[Why&Next] Is Extreme Heat Scarier Than War?... Food Companies Face Highest Cost Burden in Five Years

Cocoa, Coffee, and Sugar Face Successive Supply Disruptions
Last Year, Major Food Companies' Average Cost Ratio Reached 74%
Rising Exchange Rates Further Increase Procurement Burden

Last year, major domestic food companies faced their highest cost burden in the past five years. Their cost-to-sales ratio was even higher than during the period of surging global grain prices caused by the Russia-Ukraine war. This was due to rising costs for raw materials, as prices of climate-sensitive agricultural products such as cocoa and coffee increased, combined with a strong exchange rate.

According to the Financial Supervisory Service's electronic disclosure system on the 29th, the average cost-to-sales ratio of twelve major food and beverage companies—including CJ CheilJedang, Nongshim, Ottogi, Orion, Lotte Wellfood, Daesang, and Dongseo Food—reached 74.0% last year, marking the highest level in the past five years.

On the 19th, chocolate-containing products are displayed at a large supermarket in Yeonsu-gu, Incheon. Photo by Yongjun Jo jun21@

The average cost-to-sales ratio for these companies rose from 70.3% in 2021 to 73.2% in 2022 and 73.3% in 2023. At that time, the food industry faced cost pressure as prices of wheat, corn, soybeans, and palm oil soared due to the aftermath of the Russia-Ukraine war. However, as global grain prices stabilized, the average cost-to-sales ratio declined to 71.3% in 2024.

Last year's cost-to-sales ratio was even higher than in 2022-2023, immediately after the onset of the Ukraine war. This means that for every 100 won in sales, 74 won was spent on manufacturing costs. The average cost-to-sales ratio in the first quarter of this year also remained high at 73.8%.

Companies with higher usage of coffee and cocoa experienced larger increases in their cost-to-sales ratios. Dongseo Food's cost-to-sales ratio rose by 10.5 percentage points from 60.9% in 2021 to 71.4% last year. During the same period, Lotte Chilsung's ratio rose from 58.2% to 66.5%, an increase of 8.3 percentage points, and Lotte Wellfood's ratio increased by 7.0 percentage points, from 65.8% to 72.8%.

From Cocoa and Coffee to Sugar: A Market Shaken by Climate

The food industry attributes recent raw material price hikes to the effects of "climateflation." "Climateflation" refers to a rise in food prices as agricultural production decreases due to climate change. A report jointly published this year by the United Nations Food and Agriculture Organization (FAO) and the World Meteorological Organization (WMO) also cited heatwaves as one of the greatest risks facing global agriculture. It was analyzed that a 1-degree Celsius increase in temperature leads to an average decrease in corn yields of 7.5% and wheat yields of 6.0%. In areas affected by both heatwaves and drought, crop yields dropped by more than 30%.

Last year, prices of cocoa and coffee soared. The international price of cocoa hovered around $3,000 per ton in 2023, but at one point last year, it exceeded $12,000 per ton. This was due to a significant decline in output in Cote d'Ivoire and Ghana, which together account for more than 60% of world production, as heatwaves, droughts, and pest outbreaks converged. Although prices have since fallen to around $4,600 per ton, they remain higher than average.

The international price of Arabica coffee hovered around $1 per pound from 2018 to 2020 but began rising in 2021 following supply chain disruptions caused by drought and frost in Brazil. Subsequent abnormal high temperatures and drought in Brazil and Vietnam led to reduced production, and last year prices reached as high as $4.20 per pound—the highest since 1977. Recently, prices have remained above $2.70 per pound.

The impact of climate also extends to sugar. India, the world's second-largest sugar exporter, lowered its forecast for sugarcane production from 30.95 million tons to 27.90 million tons due to reduced monsoon rainfall caused by El Niño. After exporting 800,000 tons this season, the Indian government suspended further exports. With poor yields also expected in Brazil, the top exporter, and Thailand, the third-largest, the international sugar supply is likely to remain unstable for some time.

The strong exchange rate is another factor. Food companies import most of their key raw materials. Even if international prices hold steady, a rising exchange rate increases procurement costs in won. Last year, the won-dollar exchange rate climbed to as high as 1,480 won during the day, and this year, it has at times exceeded 1,540 won, with the strong dollar trend continuing.

The increased cost burden has been reflected in product prices. From late last year through the first half of this year, the food industry raised prices—especially for coffee, chocolate, and instant noodles. Dongseo Food increased prices by an average of 8.9% in November 2024 and by 7.7% in May last year. Lotte Wellfood’s Choco Pepero (54g) rose from 1,700 won to 2,000 won (up 17.6%), and Crunky (34g) went from 1,200 won to 1,700 won (up 41.7%).

Changing Origins and Diversifying Supply Chains: Food Industry Strategies

Recently, food companies have identified supply chain stabilization as their top priority in sustainability reports. Whereas exchange rates and international conflicts once acted as key variables impacting costs, now heatwaves, droughts, and floods are determining factors in raw material procurement. While wars are confined to specific regions, heatwaves can simultaneously affect multiple major production areas. This is why the food industry sees climate as a major risk.

Food companies are accelerating efforts to diversify sourcing origins. Lotte Wellfood estimates that, under a scenario of worsening climate change (RCP 8.5), raw material and logistics costs will increase by 39.3 billion won by 2030 and by 65.9 billion won by 2050. The company has expanded its cocoa sourcing network from Ghana to include Cote d'Ivoire and Ecuador, and plans to introduce Papua New Guinean cocoa starting next year. A Lotte Wellfood representative stated, "The international price of cocoa, driven up by abnormal weather and disease in West Africa—the main cocoa-producing region—exceeded $12,000 per ton at one point last year, four to six times higher than average. While prices have since declined somewhat, they remain high."

CJ CheilJedang has also taken steps to secure inventories of raw materials highly affected by climate. A company spokesperson explained, "The risk of heat damage due to rising average temperatures is likely to grow. For raw materials produced in regions heavily influenced by El Niño and La Niña, we are flexibly managing inventory and contract strategies."

The impact of the climate crisis is being felt in the fisheries sector as well. Dongwon Industries noted that rising sea surface temperatures and changing ocean currents are altering tuna migration routes. A company official said, "It is increasingly difficult to expect former catch volumes using only decades of accumulated fishing data," adding, "As fishing distances increase, fuel and logistics costs are also steadily rising." The company is expanding the use of artificial intelligence (AI) for fish shoal detection and is adopting more marine drones, while also increasing the share of Marine Stewardship Council (MSC) certified sustainable fisheries.

Jeongbin Lim, Professor of Agricultural and Resource Economics at Seoul National University, said, "Recently, the climate crisis has led to more frequent natural and agricultural disasters, causing both reduced output and declining quality, which further intensifies upward price pressure. While the Ukraine war disrupted the grain supply chain, now heatwaves and droughts threaten food production itself," he added. "In the long term, policies to maintain domestic production bases and improve food supply capacity should also be promoted."

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