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The food industry caught between two fires – farmers want more, merchants demand cheaper

Journalist’s Ain Alvela interview with Sirje Potisepp, the head of the Estonian Food Industry Association.

Estonian food industry has throughout history survived through thick and thin, but for a small country it is inevitable that both, the food industry as well as agriculture depend largely on the global political trends.

For example, even at the beginning of the last decade, Estonia was able to cover its domestic consumption of pork with its own production. Until our eastern neighbour Russia once again revealed its true nature and imports of many food items, including pork, were embargoed, which consequently drove numerous of our farms, previously oriented to the Russian market, out of business. In addition, African swine fever started to spread here. As a result, we are currently forced to buy a significant amount of pork from across the border. This all at the time, when the world market price of pork has recently reached the highest of past 20 years. There are also shortcomings in the production of chicken meat, but the domestic production of animal meat has increased so rapidly over the last decade that the consumption is not able to keep up with it, causing an overproduction of animal meat. The only food sector that has been more or less stable over the years is dairy production, as we know, about the third of raw milk produced in Estonia moves to reprocessing to Latvia and Lithuania.

Industry living in fear of new encumbrances

The food sector has not been able to escape the crises of recent years either, whether it is the food growing farmers or processing industry. It is widely known that Estonia had one of the largest inflation rates in Europe, in which the increase in the price of food certainly played a very important role. Unfortunately, price increases are unavoidable this year as well, because even if we set aside other influences, the increase in VAT to 22% at the beginning of the year has already provided its own impetus.

What is the present state of the Estonian food industry, how was the energy and raw materials crisis overcome, can we expect an end to the price rally and what is the sector’s message to the decision-makers public officials? We set out to find out this and much more from Sirje Potisepp, the head of the Estonian Food Industry Association.

In general, she agrees with the opinion of several representatives of other industrial sectors that companies could manage by themselves in the current market situation, if there were no more tax increases or new obligations placed on them. Because these obligations, whether related to waste or packaging management or environmental protection, in turn require investments, and there is simply no free money in the industrial at the moment. The profit earned, is mostly used to patch up budget holes ravaged by previous crises, to keep production running and to pay salaries to employees. And if someone at our parliament feels like we are not doing that bad as the level of unemployment remains low, people have billions on saving accounts and life in general seems good, then Sirje Potisepp advices to cast all wishful thinking aside and admit that about two thirds of people are, figurately speaking, living from payday to payday and large amount of them even from hand to mouth. It just doesn’t easily stand out without delving deeper into it.

You visited the parliament in February, where you gave a speech on food industry, what message did you forward to the members of the parliament?

The message was simple and clear – we are in a situation where food producers have already gone through the major price increases and are no longer making a loss in earnings. Because there was a time when meat and pastry industries were operating with a loss. The fact that we ended 2023 on the plus side, is largely thanks to beverage producers, who drove the entire food sector to profitability. Now that the food industry has its head on the water again, I have one request for the decision makers – do not penalize consumers any further with direct or indirect taxes, because it will give an additional setback to our food sector’s profitability. We are dealing with a crisis of the manufacturing industry in general, it has led to an economic recession, and in such a situation it is necessary to carefully consider what one or another tax increase decision will entail.

At the beginning of the decade, we were hit by a series of crises, which of them hit the food industry the hardest?

The biggest concern was the price increases of production inputs, which hit us in a very short time. It was magnified especially by the Ukrainian war, which started in 2022. By now, raw material prices have stabilized to some extent, as the first major panic has also resolved. But it was precisely this panic at the start of the war that largely caused the rapid increase in prices. Figuratively speaking – if you didn’t lock in the price of a raw material at 12 o’clock during the day, then at 6 o’clock in the evening it already had a more expensive price. Energy prices have come down as well, which all together brings some relief to the food industry compared to the last year.

The last couple of years have brought one crisis after another, how to manage and survive in a situation like that?

Yes, it is true – there have been many different and diverse crises. The food industry came through the corona period quite nicely, however, there were setbacks for restaurants and other catering services in hotels, schools, etc., which are also customers of the food industry. The lost turnover from there was by no means fully transferred to the retail trade. But yes, compared to some other sectors we managed pretty well. However, as to the increase in the prices of raw materials and energy, it could not be fully transferred to the final prices, because of contracts with trade, which stipulate, among other things, the time of notification of price changes. In addition, stores want to sell with as low prices as possible, because Estonian consumer has always been very price sensitive.

The message from the campaigns of retail chains is that the increase in prices due to the VAT increase is put on hold and stores are not increasing prices just because of the VAT increase. Is it really so? 

