Several global CPG businesses have suspended or limited production in Ukraine in order to keep their staff safe. Nestle, Coca-Cola, Philip Morris, and Mondelez are among the major CPG companies that have indicated plans to curtail or cease manufacturing and/or distribution in Ukraine. The same is true for multinational agricultural businesses with operations in Ukraine, such as Archer Daniels Midland. CPG businesses are telling their employees to stay at home or go to a safe location. Nestle, which has three Ukrainian factories, has declared that it will temporarily close its manufacturing, warehouses, and supply chain operations in the nation. Meanwhile, Philip Morris reported that it employs over 1,300 people in Ukraine, which accounts for around 2% of its entire unit shipping volume.
Wheat and corn prices skyrocketed in response to the invasion. Ukraine is the world’s fourth-largest agricultural exporter, with exports going to China, the Middle East, North Africa, and Europe. Ukraine is the world’s largest exporter of wheat and one of the world’s major exporters of corn, accounting for 12 percent and 13 percent of global exports, respectively. Ukraine also exports a lot of barley and rye.
The Wall Street Journal noted the seasonality of Ukrainian grain exports and emphasized countries that rely on Ukrainian grain the most, including China and Egypt. Late winter/early spring are traditionally sluggish seasons for agricultural production and exports, but there is a concern that farmers will be unable to fertilize crops that have already been sown this spring, as they normally would. Farmers may be unable to complete the work required to fertilize crops due to a lack of mobility induced by the conflict. Furthermore, because natural gas is a vital component in fertilizer, the conflict might drive up fertilizer prices or render fertilizer unavailable. Unfertilized crops may provide yields that are up to one-third lower than normal. Due to a lack of fertilizer or closed shipping lanes, a decreased amount of agricultural exports from Ukraine may prompt purchasers to import more wheat from Australia or elsewhere in Europe. Meanwhile, there may be greater interest in agricultural exports from North America to assist cover the hole created by Ukraine’s degraded agricultural exports.
The major impact that I anticipate the conflict having on CPG firms is that it is likely to exacerbate the cost inflation that the companies have seen, thereby lengthening the time it will take for most CPG companies to return their gross margins to desired levels. This cost pressure will most certainly be felt most sharply in ingredient pricing, which typically accounts for roughly 70% of a CPG company’s cost of sales. Furthermore, increased energy prices should contribute to greater transportation and packaging costs, as most of it is petroleum-based.
Sales of plant-based meat alternatives continue to lag in CPG earnings. Beyond Meat (Nasdaq; BYND) is a contentious stock with up to one-third of the float shorted. BYND was down 10% on Friday and is now down over 70% in the last 12 months. A quarter ago, I wrote about how customers appeared to have lost some interest in trying plant-based meat alternatives, and how a growing number of competitors are vying for the same restricted space at grocers. At least in the company’s retail business, these tendencies appeared to have been maintained in the fourth quarter. Beyond Meat’s, the most recent quarter showed a 20% drop in grocery sales compared to the same period a year ago.
