The Russia-Ukraine war is typically associated with energy prices, arms spending and geopolitics. But its effects on the global FMCG sector reveal a less visible but equally significant vector – farm commodities. Wheat and sunflower oil in particular became a war bridge to the supermarket aisle.
This is because the needs of FMCG companies are for high volumes, low cost and high certainty inputs. Wheat is at the heart of packaged products like bread, biscuits, noodles, cerealsand bakery items. Sunflower oil is an important ingredient in oils, snacks, sauces and other processing foods. The impact of the war in the Black Sea region had implications not just for agriculture but for the cost, margins, pricing, and demand of FMCG companies around the world.
What this means is that the war did not have a direct impact on FMCG businesses via the destruction of factories or retail stores. It affected the industry through commodity dependence. Wheat and sunflower oil became the vehicles for geopolitical risk to move into the mainstream.
Pre-war structure: FMCG’s dependence on Black Sea wheat and sunflower oil
This was important for FMCG companies because these were not speciality products. Wheat and sunflower oil were inputs in many popular food categories where economies of scale and cost matter the most. A bakery, instant noodle, packaged snack or edible oil company can cope with price variations, but not a shock for both availability and price.
The business model of that time was efficient due to the Black Sea’s capacity to export sufficient volumes, existing trade channels and price competitive suppliers. But this came with a risk of concentration. Firms were not exposed to simply the price of wheat and sunflower oil, they were exposed to the geo-political risk of the region from which they came.
How war disrupted wheat and sunflower oil markets?
At the onset of the war in February 2022 the focus was on export issues. Seaports were shut down, shipping routes are hazardous and trade finance and logistics in the region were more complex. This led to a sudden supply constraint for world wheat and vegetable oil.
Wheat prices were expected to rise more than 40% in 2022 to reach a record high (in nominal terms) because of supply disruptions caused by the war. FAO stated global food prices reached a record high in March 2022, with the vegetable oil price index up 23.2% on the month due to higher quotations for sunflower oil (the world’s largest exporter of sunflower seed oil is Ukraine).
This price increase is relevant for FMCG because the cost of both wheat and sunflower oil is at the heart of many processed food supply chains. Wheat price increases increase prices for flour-based products. Shortages of sunflower oil increase the costs of edible oils and processed foods, but also feed through to their substitutes such as palm, soy and rapeseed oil.The shock in sunflower oil prices also pushed up other vegetable oil prices, as buyers turned to substitutes.
So the war triggered a multi commodity shock. It caused a multiple commodity shock in grains and edible oils.
Why wheat mattered: From grain markets to packaged food inflation
Wheat is a critical ingredient in the world’s food basket. In the FMCG sector it is an important ingredient in basic staples and also processed/branded products like biscuits, pasta, noodles, breakfast cereals, bakery products and ready-to-eat food.
The spike in wheat prices in 2022 resulted in increased cost of procurement for wheat flour and other ingredients. This impacted brands in packaged foods as well as private labels. Given that wheat products tend to be high volume and price sensitive, companies could not easily pass on the full cost increase without impacting their bottom lines.
There were two effects on the market. First, companies increased prices to maintain profitability. Second, consumption growth slowed down as consumers grew price sensitive. That is, revenue growth was driven more by higher prices than consumption growth.
This is significant for the market. Revenues in the FMCG sector can increase with inflation, but this doesn’t necessarily reflect a strong market. If revenue growth is primarily driven by price rises and stagnation in consumption, the market can look healthy while demand is not.
Why sunflower oil mattered: A small input with large market transmission
Sunflower oil was even more concentrated than wheat. Russia and Ukraine were the world’s leading exporters of sunflower oil. The loss of Ukrainian exports prompted the world to look elsewhere for oil alternatives like palm oil, soybean oil and rapeseeds oil. This put pressure on vegetable oil prices.
Sunflower oil is important to FMCG businesses because it’s incorporated into packaged snacks, processed foods and sauces, ready-to-cook products and mixed oils. It is also important for its flavour, stability and formulation properties. It can be difficult to replace. It may involve changes in sourcing, supply contracts, product formulations, product labels and quality assurance.