Indeed, this is a problem to us as well because the increase in VAT has actually increased prices substantially more than just 2%. In addition to the government’s tax package, including direct and indirect taxes, which all have also influence on prices. Including the infamous waste reform, which has been very skilfully presented to the public as a great opportunity to sort packaging waste, but at the same time it means a serious tax package for packaging companies, including also the food industry, as we currently have no good alternative for plastic packaging. Such taxation of plastic packaging does not exist in any other European country, but they want to make us compete in the free market under the burden of these requirements. At the same time, Estonia lacks the capacity to recycle plastic waste.

The increase of VAT will thus benefit raw material sellers and merchants?

Basically, yes. The price of food is formed in the supply chain – farmer, processor, trade, consumer. In between, there is also transport and logistics, as well as all kinds of services, and the prices of all of them have increased. The costs of farmers for growing food products have also increased significantly. In this way, the price increase will reach the industry, whose increase in the prices of inputs we already talked about. Next, the products move on to the merchant, where markup is added. Allegedly, the mark-ups in the Estonian retail trade are much higher than in most EU countries, and a study conducted by the Estonian Institute of Economic Research also showed that these mark-ups have increased. And then in addition there is finally also the 22% of VAT, which makes up a fifth of the product’s price and is also one of the highest in Europe, because there are no exceptions for food items. I am not making this up, the consumer price index in Estonia increased by 4,7% in January.

“The increase of VAT has increased prices in the food industry significantly more than 2%,” Sirje Potisepp

Is sugar tax also a possibility?

Yes, they are flirting with this idea as well, calling it a lemonade tax. But it is far from just being a lemonade tax, because it concerns a very large category of products. This would be another blow that will seriously affect the competitiveness of our companies, which was already damaged last year when other European countries started heavily to support their industries. We are a part of the European inner market, but different countries still act differently.

How long could this price rally last?

On the one hand, we have a very strong competition in the Estonian commerce sector, which should decrease the prices. On the other hand, as long as people can afford to buy food, prices are not expected to drop even in terms of mark-ups.

Why is it that food in particular is becoming more expensive at such a fast pace in Estonia?

In larger countries like Poland, Lithuania or Germany, there are bigger subsidies in agriculture and the production of raw materials is cheaper, because of the larger volume, for example. In addition to subsidies that many countries had for their industries last year. But raw materials are bought by the industry at the global market prices.

Yes, but unlike European farmers, in Estonia they do not strike. Does this mean that they are well paid for the raw material by the local industry?

It is important to the farmer what price he gets for his production. I repeat that the food industry is in the most difficult position in the supply chain, because, on the one hand it is put under pressure from the farmer who wants a higher price for raw materials, and on the other hand from the merchant who wants the prices to be as low as possible. It is true that prices of some of our raw materials are even lower than those of the old Europe, but they also have the capacity to pay more. However, in terms of main raw materials, the basis is still the global market price.

To what extent is food security ensured in Estonia, considering the availability of domestic raw materials, for example?

If we look at the level of self-supply then I believe that we are in a quite good position, but it could always be better. We are producing milk 180% of our own consumption and are also quite well supplied with domestic grain – during the past few years the crop yield has been good, and the prices also stayed at a high level. At the moment we are not capable of self-supplying ourselves with pork and chicken, but we do with beef. In the case of fish, our own consumption is much lower than production. However, the problem with fish products is their high price and problematic availability.

How can the turbulent situation in the world affect international supplies of raw materials or food?

Before Covid everything was working well. If it was agreed that packages would arrive at two o’clock, you could be sure that they would be at the door of your factory at exactly two o’clock. Everything changed overnight when the pandemic started. It is nice to talk about solidarity and the free movement of goods, but when things go wrong, every country takes care of its own people first. We saw during the pandemic how borders were closed, and supply problems started. We will have to take this into account also in the future, because Estonian food industry is very dependable on foreign raw materials.

“We saw during the pandemic how borders were closed, and supply problems began. We will have to take this possibility into account in the future as well,” Sirje Potisepp

To what extent does the green turn affect the food industry, and how likely it is going to increase prices?

The green turn with everything it includes is definitely one of the keywords of the future of the food industry. The European Green Deal formulated by the European Commission, has here in Estonia become a policy instrument meaning commands and prohibitions rather than mutual agreements. We will see when the new climate law is ready what our climate policy will be like. Is it supportive of companies’ competitiveness or not. Our decisions and commitments should not be greater than at the minimal level of what the European Union is expecting from us. However, I can sense that our politicians want to turn the screw on the obligations of businesses as much as possible. If some company sees the green turn as a tremendous competitive advantage, then no one is forbidding them to implement these measures. But it is not right to impose obligations on everyone in the strictest form possible. The general principle should assume moving on the same pace with other countries.

Number: 54 million euros was the net profit of the Estonian food industry in 2022, of which the profit of the beverage industry was 34 million.

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