Record gas prices and bleak prospects for the greenhouse business in Ukraine

EastFruit analysts draw attention to a very serious threat to the greenhouse business in Ukraine in the form of rising global prices for natural gas. Because the vast majority of greenhouse farms in the country continue to use gas as the main source of heat, and in some cases for generating electricity, an increase in the cost of gas can lead to a halt in production or bankruptcy of greenhouse enterprises.

Spot gas prices in the EU at the end of September are about ten times higher than at the same time a year earlier for a variety of reasons. Among them is a sharp increase in gas demand in Asia, which is actively recovering its economy after the coronavirus pandemic. Therefore, liquefied gas from the United States and other countries is sent mainly to this region. On the other hand, Russian Gazprom has been supplying only minimally contracted volumes of pipeline gas to the EU all summer and did not fill its own gas storage facilities in the European Union, as usual. This strategy allowed to “warm up” the gas market in the EU and lead to a sharp increase in energy prices.

In Ukraine, exchange quotations for gas prices are also several times higher than a year earlier. Therefore, according to EastFruit estimates, even if there is no further rise in gas prices for greenhouse enterprises, the cost of generating one gigacalorie of heat in the fall and winter of 2021 will be 4-5 times higher than a year earlier.

Let us remind you that the generation of a unit of heat energy in Ukraine is more expensive than in any other country in Eastern Europe. For comparison, a year earlier the cost of heat generation in Ukraine was 4-5 times higher than in Russia. Only thanks to low world gas prices and technological progress, Ukraine even began to restore the volume of exports of greenhouse vegetables. However, the volume of imports continued to grow. In 2020, the import of greenhouse tomatoes to Ukraine updated the record and reached 87 thousand tons, and the bulk of the products came from Turkey.

In 2021, imports of greenhouse vegetables to Ukraine continued to grow. In the first seven months of 2021, imports of greenhouse tomatoes increased by 20%. Exporters from Turkey, Azerbaijan and Belarus increased their supplies the fastest.

“In the spring of 2021, I was often asked why Ukrainian tomatoes are sold so much more than imported ones? I explained that the Ukrainian tomato is grown next to the consumer, so it tastes better and the consumer is ready to pay more for it. Yes, the costs of growing it are higher due to expensive energy sources, but if the consumer does not want to pay a higher price, then production will simply become unprofitable. Indeed, in Turkey it is much warmer than in Ukraine and heating of greenhouses there is either minimal or not carried out at all, “explains Andriy Yarmak, Economist, Investment Department, Food and Agriculture Organization of the United Nations (FAO)

“This year, given the high level of gas prices, we should expect a decrease in the production of Ukrainian greenhouse vegetables, a shift in the beginning of their growing season by several weeks in order to reduce heating costs, a general increase in prices for greenhouse vegetables on the market and an increase in their imports. from Turkey, ”the FAO expert predicts.

At the moment, wholesale prices for greenhouse tomatoes in Ukraine are 35% higher than a year earlier. In the summer and even in the spring, tomato prices in the country were at a record low for the past few years. However, most likely, the price level in winter will be higher than last year, both for Ukrainian greenhouse vegetables and for imported ones.

Accordingly, an increase in production costs and price levels can lead to a reduction in sales. And this, in turn, will reduce the profitability of the greenhouse business and can lead to bankruptcies of the least energy efficient greenhouse plants, as well as those with insufficiently fine-tuned marketing.

It should be remembered that the rise in gas prices affects not only Ukraine. Already, in the EU countries and the UK, the volume of growing greenhouse vegetables in the least warm regions is decreasing. Accordingly, one of the options for solving the problem may be the development of export of greenhouse vegetables to countries where the level of income of the population is higher, and consumption is not so strongly dependent on the level of prices.