The Russia-Ukraine war continues to be a threat to the global supply of grain as well as the global supply of oil. However, Indonesia’s F&B sector is unlikely to be affected much and is expected to grow at a stable rate of between 5-7% in 2022. 

While the world is still reeling from the economic impact of the COVID-19 Pandemic, the war between Russia and Ukraine is fuelling yet another global crisis. Russia’s invasion to Ukraine and its blockade of the Black Sea route, Ukraine’s primary grain export route, has caused a shortage of global wheat stocks, especially in countries that are greatly dependent on Ukraine and Russia.  

In the last ten years since 2012, both countries managed to be in the top five of the world’s largest wheat exporters. According to the Observatory of Economic Complexity (OEC), by value, both have a combined share of around 28% of the global wheat supply in 2020. In terms of quantity, Trademap.org reported that the world relied on 37,267,013 and 18,059,777 tons of wheat to Russia and Ukraine respectively within the same year. 

The same goes for the supply of cooking oil produced from seed oil which, in the last decade, was heavily dependent on Ukraine and Russia. In 2020, each country contributed 39.2% and 18.2% respectively, as published by the OEC. What is more, price leaps are also happening to crude oil due to the ban on Russian oil by the West. Russia supplies approximately 10% of the global crude oil and petroleum products, according to the Organization of Petroleum Exporting Countries (OPEC), and the ban has resulted in supplies in some countries s falling short. 

Additionally, ever since the COVID-19 Pandemic hits, supply chain has been and is expected to continue to be a main issue for businesses. In exacerbating the issue, the Russia-Ukraine war has caused further shocks to market prices. Food prices reached a historic high of 159.7 points in the Food Price Index as reported by the Food and Agriculture Organization (FAO) in March 2022, while oil prices reached as high US$117.2 per barrel in June 2022, as recorded by OPEC. 

Furthermore, the European Central Bank (ECB) stated that conditions in the Eurozone have worsened since the crisis, leading to higher prices on commodities in the euro area. 

Indonesia amidst the price hike 

Indonesia’s wheat consumption continues to increase each year. As quoted by the BBC, Dwi Andreas Santosa, a professor from The Bogor Institute of Agriculture, said Indonesia’s consumption of wheat has increased from 18% in 2010 to 26% in 2020. This is further supported by data from the Indonesian Statistics Agency (BPS), which states that, cumulatively starting from January 2022 to May 2022, Indonesia imported 4.36 million tons of wheat and meslin – 5.5% higher compared to the previous year. 

However, Indonesia’s wheat supply is less likely to be heavily disrupted by the war as most of the country’s wheat comes from Australia, followed by Argentina, Canada, Brazil, and India. Another positive condition for Indonesia is the country’s stock of cooking oil which, by-and-large, is sourced from domestically produced palm oil kernels. According to the US-based Global Agricultural Information Network, compared to other cooking oils, palm oil will still have the largest share of cooking oil consumption in the country of 16.9 million metric tons by 2022/23, a 3% increase from 2021/22.  

The shock to crude oil prices has had an effect on the country though. A net oil importer, Indonesia has had to triple its energy subsidy from Rp 151.2 trillion (roughly $10.15 billion) to Rp 502.4 trillion in the middle of 2022 due to the increase in crude oil prices and the general weakening of its currency compared to the greenback. This condition has led to increased calls for Indonesia to up the price of subsidized gasoline, which would in turn lead to inflation and price increases across the board. 

Contrary to widespread belief however, the price increase on subsidized fuel would not have that much of an impact on the F&B sector, at least not according to the Indonesian Food and Beverage Producer Association (GAPMMI). As widely quoted by local media, GAPMMI Chairman Adhi S. Lukman said Indonesian F&B producers would choose to reduce their margin or production volume rather than increase selling prices. This is because, according to Mr. Lukman, logistics costs on average contribute only about 6% to F&B production cost. Therefore, the effect would only be approximately 1-2% of the price of the product itself.  

This demonstrable resilience of the F&B sector cannot be separated from Indonesia’s large population of over 270 million – the fourth largest in the world – which contributes highly to the sector’s growth. Data from the BPS shows that, even during the COVID-19 pandemic, specifically in the second quarter of 2020, the food and beverage industry still grew by 0.2% (yoy). In the first quarter of 2022, the F&B industry managed to grow by 3.75% (yoy), contributing 37.77% to the country’s GDP growth from the non-oil and gas segment in that same period.  

As Indonesia’s economic recovery momentum grows following the pandemic – with a better than expected 5.44% growth in Q2 2022 – the F&B sector is also expected to follow with a projected growth rate of between 5-7% by the end of 2022. 

Beyond 2022 

While the F&B industry may be able to withstand the inflationary pressure in 2022, a prolonged conflict between Russia and Ukraine could nevertheless bore negative impacts on the sector. Considering the country’s growing consumption of wheat and possible further supply disruptions that may occur from the war, it could become more likely for food producers to pass on their increased production costs to customers, leading to an even higher inflation rate as food and beverages are basic necessities.  

In this regard, Indonesia actually has a significant role to play as the President of the G20. Some measure of hope rests on Indonesian President Joko Widodo’s active role in attempting to broker a dialogue, if not peace, between the active parties in the Russia-Ukraine conflict. All eyes will be looking towards the upcoming G20 Summit in Bali this coming November for any development in regard to the Russia-Ukraine War. In the meantime, due to the unsustainability of the current condition, businesses in the F&B sector can expect the government’s support in keeping the prices of essential goods stable through either market operations or monetary policies.