UniCredit Bank Austria Industry Report
- Food price increases reach supermarkets: Consumer prices up 4.5% in January and February
- Low-income households disproportionately affected by price increases
- Ukraine war poses little threat to Austrian food supply
- Food production turnover up a strong 6% to €19.5 billion in 2021
- Food production growth prospects bleak for 2022, gas supply freeze would significantly hamper industry
The outbreak of the Ukraine war has not only multiplied energy costs; food costs have also risen steadily and are currently reaching new highs. As early as January 2022, the threat of a supply shortfall, especially of grain and oilseeds from the region, triggered a massive price hike and made grain in the domestic wholesale trade around 53% more expensive in the first quarter compared to same quarter of the previous year. There is currently no end in sight to the price increase with quality wheat quoted in Vienna at over €400 per tonne at the end of March, which means that the price has more than doubled compared to the previous year.
"The higher prices for energy and agricultural commodities have also caused fertilisers, pesticides and seeds to become considerably more expensive, and the production costs of other foods have risen. For example, at the end of March, prices for pigs raised for slaughter in Austria and for cows raised for slaughter were respectively 23% and 46% higher than in the previous year," according to Günter Wolf, an economist at UniCredit Bank Austria. This has not only increased the cost pressure on meat processing companies. Processors will try to pass on their higher raw material costs, further driving up consumer prices.
Food price increases have already reached supermarkets
Food already became 4.5% more expensive in January and February 2022. The price increase means an additional burden of €16 per month for the average Austrian household, which spends €351 per month on groceries according to the 2020 Consumer Survey. The price increase in 2022 is approaching the record level of 6.7% set in 2008, when consumer prices across Europe were driven by a sharp increase in food demand on the world market, higher consumption of agricultural commodities for biofuel production and bad harvests.
The first two months saw above-average increases in the price of bread and cereal products (average of 5.8%), vegetables (average of 7.7%) and confectionery (average of 5.2%). The price increase for meat and meat products and dairy products remained below average at 3.9% and 2.8% respectively.
Food price increases are a particular burden on low-income households. While an average Austrian household spends about 11% of its consumption budget on food, it is almost 16% for households in the lowest income fifth. The burden of rising food prices on low-income households becomes even clearer when price trends are contrasted with the proportion of households that do not have the financial means to afford a meal that is "desirable for most people" (an aspect of material deprivation presented in the context of the EU surveys on the living conditions of the population). In 2020, the last year in which the survey was conducted, this segment included 4% of all households as well as 11% of households at risk of poverty in Austria (i.e. households with less than 60% of the median income).
Ukraine war poses little threat to Austrian food supply
Even though foods are exempt from the economic sanctions, significantly fewer exports from Russia and probably a complete loss of exports from Ukraine are to be expected this year. Austria does not purchase any significant quantities of agricultural products from either country; in all goods worth €71 million in 2021, including (processed) fruit and vegetables from Ukraine worth €53 million. The importance of both countries as consumers of domestic food is also low with products worth €169 million delivered to Russia and food worth €56 million to Ukraine in the previous year. Overall, this corresponds to 2.3% of all food exports from Austria. Some of the exports will definitely cease in 2022. In addition, the subsidiaries and joint ventures of Austrian companies in both countries are at risk.
There will be considerable import shortfalls for individual agricultural products. For example, Russia and Ukraine harvest more than half of the world's sunflower seeds and about a quarter of its wheat and barley. Although the conflict in no way threatens food security in Austria, it does place a burden on food processors in Austria through the sharp rise in agricultural product and fuel prices and ultimately drives up consumer food prices.
Food production recorded above-average sales growth of 6% in 2021
In 2020 and 2021, the two exceptional years caused by the pandemic, food production was confronted with massive drops in demand, especially domestically. In 2020, food consumption in Austria decreased by 11% when adjusted for inflation and decreased slightly again in 2021.
Nevertheless, food production gained momentum in 2021, although a production increase of 2.4% did not quite compensate for the 3.4% decrease in 2020. However, strong producer price increases ensured a sales growth of 6% to €19.5 billion, with domestic turnover accounting for €12.1 billion of this. The largest growth contribution in 2021 came from foreign sales, which increased by 9% to €7.4 billion.
Economic outlook for food production in 2022 has deteriorated
Food production was able to carry the momentum from the fourth quarter of 2021 into the current year. In January and February, both production and sales growth accelerated to an average of 10% and 18% respectively, as did employment growth in the sector to 4%. However, with the outbreak of the Ukraine war, the originally very optimistic production expectations for 2022 have fallen and herald a significant slowdown in food production growth.
Overall, the outlook for food production in 2022 is characterised by a high level of uncertainty. Due to the ongoing political and economic turmoil and commodity prices, current food prices are at record levels. In addition, a loss of Russian gas supplies would significantly hamper food and beverage production in Austria. The industry covers about 55% of energy consumption with natural gas (making it the fifth largest gas consumer in the production sector). What other effects the pandemic and the war will have is difficult to predict at the moment.
In the short term, important demand indicators are definitely signalling a slump in food demand in Austria. "Real disposable household incomes are expected to fall for the third year in a row in 2022, thus also curbing consumer demand. At the end of March, consumer sentiment in Austria, as well as in the eurozone, fell to a level as low as that last seen during the 2008–2009 economic crisis," according to Wolf. Above all, a high proportion of consumers expect their financial situation to deteriorate over the next 12 months.
Enquiries
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0)5 05 05-41954;
Email: guenter.wolf@unicreditgroup.at