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European food producers vexed by energy price increases

In 2019, energy had a 2% share in the total costs of food manufacturers in the EU. Given the sharp increase in energy prices, that share currently ranges between 7.5-10% (without price caps or compensation). There are also many signals that some food manufacturers have seen their energy bills rise to up to 30% of their total costs. In food processing, activities such as flour milling, baking, and fruit/vegetable/potato processing are relatively energy intensive.

At this stage, there are large differences between what companies are paying for energy because some still have longer-term fixed contracts, while others had to renew their contracts at much higher rates. Companies that locked in energy prices before 2021 and companies that use other energy sources than gas for generating heat are certainly in a more favorable position. However, differences will become less pronounced in the months ahead as older, lower-priced contracts and lucrative hedges expire, and government support measures level out some variances.

Besides the direct impact on costs, there is also a pass-through of higher energy prices towards food and beverage makers as they procure many inputs from agriculture and because they need transportation. Thus far, food manufacturing output has proven to be quite resilient, aided by the ability to pass on (some of) the higher costs to customers and consumers. This pass-through is illustrated by current double-digit levels for food inflation in the EU.

Still, food production data up until August show that production volumes in the food and beverage industry in the EU are higher this year compared to 2021. The long-term trend shows that output volumes are generally not very susceptible to external shocks, apart from a considerable drop at the start of the pandemic.

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