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Price of bread increases: Would bread factories avoid massive production cut?

Author : Olena Holubeva

Source : 112 Ukraine

The issue of gas for bakers is not being resolved, so in January bakeries increase selling prices by an average of 10%.
16:34, 12 January 2022

112 Agency

The next step will be to increase prices by another 20%. As a result, the cost per unit of mass-grade grain products will grow from the current 1 USD to 1,25 USD. At the same time, small bakeries may not at all withstand the rally in the prices of energy resources, flour and other components. If they stop working, store shelves in some regions may be completely empty.

Why bakeries are raising prices

The largest specialized associations of the bakery industry informed 112ua.tv about the increase in prices for bread. In January, they will grow by an average of 10%.

"A certain compromise has been reached with retail chains regarding the minimum revision of prices for products," Yuriy Duchenko, President of the All-Ukrainian Association of Bakers, told 112ua.tv.

Oleksandr Vasylchenko, chairman of the board of Ukrkhlebprom, specified that prices will rise by up to 10%, including for mass varieties of bread: "Ukrainian" and loaf. He noted that an increase in prices within such limits will temporarily "delay the demise of bakeries." Bakers are waiting for the promised reduction in the price of natural gas. According to optimistic forecasts, producers will receive it no earlier than mid-January.

Vasilchenko confirmed that an increase of 20% will be the next step for bakers after the January rise in prices if the situation with providing enterprises with gas does not move off the ground. The head of "Ukrkhlebprom" calculated that in this case, the price per unit of mass-grade grain products would rise from the current 1 USD to 1,25 USD.

Related: Would government control on gas tariffs save from increased food prices?

The authorities cannot knock out cheap gas from gas workers

As 112ua.tv reported, on December 31, the Cabinet of Ministers published a resolution under which private gas producers are obliged to sell 20% of gas on the Ukrainian Energy Exchange to certain food industry enterprises at a fixed price, excluding rent payments, by April 30. The Ministry of Agrarian Policy has already provided a list of enterprises that apply for the purchase of gas at a reduced price. There are 7,000 manufacturers in it - much more than it was originally assumed. In addition to bakers, producers of flour, poultry meat, milk, sunflower oil apply for preferential gas.

The last meeting with gas producers on the issue of providing producers of social food with gas at preferential prices was held at the Ministry of Energy on January 6. According to insiders, a representative of the Ministry of Economic Development and Trade threatened that if by January 15 private traders do not put the required volumes of gas at a discounted price on the exchange, then in the near future the rent for gas production may be multiplied.

Producers of "social" food products need 50 million cubic meters monthly. Of this volume, 10 million cubic meters of gas per month is needed to cover the needs of bakers.

As 112ua.tv reported earlier, private producers believe that government regulations obliging them to sell gas at a fixed price on the exchange are illegal. They note that there are no transparent mechanisms in the country with the help of which it is possible to track the intended use of gas. In other words, how to make sure that all the gas at a reduced price will be directed to baking "social" loaves, and not confectionery and buns? Nor can we be completely sure that surplus gas will not be resold at market prices.

Gas producers are outraged that, in violation of the Gas Market Law, they are forced to fulfill their social obligations without any compensation for the losses they will incur by selling gas at below-market prices. As reported, the Association of Gas Production Companies has already stated that the Cabinet of Minister's decree on fixing gas prices for the food industry can be challenged in court.

Related: Will Ukraine have enough gas in 2022?

There are no preferential gas prices on the exchange yet. On January 11, the state-owned Ukrgasvydobuvannya for the first time independently entered the energy exchange. The company offered 5 million cubic meters. m of gas at market price – 1,7 USD / 1,000 cub. m (including VAT).

A number of regions may be left without bread at all

Bakeries say the situation remains critical, as, in addition to high gas prices, the industry is being pressured by high flour prices. Since the beginning of the year, they have already grown by 20%. By the way, millers were also included in the list of contenders for preferential gas, and if they do not receive it, they will continue to raise prices. Prices for sugar, salt, and yeast continue to rise.

Vasylchenko does not exclude that if the issue of gas for bakers and millers cannot be resolved, a number of bakeries will be forced to stop. They simply will not be able to pay for gas. This will have serious consequences.

"Bakeries are focused on regional sales markets. As a rule, only large cities with high payment demand provide several bakeries - such is the situation in Kyiv, Dnipro, Kharkiv. But in small towns and regional centers - one bakery each. These enterprises turned out to be the most unprotected today. If they cannot pay for gas and are forced to stop work, it will not be possible to avoid interruptions in the provision of bread in their traditional sales markets," Vasylchenko said to 112ua.tv.

Bread has the shortest shelf life of all products - 2-3 days. It is known that only "fresh" bread is tasty, and stale bread is difficult to sell even with discounts. For this reason, organizing the logistics for the delivery of fresh baked goods is very difficult. If the regional bakery is shut down, one can hardly expect that competitors will be able to quickly fill the vacant niche.

There are only four large companies operating in the grain business in Ukraine, covering several sales markets at once - the capital Kyivkhlib, Khlib Investments (5 bakeries), Kulynichi (10 specialized bakery complexes), Formula Smaku (4 bakeries) and Lauffer Group, a leader in the eastern part of Ukraine.

“It is possible that in some regions a situation will arise when the remaining afloat enterprises will not be able to quickly cover the demand and organize the delivery of bakery products from neighboring markets. Theoretically, I assume that residents of some settlements will face empty shelves in the bread department,” says Vasylchenko.

Related: Ukraine to limit gas price for bread production companies

According to him, this will primarily affect small towns, villages, and regional centers.

"If the gas issue is not resolved further, medium and small bakery enterprises will begin to die. This means that villages and regional centers, small cities will be the first to face the problem of providing factory bread," the head of Ukrkhlebprom told 112ua.tv.

Shortage of flour

In addition to gas, bakers are seriously concerned about the situation with the availability of flour. Despite the record harvest, a flour shortage may occur in Ukraine before the end of winter.

"Flour is expensive, but it is still available. At the same time, we see that 90% of the wheat that is exported is food. And by February the market may begin to experience its deficit," says Oleksandr Vasylchenko.

The head of the Ukrkhlebprom association said that the bakers turned to the authorities: they asked to study the situation in terms of the grades of harvested grain, which, possibly, would have led to the creation of mechanisms to stimulate traders to export, first of all, feed wheat.

“We are not interested in all milling wheat in the harvest, but only in the second class. If millers cannot buy grain of the second class and use, for example, the third class, there will not be a sufficient level of gluten in such flour. Bread baked from such flour will come out vague, cracked," said Vasylchenko.

Related: Eggs, bread, sugar are new black caviar: What will happen to food prices in Ukraine?

According to him, in order to preserve the quality of bread, bakers will have to switch to imported flour, and this will become another factor of pressure on selling prices.

"In this situation, Russia and Belarus are unlikely to help us. We will have to ask Turkey for help, to which we will first sell grain, and then we will buy flour at exorbitant prices," the head of the Ukrhlebprom association concluded.

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