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

Author : Olena Holubeva

Source : 112 Ukraine

Bakeries, poultry factories, dairies, manufacturers of confectionery, and other products reported the threat of further growth in prices for their products, without which they would work at a loss. The main reason for the rise in prices for food products lies in the rapid rise in the cost of gas
12:00, 10 January 2022

112 Agency

On December 31, the Cabinet of Ministers published a decree under the Christmas tree, according to which private gas producers are obliged to sell 20% of gas on the Ukrainian Energy Exchange to producers until April 30 at a fixed price excluding rent payments. In addition to the fact that the decree does not apply to all producers in need of support, the way to stop food prices itself cannot be called complex.

Prices are rising not only because of the cost of gas, but also because of the rise in prices for most of the cost components: feed, grain, packaging, and electricity. On the other hand, the return to the practice of selling gas at reduced prices to individual enterprises opens the way to possible abuse and corruption risks. One can only guess how much "blue fuel" will go not to the food workers in need of support, but will be resold at market prices.

Related: Europe set record for extracting gas from storage

Food executives ask for support in exchange for a promise not to raise prices

As we have repeatedly reported, over the past year in Ukraine all foodstuffs have risen in price at a record. Representatives of associations uniting the largest sectors of the food industry asked the authorities to provide support to the enterprises. Otherwise, they will be forced to either raise prices or stop work altogether. President of the All-Ukrainian Association of Bakers Yuriy Duchenko warned about the need to raise prices for bread, including "social varieties", by an average of 30%.

"The rapid rise in prices has brought the food and processing industry to the brink of survival. If we talk about bread, which has always been the number one product, has always been available, bakers are now facing the threat of stopping production. Gas prices have risen 10 times a year. For loaves of bread of social grades, gas was 1,6 cents, but today we are talking about 20 cents. At the same time, all components of the cost price have increased. Flour has risen in price by 40% over the year," Duchenko said.

In Kyiv today, the price for a loaf ranges from 0,7 USD per unit of production.

In case of a 30% increase, the price for a long loaf will rise to almost 1 USD per unit.

Producers of poultry meat also warned of the threat of further price increases. Over the past year, products have already significantly increased in price. Average consumer prices for chicken carcass and chicken fillet in October this year increased by 33.2 and 30.5% (compared to October 2020), to 2,7 USD and 4,3 USD / kg, respectively. Until December last year, the main reason for the rise in prices was considered to be the rise in prices for compound feed, which occurred as a result of the rise in prices for grain and oilseeds. The Union of Poultry Breeders of Ukraine reported that due to a two-fold increase in prices for compound feed last year, industrial production of eggs fell by 25%. Almost 20 poultry farms have closed in the country. 15,000 jobs were lost. In 2021, one of the leaders in the production of broiler meat, Agromars, one of the largest producers of broiler meat, went bankrupt.

Related: EU proposes to recognize nuclear power plants and gas as green energy

Today, due to the rise in gas prices to 2,000 USD per 1,000 cubic meters. m poultry enterprises were faced with the need to raise prices for their products by another 0,5 USD/ kg, said head of the board of directors of the Association "Union of Poultry Farmers of Ukraine" Oleksandr Bakumenko.

“Poultry farms use gas in complexes for growing poultry. The process takes 1.5-2 months, during which it is necessary to maintain a certain temperature in the premises where the poultry is kept, which in the selling price of the enterprise was equal to 0,03 USD, now it is 0,3 USD per 1 kg. In the structure of the prime cost, gas has increased up to 30%. to compete with prices in foreign markets?" asks Bakumenko.

The head of the board of directors of the Association "Union of Poultry Breeders of Ukraine" stressed that stopping the production of poultry meat is not the best way out due to the specifics of production.

"What does it mean in the case of our industry to stop production? You understand that this is not pouring vodka - he turned off the tap and that's it. This is a bird! This is the millionth livestock. If they turn off the heat, they will simply die, the spectacle will be terrifying!" Bakumenko notes.

Over the past year in Ukraine, prices for the entire range of dairy products also increased significantly: from chilled milk to cheeses. The price of butter has broken a record in the past five years. The head of the Union of Dairy Enterprises Vadym Chagarovsky said that despite the growing price tags, "for more than six months the industry has been in crisis and has been operating at a loss." Milk producers are in a difficult situation due to a tenfold increase in gas prices, a 2.5-fold rise in electricity prices, 25% rise in raw milk, and 42% in packaging materials. A major producer of whole milk products and cheeses, Milk Alliance, has already warned about the impossibility of working with losses without rising prices and a possible halt in production.

The price of confectionery products increased by 25-30% over the past year.

“It should be noted that this is very high inflation. I cannot recall such an increase in prices in the industry in just a year. But this did not completely save the situation, Ukrainian confectioners will be forced to increase prices by at least another 10-15%. And this is still an optimistic forecast," President of the "Ukrkondprom" Association Oleksandr Baldynyuk said.

He stressed that modern Ukrainian confectioners have energy-efficient production. The industry has been sufficiently modernized. In recent years, large investments have been made in the technical equipment of enterprises.

Like representatives of other industries, confectioners note that, along with gas prices, other factors influence the economic condition of their enterprises.

"Gas is not the only problem. If prices for it had not risen, and you asked me how are you, I would say that the industry is already not easy in connection with the prices of flour, sugar, butter, confectionery fats, which over the past year, prices have risen significantly, and due to the increased prices for electricity. But gas is literally a shocking blow. Producers of the flour group of products: biscuits, waffles, cakes, caramel are especially hard to bear, since the ovens mainly operate on gas," said Baldynyuk.

Related: Will Ukraine have enough gas in 2022?

