CJ CheilJedang and Nongshim Deserve Attention
The author is an analyst of Shinhan Investment Corp. He can be reached at sanghoonpure.cho@shinhan.com. – Ed.
Russia to restrict grain exports through the end of June
Russia and Ukraine are major grain producers, together producing 14% of the world's wheat supply and 5% of corn supply while accounting for a much larger share of global exports at 26% for wheat and 16% for corn. As a result, Russia's recent decision to halt exports of major grains such as wheat, barley and corn through the end of June caused grain prices to soar across the board in March. Prices of corn, wheat, soybean and raw sugar have each gone up by 21.6%, 45.6%, 22.1% and 0.4% YTD.
Short-term impact limited but prolonged ban could lead to price hikes
Korea, according to the Ministry of Agriculture, Food and Rural Affairs, imports just 10% of its wheat and corn from Russia and Ukraine with most of the amount used for animal feed. Currently secured levels are enough to meet demand through end-July (or end-February 2023 including contracted imports) for feed wheat and mid-June (or end-July 2022) for feed corn, and efforts are also underway to diversify the source of imports. Due to the three-to six-month lag between the purchase and input of grains, we believe short-term impact of Russia’s export ban will be limited. However, if Russia’s restrictions on exports continue into 2H22, rising cost burdens could lead to additional price hikes for food/beverage products going forward.
Current grain price trends different from past uptrends
We see some relief in that grain prices are rising at a relatively slower pace vs. the past. The first agflation (2006-2008) was driven by growth in demand from emerging countries, impact of extreme weather events, and increase in international oil prices. The second agflation (2011-2012) was caused by the drop in global grain production as major producers were hit by severe drought. While the shortage of grain stocks and subsequent hike in prices was the main cause of both agflation waves in the past, we point out that stock-to-use ratios of major grains have fluctuated steadily upward over the past few years. Even after recording the biggest decline among major grains, wheat ending stocks as a percentage of use is still relatively high compared with levels seen over the past 10 years. In addition, grain producers other than Russia and Ukraine may expand growing areas to boost production, helping to downward stabilize prices going forward. All in all, we do not expect the current agflation to continue in the longer term.
Focus on companies with pricing power or less exposure to grain price volatility
Surging grain prices will justify price hikes by food/beverage companies. The price-hike cycle for food and beverage products kicked off in 2H21, but rising grain prices could require even more price increases in 2H22. Expecting only the top-tiers with strong brands and pricing power to attempt another price hike after raising product prices in 2H21, we recommend focusing on CJ CheilJedang and Nongshim. Alcoholic beverage and tobacco companies, given their low reliance on imports for raw materials and limited exposure to grain price volatility, also warrant attention in our view.