Tough Times Ahead for Dining Tables... Soaring Exchange Rate Threatens a Domino Surge in Food Prices [Why&Next]

Exchange Rate Rises for Six Months, Spreading Cost Burden to Raw Materials and Inflation
Mounting Cost Pressure but Prices Remain Fixed: Food Companies Take a Wait-and-See Approach

The won-dollar exchange rate has been on an upward trend for six consecutive months since the second half of this year, resulting in mounting pressure on the food industry, which relies heavily on imported raw materials. The rise in the exchange rate directly increases import costs, leading to growing pressure to raise product prices. While consumer prices have been maintained due to the government's price control policy, there are concerns that if the strong dollar trend continues, a domino effect of price hikes may occur in the first half of next year.

Yonhap News Agency

On December 23, the won-dollar exchange rate in the Seoul foreign exchange market opened higher than the previous day's weekly closing price of 1,480.1 won, surpassing 1,483 won. This marks the highest level since the 2008 global financial crisis. The value of the won stabilized from the 1,470-won range at the beginning of this year, following last year's end-of-year civil unrest and after the presidential election, reaching the 1,350-won range. However, since July, it has been on a steep upward trajectory.

As a result, the food industry has continued to face profitability pressures this year due to rising import raw material prices driven by the strong dollar. According to the Financial Supervisory Service, Lotte Wellfood's raw material and consumables costs from January to September this year reached 1.473 trillion won, an increase of 157.7 billion won compared to the same period last year (1.3153 trillion won). Lotte Wellfood is a company that manufactures and sells products such as gum, candy, biscuits, chocolate, ice cream, and processed meat, sourcing a significant portion of its key raw materials from overseas. The situation is similar for Ottogi. Ottogi's raw material and merchandise purchases from January to September amounted to 1.7522 trillion won, up 160.1 billion won from the same period last year (1.5921 trillion won). More than half of Ottogi's total raw materials are imported.

Exchange Rate-Driven Cost Burden Spreads to Raw Material Prices and Inflation

The cost burden faced by the food industry is not limited to fluctuations in international raw material prices. Most key raw materials, such as soybean oil, palm oil, cocoa, and dairy ingredients, are traded in US dollars. Even if international prices remain unchanged, an increase in the won-dollar exchange rate inevitably raises the import unit cost in won. Although international raw material prices have recently stabilized, companies are feeling an even greater cost burden due to the rising exchange rate.

In fact, unit prices for raw materials have risen sharply. According to Lotte Wellfood's quarterly report, the cumulative average unit price of dairy products such as processed butter and whole milk powder as of the end of the third quarter was 6,571 won per kilogram, up 18.6% from 5,539 won the previous year. The price of cocoa products, such as cocoa beans, nearly doubled from 8,718 won to 15,440 won per kilogram. The price of oils and fats, such as soybean oil and palm oil, also rose 37.9% from 1,548 won to 2,135 won per kilogram, while processed meat products increased from 4,573 won to 5,101 won per kilogram.

However, during this period, the price of cocoa fell by about 38%, from 11,000 dollars per ton at the beginning of the year to 6,800 dollars. Despite this, Lotte Wellfood's cocoa cost per unit actually rose by 2%. The decrease in international prices was offset by the rising exchange rate, resulting in continued cost pressure.

Daesang set its business plan for this year based on a won-dollar exchange rate of 1,300 won. Both best-case and worst-case scenarios were prepared around this rate. However, the current exchange rate has already exceeded the company's worst-case scenario.

In response to the rising exchange rate, Daesang is simultaneously working to lower unit costs through strategic purchasing, adjust its product portfolio to focus on profitability, reduce manufacturing costs, and improve promotional efficiency. However, the burden remains, as global economic uncertainty persists and the strong dollar is likely to continue for the time being.

The problem is that the upward trend in the exchange rate shows no sign of abating. The average monthly won-dollar exchange rate surged from 1,392.38 won in September to 1,424.83 won in October, and soared to 1,460.44 won in November. In December (based on data from the 1st to the 19th), it continued its high trend at 1,472.49 won. The previous day's weekly trading closed at 1,480.1 won.

The rise in the exchange rate is being sequentially transmitted from import prices and producer prices to consumer prices. In November, the import price index rose by 2.6% from the previous month, reaching its highest level in one year and seven months. The producer price index also rose by 0.3% last month, marking three consecutive months of increases. As of November, the consumer price index rose by 2.4% year-on-year. After dropping to the 1% range at 1.7% in August, the rate of increase rose to 2.1% in September, 2.4% in October, and has remained in the 2% range for three consecutive months.

Price Hike Pressure and 'Wait-and-See'-Will Increases Come After Local Elections?

Industry insiders believe that if the won-dollar exchange rate rises to the 1,500-won level, many food companies will find it difficult to withstand the burden. As cost pressures continue, there is a growing sentiment across the food industry that further delaying price increases is becoming increasingly difficult. While companies have responded by cutting costs and reducing promotions, most of the room for additional reductions has already been exhausted internally.

The rising exchange rate affects not only raw materials, but also packaging, logistics, and overall energy costs required for factory operations. In addition, increases in industrial electricity and gas rates could further add to the burden. A food industry official stated, "We've already done everything possible to reduce costs and expenses. With limited options for further response and profit targets continuing to fall, it's questionable how much longer we can endure."

However, it is difficult for individual companies to take the lead in raising prices. This is because they are inevitably conscious of the government's price control stance and public opinion. As a result, a 'wait-and-see' approach is expected to continue across the industry as companies monitor each other's moves. If the strong dollar trend persists, there is also the possibility of simultaneous price adjustments across the industry.

Domestic food companies typically experience a three- to six-month lag between purchasing international raw materials and their introduction to the domestic market, causing domestic price changes to be reflected belatedly. As a result, there are observations within the industry that, citing accumulated cost burdens, food prices may rise en masse after the local elections in June next year. Another industry official stated, "The government needs to consider more comprehensive policy responses, such as expanding quota tariffs to ease the burden of imported raw materials. In an environment where maintaining the status quo is the only focus, investment and hiring are inevitably dampened, which could ultimately make the domestic market even more difficult."

Meanwhile, the strong dollar is actually a positive factor for some food companies. Companies with a high proportion of exports or significant overseas production and sales are relatively less affected by the impact of the rising exchange rate. For export-oriented companies, assuming export volume and foreign currency-denominated export prices remain constant, a higher exchange rate increases sales in won terms. In the case of ramen, while 90% of raw materials are imported, Samyang Foods, whose export ratio exceeds 80%, benefits more from increased profits due to the exchange rate than it suffers from higher cost burdens.