Cocoa crunch
Written by Chong Jin Hun
Monday, 07 March 2011 11:45
KUALA LUMPUR: Having a cup of nicely brewed coffee and a chocolate brownie for your afternoon tea break could soon be an expensive affair should the price of coffee and cocoa beans continue to rise.
Costlier coffee and cocoa beans are also eating into the profit margins of the food and beverage (F&B) manufacturers beyond putting a squeeze on consumers’ wallets.
Against such a backdrop,
some of the consumer stocks on Bursa Malaysia — long considered sound defensive picks — are becoming less safe due to the looming margin squeeze and weaker demand as their products get more expensive.
Already, these companies, including names like
Nestle (M) Bhd, Cocoaland Holdings Bhd, London Biscuits Bhd and Apollo Food Holdings Bhd, have reported weaker quarterly results due to higher input costs.
Cocoa prices rose to a 32-year high at US$3,706 (RM11,230) a tonne last week due to the ongoing political crisis in Ivory Coast, which produces 60% of the world’s output. The commodity has rebounded 46% from a low of US$2,543 a tonne in June, 2009.
Meanwhile,
supply fears pushed the price of coffee to a high of US$2.74 (RM8.30) a pound in February, more than double the low of US$1.27 a pound seen in March 2009. Concerns over poor harvests in coffee producing countries like Mexico, Colombia and Kenya have been exerting upward pressure on prices.
Nestle’s net profit for 4QFY10 ended Dec 31, plunged 54% to RM39.3 million from RM86.2 million in the corresponding period a year ago, despite higher revenue of RM963.9 million versus RM950.6 million. The group attributes the profit contraction to the
sharp increase in cocoa and milk prices that dented its gross margin.
Nestle says the average price of cocoa powder more than doubled in 2010 compared with the previous year, while the price of skimmed milk powder rose about 20%.
“The sharp increase in global commodity prices and the government’s gradual reduction in food and fuel subsidies, which puts pressure on the group’s input costs, remains a concern.
“The group will continue to closely monitor the development of commodity prices, evaluate and adjust its pricing policy accordingly,” Nestle said in its results briefing.
Where possible, Nestle says it will use operational efficiencies and cost-saving measures to avoid passing on the price increases to consumers.
To mitigate the cost pressures, Nestle raised prices for some of its products last month. The price of Milo Fuze and powder products have gone up by between 5% and 6%, while the price for the Nescafe three-in-one product is up by 4%.
Nestlé is seen as a reference point when it comes to raising prices, analysts and industry observers say. Other food manufacturers are expected to follow in Nestle’s footsteps.
Tai Chun Wah, Cocoaland’s group accountant, says rising cocoa bean prices will crimp the company’s bottom line in the short term.
Tai says the manufacturer, which produces chocolate confectioneries, will pass the additional cost to consumers within six months.
“In the short term, the higher inputs costs will reduce profits,” Tai says.
Cocoaland’s net profit halved to RM9.52 million for FY2010 ended Dec 31. In its latest quarterly result announcement, Cocoaland warned that it faces greater challenges ahead in anticipation of higher raw material prices and intense competition in domestic and overseas markets.
Tai believes that raising selling prices is an emerging trend as big players like Nestle have started to do so. “Consumers have to accept it,” he says.
He adds that he expects cocoa prices to rise further due to supply concerns.
London Biscuits said in its results announcement for 2Q ended Dec 31, that it expects its financial year ending June 30, will be another challenging year. The confectioner reported a 76% plunge in net profit to RM1.08 million for the quarter.
Apollo, meanwhile, saw its net profit decline 31% to RM3.95 million in 2Q2010 ended Oct 31. It attributes this to higher operating costs and lower gains from the disposal of available-for-sale financial assets.
“Despite the improvement in the global and domestic economy, the group’s operating environment is expected to remain challenging and competitive,” the company said in notes accompanying its quarterly numbers.
While the F&B companies are feeling the bite of high commodity prices, there is a liver lining for some, as Malaysia is a producer of cocoa, though not a major one.
Malaysia produced 18,152 tonnes of cocoa beans in 2009, according to the Malaysia Cocoa Board. Of this amount, 13,213 tonnes came from Peninsular Malaysia, 3,688 tonnes from Sabah and 1,251 tonnes from Sarawak. Production is estimated to have fallen to 15,654 tonnes in 2010.
Malaysia’s cocoa bean production is mostly undertaken by smallholders, rather than large plantation players, and these smallholders will benefit from higher prices.
The country’s cocoa production has declined greatly as low prices in the past prompted farmers to switch to more lucrative crops. In 1990, for instance, the country produced 247,000 tonnes -- a staggering 13.6 times more than 2009’s output.
Guan Chong Bhd, a cocoa-ingredient producer, is riding the rally in cocoa prices. It is sitting on a large inventory of cocoa beans that has appreciated in value due to rising prices. The company’s inventories totalled RM154.92 million as at end-2010
“We can buy high and sell high,” says Brandon Tay Hoe Lian, Guan Chong’s managing director and CEO.
He adds that the company can always pass on additional costs to customers.
For FY2010 ended Dec 31, Guan Chong’s net profit soared seven-fold to RM100 million as revenue rose 83% to RM1.17 billion.
The company says its financials were also helped by foreign exchange gains due to the strengthening ringgit. The firm also booked gains from commodity futures contracts, and foreign exchange derivatives.
It is also worth watching companies like MBf Holdings Bhd, which operates coffee and cocoa plantations in Papua New Guinea.
MBf Holdings’ website indicates that the company has a 1,100ha coffee plantation and 2,100ha of land for tea cultivation in Papua New Guinea. Details about its cocoa operations were however not specified.
Agriculture operations in Papua New Guinea accounted for 11% of MBf’s revenue in the financial year ended Dec 31, 2010, its latest quarterly results showed.
This article appeared in The Edge Financial Daily, March 7, 2011.
