The Ukraine war and its impact on the food sector

The current crisis in Ukraine is creating a wave of uncertainty across the world. Its impact has already been felt with sharp rises in prices for food and fuel, and damage to global food supply is likely to last longer than the war itself.

Ukraine and Russia are global food production powerhouses. Together the countries account for almost 30% of global wheat exports. It is not just wheat which is affected. Both Ukraine and Russia are top exporters of many oilseeds and cereals. Russia is a large exporter of the key ingredients in the making of fertilisers, gas and potash.

Ukrainian ports are shut and exports from the Black Sea region may not resume to pre-invasion levels for many years. Whilst sanctions have not yet been applied to Russian food exports, many traders are reluctant to deal with Russian exports due to fear of being fined or damage to their reputation. 

Ukrainian farmers are likely to have much lower yields in the coming years and areas planted are likely to be smaller as a result of the war. Certain crops which are usually sown at this time of year may not be sown at all. Alternative sources, such as Egypt, are simply unaffordable.

UK farmers and food producers are dealing with increased input costs, such as fertilizer and red diesel. These higher input costs, in addition to increased energy bills and COVID related inflation and supply issues, have led to higher food prices and ongoing supply issues. 

In addition, Ukraine is a major exporter of seasonal workers in the UK. With many being urged to sign up to join the Ukrainian army and visa services suspended in Ukraine, UK farms could face a drastic labour shortage this year.

As a result, there are concerns that future yields for UK farmers will be lower, further adding to food supply disruption.

Key issues to consider in food supply contracts

The need for a consistent supply is at the heart of food supply agreements and the ongoing relationship between suppliers and retailers. With inflation, increased costs and supply issues, suppliers should review the terms of their contracts, in particular any price fixing, material adverse change and force majeure clauses.

A well drafted contract should incorporate clauses which increase the price of products in line with the Retail Prices Index (or another index) or which give a right to vary prices to ensure supplying products under the agreement remains profitable for the supplier.

Material adverse change clauses deal with a change in circumstances and the effect of the clause will vary depending on the contract in question. Generally, these clauses can relieve a party from its obligations in the event that circumstances have drastically changed. Depending on the wording in the contract, the war in Ukraine could be considered a material adverse change. 

Force majeure clauses suspend performance of obligations where a party is prevented from performing due to events outside of its control. The clause will include a definition of what is considered a force majeure event, so this will need to be checked carefully, but standard clauses tend to include war, armed conflict, imposition of sanctions, embargo or breaking off of diplomatic relations. Food suppliers should include clauses in their contracts which they can rely on in the event they are unable to fulfil their contractual obligations due to a matter outside of their control. This concept can only be relied on if it is expressly contained in the contract, as the concept of force majeure is not recognised in English Law.

Birketts’ Food Sector Team has previously produced helpful articles on these matters, which can be found here, here and here.

In conclusion

Uncertainty in the global food supply chain and price volatility are sky-high. Whilst some of the key issues in food supply contracts are considered in this article, it is not an exhaustive guide and each contract should be reviewed in light of the particular circumstances.

Parties in the food supply chain should actively review existing contracts and consider updating standard contracts in light of the issues mentioned above. If you would like to discuss this article and/or food supply contracts, please contact Edward Savory.