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Food industry: agricultural commodity prices peak, agrifood products hit trough

By on August 25, 2021 0

The author is an analyst for NH Investment & Securities. She can be reached at [email protected] – Ed.

Cereal prices will follow a gradual downward cycle; agflation fears to weaken

Global asset markets have seen a significant shift since 2H20 amid fears of global inflation resulting from a sustained uptrend in grain prices. We note that the upward trend in grain prices is the result of: 1) La Niña, which has a negative impact on grain planting, crop yields and harvests; and 2) the weak dollar.

However, we expect that agflation fears will gradually subside in asset markets. For now, still tight stocks from last year’s harvest should support high grain prices. But, as climatic factors have eased since May 2021, the anticipation of a further expansion of harvests and a strong dollar trend have interrupted the cycle of rising grain prices. In addition, high grain prices have led to a slowdown in China’s grain imports and a drop in global demand for biofuels. Considering all the factors mentioned above, we expect world grain prices to gradually decline and stabilize in the future.

Once the prices of F&B products go up, they rarely go down

Typically, higher commodity prices put downward pressure on restaurant business margins, but if they pass increased costs on to customers, their operating leverage increases. In general, price cycles proceed as follows: supply-demand imbalance → rising speculative demand → rising prices → rising supplier / supply → falling prices. The F&B sector, however, differs from others in that once the prices of F&B products rise, they seldom fall, and when commodity prices fall, F&B margins often improve dramatically. remarkable as a result. As a result, price increases benefit F&B games in the long run.

High base effect to disappear from 3Q21

The base high effect (yy) should disappear from 3Q21 in the F&B sector. Panic buying caused by the pandemic turned out to be very strong in 2Q20, and until 3Q20, the cost burden remained low in a context of falling raw material costs. But, the demand for storage has since weakened as the cost burden has increased. As a result, the high base effect, in terms of sales and net income, should only persist until 3Q21. As we forecast an overall decline in commodity prices starting in 4Q21, most F&B players should seriously benefit from the price increase effects this year. At the same time, a steady increase in household food consumption and a recovery in market share in the main catering sites should lead to improved margins.

Top picks: CJCJ and Orion

We recommend making investments focused on CJCJ and Orion. As for CJCJ, despite a profit surprise in 2Q21 and an improvement in fundamentals by division, its share price has corrected considerably. At Orion, the weakness of 1H21 results is coming to an end. Considering this, both coins appear to be solidly dumped. Likewise, we expect Nongshim to post a recovery in profits from 2H21 through next year after hitting a low in 2Q21. Lotte Chilsung is expected to post net year-over-year profit growth.


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