The great European energy crisis is now coming for your food

Energy Rally Boosts the Value of Everything From Bread to Sugar

It's a double whammy for firms struggling with material costs.

At the 240,000-square-foot Brioche Pasquier plant, located about an hour's drive from London, every roll that comes out of giant gas furnaces now costs at least 50% more.

From butter to eggs to sugar, much of the raw material a French baker uses to make croissants, brioches and chocolate has already risen in value as goods have risen over the past year. But now the company is also struggling with rising electricity bills.

It's a double whammy for food producers and a cost that is quickly felt in the pockets of consumers struggling with the cost-of-living crisis. In the UK, the Bank of England expects inflation to peak at more than 13% this year, a third of British households intend to spend more than 10% of income on energy, and now rising food prices are driving up food poverty. 

"It's a domino effect that happened with the fact that we had to significantly increase the energy," said Ryan Peters, managing director of Brioche Pasquier UK Ltd., which runs the Milton Keynes plant. "We have to try to raise our prices a little bit for retailers, and unfortunately that's about consumers."

Global food prices hit a record earlier this year as Russia's invasion of Ukraine stripped the world of key products, including wheat and vegetable oils. And while global spending has begun to decline – declining for the fourth month in July – consumers are unlikely to get a big reprieve. 

This is because food producers in Europe are currently struggling with high energy prices, with gas, coal and electricity trading at multiples of normal levels. And the worst is yet to come when the dark and frosty winter days arrive, which will increase the demand for energy for heating and electricity generation.

"Whether it's roasting coffee or producing sugar from beets, companies are only talking about increasing raw materials so far," said Kona Haq, head of research at commodity trader ED&F Man. - I think the worst is yet to come, as energy prices are rising. This winter will be a game changer and processing costs are likely to rise."

Suedzucker AG, Europe's largest producer of beet sugar, said earlier this year that "substantial increases" in raw material, energy and packaging costs offset higher revenues in the first quarter. Allied Bakeries, a bread maker of Kingsmill and Allinson, said in June that higher input costs continue to weigh on margins despite sales outpacing in the third quarter.

Companies that turn soybean, canola and sunflower seeds into vegetable oils are slowing production in the UK and Europe and shifting production to other regions with lower energy prices. Oilseed processing in the UK and Europe fell 3.2% in June to its lowest level since at least 2019, data from industry group Fediol showed.

The outlook is so bleak that governments have begun to intervene. The European Union last week approved a €110 million ($112 million) aid package to support companies in the agricultural sector that have been hit by increases in energy, fertilizer and other raw materials due to the war in Ukraine. Other countries may follow suit.

"The agricultural sector has been particularly hard hit by rising energy prices and other input costs caused by Russia's invasion of Ukraine and related sanctions," said EU Antitrust Commissioner Margrethe Vestager. "We continue to work closely with Member States to ensure that national support measures can be taken in a timely, coordinated and effective manner."

Energy-intensive food factories across Europe could be forced to close if natural gas shortages trigger rationing. Germany has already adopted the second of the three-stage emergency plans, and the next one could cause shutdowns in all sectors. The UK also has a plan that includes reducing or reducing supply to factories. Such worst-case scenarios could lead to even higher food prices.

In east London, Tate & Lyle Sugars is working hard to ensure it can continue to deliver to customers every day from its Silvertown refinery off the Thames, said Gerald Mason, senior vice president of the company, owned by American Sugar Refining Inc. 

"Just as people struggle with their household budgets, we have to manage very volatile energy costs and inputs, making sure that every penny our business spends and earns as revenue is actively managed in real time," he said. "We don't run casinos. We make food, which gives us a lot of responsibility to do it right."