This meant the shock of the sunflower oil shortage was more than material procurement. It became an operational issue. Businesses had to source other oils, cook up products and resist compromises to quality due to price increases. That created challenges in supply chains and production scheduling.
Company-level impact: Pricing power became the key market differentiator
The price shock was a profit shock. Input costs for FMCG companies increased as a result of higher food inputs, energy, packaging and shipping costs. Companies with higher brand power and market share could pass the cost through to customers.
In 2022, Unilever’s underlying sales were up 9.0%, reflecting the impact of prices set to offset input cost inflation. It delivered a price growth of 11.3% for the year and a 2.1% underlying volume decline. This trend was reflected in Nestlé. In 2022, Nestlé’s organic growth stood at 8.3%-8.2% pricing and 0.1% real internal growth.
This is the crucial market insight: the Russia – Ukraine war did not just raise prices for FMCG products. It changed the market’s view of FMCG performance. Market participants had to sort brands by those with demand growth from real volume growth and those with inflation-facilitated price growth.
Consumer impact: From premiumisation to downtrading
When rising wheat and sunflower oil prices flowed through to retail prices, consumers responded. It was most apparent in the food sector, where price rises are prominent.
Consumers responded in three ways. Some cut back on discretionary foods. Some switched from high priced brands to low priced brands. Some switched to private brands from grocery retailers. It’s called downtrading.
Downtrading is important for the long-term viability of FMCG businesses. Higher margin brands are typically premium brands. When consumers chose more affordable brands, they can adjust prices to preserve revenue but at the expense of mix quality. This can impact on margins and consumer retention in the long term.
The impact was greater in developing markets where food represents a greater proportion of consumers’ budgets. Here, an increase in staples or oils frees up less income for the latter. In developed markets, the ability to raise prices was greater but private brands also showed growth.
Broader market impact: FMCG became a channel for global inflation
The recent wheat and sunflower oil shock reveals the role FMCG plays in passing commodity market shocks through to household prices.
This is how it works:
War disrupts supply. Commodity prices rise. FMCG input costs increase. Companies raise prices. Consumers downtrade. Volumes weaken. Equity markets adjust for earnings quality.
The chain is significant, as FMCG is a defensive sector. Consumption of basic products appears to be inelastic. However, the Russia–Ukraine war demonstrated that defensive demand will not entirely insulate companies from cost increases. If costs increase too much, then margins get squeezed. If prices increase too much, demand declines.
That is why the stock market responded differently to different players in the FMCG sector during the war. Firms with intangibles, sourcing flexibility and market power were less affected. Food companies with higher price sensitive produce exposure suffered more.
Structural shift: Wheat and sunflower oil became strategic risks
Prior to the war, commodities such as wheat and sunflower oil were sometimes considered operational factors. Post-war, they are risk factors.
FMCG firms re-evaluated concentration of sourcing, diversification of suppliers, inventories and sourcing from risky geographical areas. The focus evolved from cost minimisation to risk mitigation. This trend is part of the post-pandemic and post-war supply chain revolution: companies are ready to pay more for supply certainty.
For wheat, this involves obtaining grain from various regions like North America, Australia and Europe. For vegetable oils, this means researching a range of oils, being less reliant on one type of oil (palm, soy, sunflower and rapeseed). But such changes come at a price. They can increase the cost of ingredients, working capital requirements and complexities of formulation.
Conclusion
Two key commodities, wheat and sunflower oil, dominated the impact of the Russia-Ukraine war on FMCG markets. Their significance was not just their export volume, but their use within the FMCG products.
It highlighted the impact of concentrated commodity supplies on the entire FMCG supply chain. Bakery, noodles, cereals and packaged staples were affected by rising wheat prices. The shortage of sunflower oil was passed along to edible oils, snacks and processed foods, but it also led to oil price inflation. Input shocks pushed up companies’ costs, triggered price adjustments, depressed volumes and shifted consumption.
The long-term lessons is that FMCG business can no longer think of ag inputs as a constant environmental backdrop. Products such as wheat and sunflower oil have become focal points of the insertion of geopolitics into the market. Future vulnerability of the sector requires a combination of brand and distribution, but also flexibility and pricing strength, and the delivery of geopolitical risk management.
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