The domino of Europe’s great energy crisis has now passed to food

At Brioche Pasquier’s London factory, every roll that comes out of the company’s giant gas ovens has production costs increased by at least 50%.

From butter to eggs and sugar, the prices of most raw materials used by the French bakery have risen following the commodity rally over the past year. But the company is now also facing rising energy bills, Bloomberg points out.

This is a double whammy for food producers and a cost that is directly felt in the pocket of consumers amid a generalized cost of living crisis.

In the UK, where inflation is expected to peak above 13% and a third of British households are expected to spend more than 10% of their income on energy, rising food costs are exacerbating food poverty.

“It’s the domino effect that has happened as we’ve had a huge increase in the cost of energy,” Ryan Peters, chief executive of Brioche Pasquier UK, which runs the factory in Milton Keynes, told Bloomberg.

“We’ve tried to raise our prices a little bit to retailers and that’s unfortunately passed on to consumers,” he points out.

Global food prices hit a record this year as Russia’s invasion of Ukraine left the planet short of staples such as wheat and vegetable oils. And although global food costs have started to fall (for the fourth month in a row in July) consumers look unlikely to see an improvement in prices.

Which is because food producers in Europe are now faced with high energy prices, with natural gas, coal and electricity trading at many times their usual prices.

And the worst is yet to come, Bloomberg points out, as the dark and icy days of winter approach, which will increase energy demand for heating and electricity.

“Whether it’s roasting coffee beans or producing sugar from beets, companies until now have only been talking about increasing raw materials,” notes Kona Haque, head of research at ED&F Man.

However, she adds that “I think the worst is yet to come as energy prices rise. This winter will be a game changer and processing costs will likely increase.”

Suedzucker AG, Europe’s biggest sugar beet producer, said earlier this year that “significant increases” in raw material, energy and packaging costs offset its increased revenue in the first quarter.

Allied Bakeries, maker of Kingsmill and Allinson bread, said in June that increased input costs continued to weigh on its margins, despite strong sales in the third quarter.

Companies that turn soya, canola and sunflower seeds into cooking oils are slowing production in the UK and Europe and moving it to other regions with lower energy prices.

Oilseed processing in the UK and Europe fell by 3.2% in June, falling to the lowest level since at least 2019, according to data from industry group Fediol.

Government assistance

The outlook is so bleak that governments have already begun to intervene. The European Union last week approved a 110 million euro aid package to support companies in the agricultural sector, which have been hit by an increase in energy, fertilizer and other raw materials due to the war in Ukraine. Individual countries are also expected to follow suit.

“The agricultural sector has been hit particularly hard by the rise in the price of energy and other costs, caused by Russia’s invasion of Ukraine and subsequent sanctions,” said EU Antitrust Commissioner Margrethe Vestager. “We continue to work closely with member states to ensure that national support measures can be put in place in a timely, coordinated and effective manner.”

In addition, energy-intensive food factories in Europe could be forced to close if gas shortages lead to rationing.

Germany has already activated the second of three stages of its emergency plan, and the next stage could lead to shutdowns across industries. The UK also has a plan that involves reducing or limiting factory supplies. Such negative scenarios could lead to even higher costs of grocery goods.

In east London, Tate & Lyle Sugars is working hard to ensure it can continue to supply sugar to its customers daily from its Silvertown refinery next to the Thames, said Gerald Mason, senior vice president of the American Sugar Refining-owned company.

“Just as people struggle with their household budgets, so we have to manage the extremely high variability in energy expenditure and costs, ensuring that every penny our business spends and earns is the result of optimal real-time management,” he tells Bloomberg.

“We don’t run casinos. We make food, which puts a lot of responsibility on us to get it right,” he adds characteristically.