. This is expected to result in a reduction in the size of the herd as well as yield.

Livestock:

As with dairy, the forage situation by next autumn will be a determining factor in how businesses react and adjust the size of breeding herds and fl ocks. With fertiliser issues in the arable sector, there is also concern for what this might mean for straw availability for the next two winters.