Food Industry Faces Increased Raw Material Costs Due to Rising Exchange Rates... Will They Pull the Price Hike Card Again?

Won-Dollar Exchange Rate Surpasses 1300 Won, Increasing Foreign Exchange Instability
Rising Costs of Imported Raw Materials Add to Burden
Cost Offset Difficult with Price Increases Alone

[Image source=Yonhap News]

[Asia Economy Reporter Koo Eun-mo] As the won-dollar exchange rate surpassed 1,300 won intraday for the first time in about 13 years, foreign exchange instability has intensified, deepening concerns within the food industry. The industry, already struggling with rising prices of raw materials and supplies since last year, is now facing increased cost burdens due to the added weakness of the Korean won.

On the 23rd, in the foreign exchange market, the won-dollar exchange rate surged past 1,300 won intraday, reaching as high as 1,302 won. The rate opened at 1,299 won, up 1.9 won from the previous day, and surpassed 1,300 won at 9:09 a.m., continuously setting new intraday highs every minute thereafter. This is the first time in 12 years and 11 months since July 14, 2009, that the won-dollar exchange rate has reached 1,300 won intraday.

As the exchange rate soars, the food industry, which inevitably faces increased import costs for raw and subsidiary materials, is growing increasingly worried. Recently, the main focus in the food and beverage sector has been on costs driven by rising raw and subsidiary material prices. The prolonged COVID-19 pandemic has destabilized global supply chains, and the war that broke out earlier this year between Russia and Ukraine has triggered a further surge in international grain prices. Considering that there is about a six-month lag before international grain futures prices translate into raw material input costs, the additional price increases caused by the geopolitical conflict between these two countries are expected to continue through the second half of this year.

Moreover, the rising prices of subsidiary materials such as packaging, along with increased freight and labor costs, are compounding the industry's cost burdens. A representative from Company A said, “From the perspective of a company with a low export ratio, concerns are growing due to the recent rise in the exchange rate,” adding, “Currently, we are continuously monitoring U.S. interest rates and raw material prices and just observing the situation.” A representative from Company B also stated, “Since we have a high export ratio, the situation is somewhat offset,” but added, “If the current exchange rate trend continues, even from the perspective of our export countries, import prices will rise, so it is difficult to be entirely optimistic.”

The COVID-19 pandemic, the Russia-Ukraine war, China's lockdown measures, the U.S. interest rate hikes, and soaring international oil prices have all contributed to ongoing inflation. On the 20th, citizens were shopping at a large supermarket in downtown Seoul. Photo by Mun Honam munonam@

Most major domestic food material and processing companies began passing on some of the cost increases through price hikes starting last year, but as the burden of rising raw material prices expands rapidly, it has become difficult to offset these costs through price increases alone. Lee Kyung-shin, a researcher at Hi Investment & Securities, said, “Overall cost increases have already affected operating performance since the second half of last year,” and added, “Although the price hikes already implemented have partially absorbed the burden related to cost increases, considering recent trends, it will be difficult to avoid direct impacts through this year.”

Given this situation, voices are emerging that price increases are necessary for companies to maintain profitability and prevent performance deterioration. Shim Eun-joo, a researcher at Hana Financial Investment, said, “According to the Korea Rural Economic Institute, a 10% increase in grain import prices leads to a 3.4% increase in processed food prices,” and added, “Considering the current cost levels, to defend profitability in the second half of the year, an additional price increase of around 20% for materials and about 10% for processed foods seems necessary.”

Companies holding products with strong pricing power, such as CJ CheilJedang, are expected to offset cost increases or even improve profits through high brand loyalty. Companies with products that maintain consumption due to higher price competitiveness compared to substitutes are also expected to stand out. For example, Orion is currently achieving volume growth that significantly exceeds market growth without price increases in the Korean and Vietnamese markets, with both volume and sales market shares expanding.

This content was produced with the assistance of AI translation services.