Why the Ukraine-Russia Conflict Will Make Potato Chips More Expensive
To keep Martin’s Snacks’ 80,000-square-foot south-central Pennsylvania factory humming throughout COVID-19, CEO Butch Potter has had to shell out 20% more for potatoes than he did pre-pandemic. His packaging film costs have gone up 35% Box prices have increased 30%. He’s also had to raise wages to retain and recruit talent.
None of his operating costs increases, however, are as extreme as the price hikes in cooking oils—mostly of the sunflower and cottonseed variety—that Potter requires to produce snacks such as Jalapeño Kettle Cook’d Chips and Slender Pop Sea Salted Popcorn. Potter says that cottonseed oil currently costs $0.99 per pound. The price was less than half as much 18 months ago. Now, sunflower oil costs $1.28 per kilogram as opposed to $0.60 in September 2020.
Many of the increases in inflation can be blamed on the effects of the pandemic. Coronavirus has impacted the willingness of workers to work in factory and retail jobs. It also caused unprecedented shortages of labor in trucking and shipping, which are responsible for transporting raw goods from origin to manufacturer, retailers and consumers. Due to logistical limitations, lead times have been increased and supply has decreased for everything (from lumber to cream cheese and computer chips to edible ones), causing both price increases and inconvenience to consumers and businesses. According to U.S. Bureau of Labor Statistics, inflation rose 7.5% from January 2021 through January 2022. This was the most rapid acceleration in the cost of consumer goods prices since 1982.
Consumers looking to find a temporary respite should look for patience instead. Now, another cataclysmic global event promises to further fracture the already crumbling supply chain: Russia’s invasion of Ukraine. “It’s almost like you’ve been sick for a while, and you’re recovering, but then you catch another illness,” says Patrick Penfield, a supply chain management professor at Syracuse University. “Unfortunately, it causes everything else in your body to react adversely.”
They are both key players in several major international industries like computers, oil, soybeans, wood, petroleum and other commodities. Their combined exports of wheat account for nearly 25%. Ukraine produces somewhere around 70-90% of the world’s neon gas, which is a vital component of the microchips used to manufacture smartphone and computer screens. Russia is responsible for 13% of the world’s crude petroleum exports, which means anything that requires transportation at any stage of production—almost everything—will be impacted. Penfield believes that inflation will reach 11% this year.
Companies like Martin’s Snacks that rely on sunflower oil will be particularly vulnerable. The Observatory of Economic Complexity estimates that Ukraine is the most important exporter of sun oil. This country accounts for approximately 46% of global sunflower seed and safflower production. The second largest producer is Russia, which exports about 23% of the world’s supply.
Potter knew that he would need to invest an extra $1.2 million to $1.4million in sunflower oil and cottonseed oil, even before Russia invaded Ukraine. To put that in perspective, Martin’s Snacks does about $22 to $24 million in sales annually. In the last year and a half, cooking oil “was our biggest cost issue” says Potter. That was “before Russia went crazy.”
Despite raising prices and having what Potter describes as “great sales,” the worsening supply chain hurdles mean that Martin’s Snacks is losing money. Potter says: “It’s going to be a negative year.”
‘There’s no way to speed it up’
The vast majority of sunflower oil used by American companies like Martin’s Snacks—which itself requires roughly 45,000 pounds of sunflower oil every 10 days—is manufactured domestically. But that doesn’t mean American manufacturers will be insulated from the global crunch on sunflower oil, which has grown increasingly popular in recent years due to its neutral taste and lower saturated fat content than its alternatives like vegetable oil.
That’s because of how globalized the marketplace is for cooking oils and other products. “When there’s a supply chain issue or problem that happens in one place,” says Penfield, “it impacts the price for all the oils everywhere.”
India imports 23 percent of its sunflower oil mostly from Ukraine. China imports about 12% from Russia and Ukraine. This could lead to a rise in raw material prices everywhere. “You’re going to see price increases,” says John Sandbakken, the executive director of the National Sunflower Association nonprofit, “because there’s going to be more buyers looking to buy the same oil.”
Easing strains on the system won’t be as simple as growing more sunflowers in countries like the United States. The peak sunflower growing season in the U.S. begins in May, but the seeds can’t be harvested until September or October to then turn into oil. “The market will base all their decisions on what’s currently available in inventory now,” says Sandbakken. “There’s no way to speed it up.”
It is not easy for manufacturers to switch cooking oils for their products. Food safety regulations in many countries mean that snack companies will need new packaging in order to show the existence of any oil swapped. “We can’t switch overnight to using another vegetable oil,” says Thomas Lock, founder of the United Kingdom-based British Snack Co. “We would have to plan that sort of several months in advance and reprint packaging.”
Lock, however, is anticipating that it will have to pay the increased oil prices. Though consumers of chips—or crisps, as snackers in England call them—will eat those costs later on. “We’ll have to increase prices,” he says, “and the consumer will foot the bill at the end of the day.”
Potter is able to use new oils with a little more ease in Pennsylvania. Potter already has labels on his chips bags to show that they could contain different types of oil depending upon the availability of raw materials. But that doesn’t completely solve his scarcity issue. The pandemic-induced supply chain and logistics issues are still raging, meaning it’s not just sunflower oil that is currently in short supply.
Last week, Potter had to shut down the manufacturing line that uses cottonseed oil because a truck didn’t drop off a new load of the ingredient in time. Potter never used to run low on oils, but now it’s a regular occurrence. He would usually substitute sunflower oil for the oils to avoid delays and keep products moving. Potter decided against taking the risk, as Russia-Ukraine conflicts put a product already in short supply in an even more fragile state.
“I didn’t want to take too much sunflower oil away,” Potter says, “because I might run out of that next week.”