KUALA LUMPUR: Fuelled by rising cocoa and coffee bean prices, the food and beverage (F&B) sector is likely to undergo a reevaluation of its supply chains.

Large companies will be compelled to reevaluate their sourcing strategies.

Tradeview Capital Sdn Bhd fund manager Neoh Jia Man said the spike in cocoa and coffee prices will prompt major players in the F&B industry to rethink their current supply chain setups.

He also highlighted Malaysia's advantageous climate for cocoa and coffee cultivation.

The attractive prices, combined with buyers' efforts to broaden their sources of supply, may re-ignite interest in cocoa and coffee farming domestically.

"The recent increase in cocoa and coffee prices was primarily driven by supply concerns.

"Cocoa production faced disruptions due to plant diseases in its key producing region of West Africa, while coffee was affected by drought in Vietnam. 

"We anticipate the cocoa supply disruption to persist for some time due to the long-standing issue of tree diseases, potentially keeping cocoa prices elevated in the coming years."

Conversely, Neoh said coffee production is more geographically diversified compared to cocoa, with 70 per cent of production concentrated in West Africa.

Therefore, the impact of climate change on coffee production may be less worrisome, therefore Neoh expects coffee prices to normalise going forward.

Nevertheless, Neoh believes cocoa and coffee bean price hikes on consumers are manageable. 

"Although the cost impact varies depending on the product, we anticipate that both off-the-shelf real chocolate and coffee products may experience a year-on-year production cost increase ranging from double-digits to mid-teens, should bean prices remain at their current levels. 

"However, manufacturers have several strategies at their disposal to offset these cost increases for consumers. 

"These strategies may include downsizing products or substituting materials with more affordable alternatives," he added.

Meanwhile, Sunway University economics professor Dr Yeah Kim Leng believes that Malaysia's food import bill will rise as a consequence of increasing coffee and cocoa prices, and consumers will have to pay more for their two favourite beverages.

He noted that the country's coffee imports make up less than one per cent of the world's total coffee imports while cocoa imports account for close to 12 per cent of the world's total cocoa imports.

"The current situation presents a great opportunity for coffee and cocoa farmers in Malaysia, especially in Sabah, to increase production in response to global supply shortages.

"Raising local production will help reduce reliance on imports in addition to enhancing the nation's food security and self-sufficiency. 

"However, like other cash crops, these two crops require medium- to long-term planning given that they take three to five years to mature."

Yeah pointed out that coffee consumption is relatively inelastic compared to cocoa.

Hence, he said coffee consumption is unlikely to be dented significantly, although consumers may switch to less expensive outlets or replace home brews to cope with higher prices.

According to the International Coffee Association, world coffee production stagnated last year, with declines of 4.7 per cent in Asia-Oceania and 7.2 per cent in Africa being offset by a 4.8 per cent rise in South America.

Yeah said adverse weather has resulted in falling production in Asia, thereby driving up prices given the relatively inelastic coffee demand and rising coffee culture in the region.

He said the supply-demand imbalance has driven up coffee prices by 16 per cent since the beginning of April.

"Similarly, world cocoa supply is facing unprecedented shortages and market upheavals due to the inability of major producers such as Ivory Coast and Ghana to meet supply contracts, thereby driving up global cocoa prices. 

"Coffee prices are expected to stabilise this year as global supply recovers, and high prices of both crops will encourage farmers to increase output," he added.

Economic analyst Dr Zulkufli Zakaria said consumer goods companies will face two main challenges regarding the commodities. 

He said first, the weakening ringgit and strong US dollar will impact medium-term purchase contracts for companies, potentially leading to other issues.

Second, he said maintaining inventory levels for cocoa, especially considering the increasing price trend, while ensuring that inventory does not exceed 20 per cent of future orders. 

"Consequently, cash-rich cocoa importers stand a better chance of sustaining themselves.

"For coffee, companies may find it more manageable as prices fluctuate but have not reached the peaks observed in February and August 2022." 

Zulkufli said Malaysia is the second largest importer of cocoa beans at US$1.06 billion in 2022 after the Netherlands.

This is in contrast to coffee imports which were valued at US$303 million in the same year.

Zulkufli said cocoa prices began to rise in October 2023, reaching US$4,566 per tonne in January this year, US$7,000 per tonne in March, and around US$12,000 per tonne currently.

He said one of the factors behind this surge is the concentration of cocoa production in West Africa, particularly in Ivory Coast and Ghana.

Zulkufli said as for coffee, which stands at US$4,900 per tonne, the price reached a peak three times, notably in February 2022, August 2022 and April 2024. 

"Looking at these factors, consumers of cocoa or chocolate are affected by the spike, and are paying higher and higher prices. 

"However, consumption of cocoa is not as vigorous as coffee on a daily basis, The consumer could have spent money without realising there is a greater increase in cocoa prices compared to coffee," he added.

Nestle (Malaysia) Bhd chief executive officer Juan Aranols recently mentioned the possibility of the company increasing prices for certain products that contain coffee and cocoa.

He said there may be a slight price increase in some of Nestle's products over the next few months.

Meanwhile, in a recent note, CIMB Securities said retail giants such as Berjaya Food Bhd, 7-Eleven, and MyNews Holdings Bhd may increase the prices of their coffee-based products.

The firm's estimates indicate that coffee-based products represented about 35 per cent, eight per cent and eight per cent of Berjaya Food Bhd, 7-Eleven and MyNews' total sales, respectively, for fiscal year 2023. 

Among the retail names under its coverage, Berjaya Food appears to be most impacted by the higher coffee prices. 

"We estimate that every 10 per cent rise in coffee prices will lead to a five per cent decline in its financial year 2024 profit forecast, assuming Berjaya Food is not able to pass on the costs."

https://www.nst.com.my/business/corporate/2024/04/1043872/rising-coffee-and-cocoa-bean-prices-may-shake-fb-sector-supply