The Ukrainian food industry is in a difficult situation. Growing imports, in particular from European countries, where enterprises receive powerful government support during the crisis, do not allow national producers to release price tags on free float. These are both targeted subsidies and tax incentives, in particular, a reduction in VAT for a wide range of food products. And while imports are not a threat to bakery producers segmented into specific markets for specific regions, confectioners, cheese makers and sausage producers are feeling a lot of pressure from the growing barrier-free imports from the EU.

For the same reason, export-oriented industries - poultry producers, confectioners, cheesemakers - find it difficult to maintain their positions in export markets.

After the loss of the capacious Russian market, the main sales markets for the confectionery industry remain the EU, Kazakhstan, Belarus, where local producers buy gas at prices much lower than in Ukraine. At current export prices, the majority of enterprises have either significantly lost their revenue, or are forced to work "in the red." They continue deliveries in order not to finally lose markets and an established supply chain, the president of the Ukrkondprom Association informs.

Representatives of the food industry asked the authorities to develop comprehensive support measures, which would consist not only of targeted compensation for the increase in energy prices but also tax incentives and subsidies. So far, these requests remain unanswered. On the other hand, the Cabinet of Ministers, right under the tree on December 31, shifted all the problems of food workers onto the shoulders of private gas producers.

Provisional appropriation and dispossession "under the herringbone"

In December, it was known that the Cabinet of Ministers and the Office of the President were actively conducting non-public consultations at which they discussed special gas prices for producers of socially important products. Insiders reported that at the meetings they discussed a model in which private gas producing companies could provide the most important branches of the Ukrainian food industry with gas at a price not exceeding 1,000 USD per 1,000 cubic meters. m. At the same time, Naftogaz was no longer considered a supplier of cheap gas - NJSC already gives almost all of its own gas to maintain preferential gas prices for the population, thermal workers, and budget organizations. The authorities called for help from private gas producers.

"In December, at the initiative of government agencies, with the participation of representatives of the Ministry of Energy, the Cabinet of Ministers and directly private gas producing companies, a number of meetings were held to find ways to support socially important sectors of the Ukrainian economy in the context of the current high gas prices. Without going into details, I will say that the companies have accumulated a market-based aid mechanism that did not include price regulation, which was that socially responsible gas producers could provide support to such an important industry as a bakery. But the two resolutions No. 1433 and 1435, which came out under the Christmas tree, came as a complete surprise to us. With these decisions, the Cabinet of Ministers actually canceled all preliminary agreements reached the day before," Artem Petrenko, executive director of the Association of Gas Production Companies of Ukraine, told yesterday.

By Resolutions No. 1433 and 1435, the texts of which were published on December 31, the Cabinet of Ministers ordered private gas producers to sell 20% of gas on the Ukrainian Energy Exchange until April 30 to producers of premium flour, bread, milk with a fat content of 2.5%, chicken eggs, poultry meat, and sunflower oil... The final list of recipients of gas at preferential prices should be prepared by the Ministry of Agrarian Policy. At the same time, confectioners, cheesemakers, pig breeders, producers of socially important cereals, who also declare the threat of a further increase in prices or stop production in the absence of an opportunity to do this, were not included in the list of recipients of gas at preferential prices.

Related: Kazakhstan President orders to limit gas, fuel, food, communal prices

According to the documents, the preferential gas price should be formed without taking into account rental payments: the prime cost plus 24% of the supplier's reward and a 1% trade markup for the supply. What should be the price for natural gas without rent, to which the premiums will be added, is a big question. As you know, the cost of gas production differs from well to well and depends on the service life, the depth of gas occurrence, the degree of complexity of its extraction, the age of the well, and reserves. How will the average be displayed?

Bakumenko, in a commentary to, said that the poultry industry will not be able to raise prices in the domestic market and remain competitive in foreign markets with gas prices no higher than 600 USD / cubic meter.

"With 550 USD per 1,000 cubic meters, it will be difficult, but at least we will be able to survive by tightening our belts, we will not have to stop production," said Bakumenko.

In order for Ukrainian confectioners to remain competitive and no longer raise selling prices, gas for them should be comparable to the prices at which EU companies buy it - up to 400 USD per 1,000 cubic meters, Baldynyuk told Confectioners were not included in the list of recipients of preferential gas.

All producers of socially significant food products (bakeries, millers, dairies, poultry, and egg producers) will need 50-60 million cubic meters to cover production needs in the three remaining cold months (January-March). m of gas monthly. According to Khabatyuk's calculations, if the New Year's government decree is implemented, 20% of the gas, which will be obliged to be put up for sale at preferential prices to certain categories of industrial enterprises on the UEB, will be from 90 to 95 million cubic meters. m of gas a month is enough. However, on condition that it comes to auctions.

Related: Gazprom's gas exports increased in 2021, company expects record-high earnings

Regulating gas prices will not help stop the rise in food prices

It will not be possible to stop the rise in food prices in Ukraine with the help of temporary point solutions - this requires comprehensive measures and large-scale state support of food producers. A competent approach is required. And you need to act immediately. The problem of expensive energy carriers in 2022 and after the end of the heating season will not go anywhere.

In summer, prices are expected at $ 500-600, which cannot be called low either. And we will come out of the current season with extremely low gas reserves in the region of 6 billion cubic meters. m in an underground storage facility. This is a technological minimum that cannot be raised. It will already be unsafe to go down below.

To fill the storage facilities again, 10-12 billion cubic meters are needed by October. m of gas, and this is a colossal volume. Of this volume, about 3 billion cubic meters. m will be injected at the expense of own production of the state Ukrgasvydobuvannya (with a summer surplus of 20 million cubic meters per day over consumption).

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