How does Ukrainian flour market operate in wartime?

Ukrainian flour millers have been working under martial law for almost 1.5 years. How the industry is developing and what to expect from the new season - we decided to ask Rodion Rybchynskyi, Director of Union Millers of Ukraine and Chairman of the Board of UkrKharchProm.

- Rodion, every industry in wartime has its own "pain". What negative factors have affected the Ukrainian flour market in recent months?

- If you want, we can do a short SWAT analysis of the work of the flour industry in 2022/23 MY.

The negative factors include a significant reduction in domestic consumption of flour, and this is understandable – part of Ukrainian territories was temporarily occupied in 2022, and many people also left abroad.

Flour production in 2022/23 MY decreased by 4.5% year-on-year - to 2.615 mln tonnes, and domestic consumption – by 17%, to 2.05 mln tonnes.

^*Forecast

Together with this, I will note the low purchasing power of the population in wartime conditions. As a result, bakeries have switched to simpler recipes and, as a result, the range of flour purchased by industrial consumers has narrowed.

There has been an outflow of qualified personnel from the industry, who went abroad (first of all, we are talking about female management personnel). And even now there are quite understandable problems with this. Not all flour mills received reservations for their male employees, because the criteria for such enterprises are quite strict.

Also, the market is negatively affected by small companies producing flour and cereals, which most often work as a "gray" segment – they buy raw materials for cash and sell products in the same way, without paying taxes to the budget. Over the past six months, many of them have appeared, such enterprises "smear" the market, taking part of the profit from honest flour millers who work "in the white".

- The lack of sea export of bran has also affected the market, hasn’t it?

- Yes, the reorganization of logistics radically changed a number of internal processes. If we talk about bran, for almost half a year since the beginning of the full-scale invasion of the Russian Federation into Ukraine, the price for this product was extremely low, and this also affected the profitability of flour milling production. Only closer to the fall of 2022, bran started to grow in price, as it was purchased for the production of pellets.

- Well, what was positive last season?

- Among the positive points, I would foremost single out the low prices for grain and the absence of price jumps for it. Such stability of prices for raw materials made it possible to stay afloat and gradually develop.

Problems with grain logistics played into the hands of Ukrainian flour millers. If earlier we were often forced to "catch up" with exporters' prices for grain, then in the new conditions we sometimes gave the best price. And the choice of raw materials, of course, has become much larger.

The industry was significantly supported by an increase in exports. Thanks to the fact that the EU countries gave us special conditions for working in their market, it allowed us to supply Ukrainian flour milling products to the European market without quotas and duties. Statistics eloquently testify to the results – the export of flour doubled in 2022/23 MY, amounting to 147 thsd tonnes.

- If we have touched the export, please tell us how has the geography of the supply of Ukrainian flour changed?

- It has changed quite significantly. I would like to note that flour mills quickly reorganized into other markets. First of all, it is about the opening of the European market, which I have already said. I sincerely thank the Europeans for helping us out in such a difficult time.

If in 2021/22 MY the lion's share of Ukrainian flour exports went to the UAE and Palestine, then in 2022/23 MY European countries became the top importers – Moldova and Poland, as well as Romania, Croatia, Hungary, Slovakia, and the Czech Republic, which also appeared on the list of buyers… 

In addition, our exporters managed to strengthen their position in the Middle East market. So, if Palestine bought 11.6 thsd tonnes of Ukrainian flour the year before last, then in 2022/23 MY this volume increased to 14.6 thsd tonnes.

Ukrainian flour was not supplied to African countries due to logistical difficulties.

As for the export of bran, after the first shock months at the beginning of the war, the market recovered and, as we can see, the supply of this product to foreign markets practically reached pre-war indicators. Similarly, with the geography of supply, it can be seen that the EU countries have significantly increased the import of Ukrainian bran.

I should also note a somewhat negative, rather limiting factor. A reorientation to the European market caused a change in the marketing strategies of Ukrainian exporters, the appearance of new expenses in the cost structure (including the recruitment of new specialists, training, advanced training, etc.).

- What can you say about the profitability of flour mill production in current realities?

- It is difficult to name specific figures. I can only note that taking into account the stability of prices for raw materials, the profitability of flour milling enterprises has slightly increased compared to the pre-war period. Here one must also take into account the increased demand for flour as a basic product (as well as other essential products which Ukrainians had hastened to pile up in the first months of the war).

If we look at the statistics of flour production in 2021/22 MY and 2022/23 MY, we will see that in the last 3 months of the season, flour mills have caught up and even surpassed the indicators of the previous season.

Will it last? In my opinion, hardly. There is a gradual recovery of the economy, saturation of the market with other food products, and the demand for such a product as flour will decrease to some extent.

Moreover, speaking of profitability, I will draw your attention to one issue. Last year's power outages forced flour mills to purchase expensive generators and other equipment to keep operations running smoothly, and these costs are inevitably embedded in the cost of production.

- How do you assess the prospects of the industry in the new season that has already begun?

- Firstly, it is quite difficult to talk about the quality of the new season's harvest. The fact that the harvest will be less than last year is natural. So, we will understand the quality characteristics closer to September.

In any case, domestic flour mills will completely cover the needs of the domestic market and the export market as well.

As for the foreign markets, the situation with the “grain deal”  will have a huge impact on the work of the industry. If the companies that worked within the "grain corridor" switch to land logistics and the Danube ports, confusion and the redistribution of the logistics services market will begin again, and this will not be a positive factor for the flour milling industry. However, in any case, we will be able to adapt to the new conditions, it will just take some time.

And there is the second important point. The increased demand for Ukrainian flour last season was caused primarily by its low cost (due to the cheapness of our grain). This year, the EU is expected to harvest more grain, which will cause prices to fall on the domestic market of European countries. Therefore, it is likely that the window of opportunity for Ukrainian flour mill products in this market will narrow in the new season.

And besides, in the first year of the war, we were welcomed on the European market, one might say, with open arms. Currently, Ukrainian manufacturers are perceived more as competitors and, accordingly, working conditions on the market will be tougher.

If we talk about forecasts, if in 2023/24 MY we manage to export at least the same amount of flour (about 150`000 tons), it will be a very good result. If it turns out to be more, it will be a very good coincidence.

By Tatyana Lyagusha