Russian invasion of Ukraine: Implications for EU agriculture and dairy

By Jim Cornall contact

- Last updated on GMT

Copa and Cogeca members have expressed their solidarity with the Ukrainian people.  Pic: Getty Images/omersukrugoksu
Copa and Cogeca members have expressed their solidarity with the Ukrainian people. Pic: Getty Images/omersukrugoksu

Related tags: Ukraine, Russia, Dairy

The Russian invasion of Ukraine has already led to massive destruction, loss of life, sanctions, and ramped up rhetoric on both sides.

Food is also critical in the conflict.

This is true not only for the countries directly involved, but also further afield.

Europe’s second largest country, Ukraine is the EU's fourth biggest external food supplier and provides the EU with a quarter of its cereal and vegetable oil imports, including nearly half of its maize. Russia is also an agricultural exporter.

Kite Consulting in the UK has published two reports on the crisis, one on the effect of the war on the UK dairy industry, and another on the impact on feed markets.

The company said sanctions will have an economic impact beyond Russia’s borders, but this is clearly preferable to getting involved directly in military action.

The report notes that Ukraine and Belarus are both dairy net exporters, while Russia is a net importer. It said the dairy exports of Ukraine and Belarus to the world market exceed that of Russian imports from the world market, and the net loss of Ukraine’s, Belarus’ and Russia’s dairy commodities trade would mean a loss of about 1.2 bn kg/year of raw milk equivalents in dairy supply to the world market.

“Any conflict in Ukraine is likely to impact global supply and demand of dairy products and, initially, it is likely this will lead to higher global dairy commodity prices,”​ Kite Consulting said.

In the short term, Kite Consulting said dairy exports from Ukraine will cease immediately due to military action. In addition, punitive western sanctions (for example, exclusion from the SWIFT payment system) could stop all Belarusian dairy exports, except those to Russia and Kazakhstan. It argues this may even impact exports to other nations, such as China, as export destinations, even though they remain neutral in the conflict, due to payment issues.

Kite Consulting said natural gas export volumes from Russia to the EU will reduce, in part due to pipelines through Ukraine being blocked. It said this sharp increase in global energy prices will mean dairy farm margins being hit directly, through rising on farm energy and fertilizer costs.

Russia may have to terminate any ‘western’ dairy imports (mainly from Argentina) due to exclusion from international banking systems, the report continued. Also, over time, the increase of dairy commodity prices and/ or an invasion and global economic downturn as a result of consequent high-energy prices may reduce world dairy demand.

The report said longer term, higher dairy commodity prices may, via higher milk prices, trigger a global increase in dairy output, and Belarus may, over time, re-establish routes to export to ‘neutral’ markets. It also said in time, trade flows between Russia and other countries will be re-established, with Russia again re-entering the world dairy market, possibly working through proxy operators like Armenia.

“The direct effect of military action will be a short-term price increase for global dairy commodities. This price rise will be caused by the ‘overnight’ loss of Ukrainian and Belarus supply of dairy commodities to the world market,”​ the report stated.

“The volume loss due to these two exporters being blocked (to all markets except the Russian Federation and Kazakhstan) outweighs the possible dairy volume freed up in countries like Argentina that now sell to the Russian Federation.”

It stated the world dairy market will likely shrink when dairy commodity prices increase further. A secondary effect will be the negative impact of increasing energy prices on consumer buying power worldwide. However, as several large dairy importing nations are also large net ‘fossil energy’ exporters, Kite Consulting said the relevance of the indirect effect could be moderate to minimal, as high energy income in these countries tends to trickle down to higher consumer buying power, and thus higher dairy import demand.

In summarizing events, Kite Consulting said potential panic buying in the global dairy market, resulting from an overnight loss of Ukrainian and Belorussian exports, may trigger further price increases, even when only moderate volumes are being traded. In the UK, farmer pressure on the UK processors to keep pace with global raw milk price increases is likely to build.

It said if the situation escalates, it will be important for UK dairy processors to increase sales prices even faster than they have been in recent months, to enable them to cover their own additional cost inflation and to be able to pass on higher income through milk price to farmers to cover further on-farm cost increases.

“As a result, inflation of consumer dairy prices in the UK seems an inevitable consequence,”​ the report concluded.

Cope and Cogeca

At last week’s Copa and Cogeca Praesidia meetings, all members expressed their solidarity with the Ukrainian people, with special thoughts going to farmers and agri-cooperative colleagues in these difficult times.

The European farming unions said the solidarity doesn’t stop at words, as they will put in place concrete actions in the coming days and weeks following the evolution of the conflict.

In times of war, the focus on food security becomes of critical importance and it is essential to take the necessary steps early on to ensure that food supplies continue reaching those most affected, in the Ukraine and globally, Copa and Cogeca said.

“This is the moment to further strengthen a united European and international cooperation,” ​its statement said.

The organizations said the destabilization of Ukraine by the Russian invasion has already triggered important global consequences.

For the EU’s farming community, which Copa and Cogeca said demonstrated both a key role and resilience during the pandemic, this crisis comes on top of Covid, and the sharp price increases of all major agricultural inputs (i.e. energy, feed, fertilizers) in recent months.

“To keep a strong and peaceful Europe, safeguarding food security and supply chains is fundamental,”​ Copa and Cogeca said in a statement.

“This is a lesson we have learned from the founding fathers of Europe. In the coming days and weeks, while primarily focusing on the ongoing conflict resolution, the EU decisions makers must also consider its impact on key economic sectors. European agriculture is a central pillar of our strategic autonomy. EU decision makers must act decisively and swiftly to preserve it.”

Related topics: Pricing Pressures, Markets, Fresh Milk

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