Food raw material prices are falling, but food companies focused only on the domestic market are seeing flat results. Most revenue has been offset as the won has weakened against the U.S. dollar.
Looking at third-quarter earnings estimates for food companies, only those that entered overseas markets are expected to show notable improvement. They are benefiting from both lower raw material prices and favorable exchange rates.
According to FnGuide on the 22nd, among listed food companies covered by at least two securities firms, only ORION, Samyang Foods, and Nongshim are expected to see year-over-year increases in third-quarter operating profit estimates.
First, Samyang Foods' third-quarter operating profit estimate is projected to rise the most. Securities analysts' average estimate for Samyang Foods' third-quarter operating profit is 136.2 billion won, up 56% from the same period last year. Nongshim's average third-quarter operating profit estimate is 44.5 billion won, forecast to increase about 18% from the third quarter last year. Over the same period, ORION is estimated to post operating profit of 142.3 billion won, up 4%.
Aside from these, most food companies' third-quarter operating profit estimates fell from a year earlier. By decline rate versus last year's operating profit, Binggrae was tallied as retreating the most. Its estimate for this year's third-quarter operating profit fell by more than 20% from the third quarter last year. This year's third-quarter operating profit is estimated to be around 103.1 billion won. CJ CheilJedang and Ottogi followed. CJ CheilJedang's third-quarter operating profit outlook is down 6.8% year over year, and Ottogi's is down 5.0%.
In the securities industry, as raw material prices began declining early this year, expectations grew that food stocks' results would improve. This was because consumer prices had already been raised in succession last year due to excessively high raw material prices. According to Food Industry Statistics Information, cocoa, which averaged $11,159.57 per ton in January, fell to the $6,000 range this month. Drought eased in West Africa, alleviating supply shortages. Over the same period, international butter prices fell from 261 cents per pound to 179 cents, and skim milk powder, a key ingredient in ice cream, dropped from 2,573 euros per ton to 2,175.67 euros.
However, the won-dollar exchange rate, which moved contrary to expectations, became a headwind. The problem was the weakening of the won due to the fallout from the tariff war between the United States and China. When the won weakens, it costs more to purchase imported raw materials.
After former President Yoon Suk-yeol declared martial law in Dec. last year, the won-dollar exchange rate, which had climbed past the 1,400-won level, went through ups and downs and recently rose again to the 1,430-won range. The investment banking (IB) industry expects the won-dollar exchange rate to stay around this level for a while. A food industry official said, "Falling raw material prices are good news, but with the won weakening, it is difficult to improve profit margins."
Amid this, the factor that divided results was overseas market penetration. ORION produces and sells confectionery not only in China but also in Russia and Vietnam, while Samyang Foods and Nongshim are focusing on exporting ramen mainly to North America. In particular, ramen exports have avoided the impact of high tariffs. The Korea Agro-Fisheries & Food Trade Corporation (aT) said that as of Sept. 29 this year, exports of agricultural, fishery, and food products surpassed $10 billion (about 14.3 trillion won). Ramen exports posted the highest growth, up 24.7% year over year.
In the securities industry, the extent of performance in overseas markets is seen as the key determinant of food companies' results for the time being. A fund manager at an asset management firm, who requested anonymity, said, "Companies may still have inventory made with high-cost inputs, so we need to watch the earnings trend through as late as the first quarter next year," adding, "But it seems clear that the drop in raw material prices has been overshadowed by the weaker won. When investing in food stocks going forward, you must check whether they are expanding into overseas markets."