Worst of the cocoa rally is yet to come for chocolate makers

The world’s largest chocolate makers are yet to see the full impact of a rally that sent cocoa futures to a 46-year high.

Companies including Hershey Co. and Nestle SA usually buy cocoa well in advance. As supplies run out and prices remain high, chocolate makers are being forced to pay up — a cost they will eventually pass on to consumers.

“It’s the most extraordinary situation I’ve seen in my career,” said Jonathan Parkman, the head of agricultural sales at Marex Group, who has followed the cocoa market for more than three decades. “I don’t think we’ve seen the worst of the situation for consumers.”

Chocolate prices have already surged 17% in the US over the past two years as commodity costs from cocoa to sugar jumped, according to consumer researcher Euromonitor International. And there’s no relief in sight, with cocoa production in West Africa — accounting for almost 70% of supplies — turning out much worse than expected.

Global supplies are set to fall short of demand for a third year in the season that started in October. Bean deliveries to ports in top grower Ivory Coast are running significantly behind. And that’s before dryness from an El Nino weather pattern starts to have an impact on the harvest, drying out the pods that contain the beans ground for chocolate.

“The pod count coming out of Ivory Coast and Africa has been materially different than what people expected,” Luca Zaramella, chief financial officer at Oreo cookies maker Mondelez International Inc., said during an earnings call last month. “There is pressure on cocoa.”

Butter Surge

To make matters worse, the run-up in costs of cocoa products — products of bean processing — has been staggering. The price of butter, which accounts for about 20% of the weight of an average chocolate bar, has already hit a record, according to KnowledgeCharts, a unit of Commodities Risk Analysis. In top consumer Europe, prices are close to 9,600 euros a metric ton, almost 2.5 times the cost of cocoa futures.

Producing treats including Hershey Kisses and Crunch bars takes months of planning. The butter that made up most of the chocolate sold at Halloween and Christmas was produced when prices were lower. The pressure is now on for Valentine’s Day, with both Nestle and Mondelez having already warned they will need to increase prices again next year.

“Product prices — liquor and butter — are off the charts, so it’s only now feeding to consumers,” Parkman said.

Chocolate makers use the futures market to hedge risk, buying cocoa eight to nine months out. Prices are now so high that protection has gone down to six months, according to Marex. In the earnings call, Zaramella said Mondelez was covered for “a good portion” of the first half of 2024.

Lindt & Sprüngli Group raised prices by 9.3% on average in the first half of the year. Prices charged by Hershey’s North American confectionery unit rose by 11% in the third quarter from a year earlier.

Price Gains

The cost increase for cocoa has been “so significant that it outstrips the slight easing seen in some other raw materials,” Lindt said in its half-year presentation.

Chocolate makers are also seeing costs including labor, processing, transporting and marketing increase, according to Carl Quash III, head of snacks and nutrition at Euromonitor. As a result, “we could see chocolate prices continue to grow for years to come,” he said.

Cocoa prices are likely to stay high until the new crop arrives in October 2024, potentially cooling the market by almost 20% to $3,500 a ton, said Megan Fisher, a researcher at Capital Economics. Some traders say relief may only come in 2025, when West African farmers will have had enough time to react to price increases.

“High prices cure high prices,” Steven Retzlaff, president of global cocoa at Barry Callebaut AG, the largest maker of bulk chocolate, said in an earnings call last month. “If you look at some of the large producers, there’s a lot of potential actually for them to increase their production.”

For now, chocolate consumption is holding up, according to Quash. But there are signs that may be changing — unit sales in the grocery category, which includes everything from baking chocolate to brownies, have fallen by 4.7% in the 12-month period ended Dec. 9, data from NIQ showed.

Consumer Cutback

More than 40% of consumers said they would cut back on chocolate and candy purchases if inflation continued to rise, according to a September survey by the company, previously known as NielsenIQ.

Factories already feeling the pinch. Returns for producers of cocoa butter and powder have been the lowest since records started in the 1980s, according to KnowledgeCharts.

Processors in Europe, North America and Asia are starting to slow down. Global grinding, a proxy for demand, could fall as much as 6% over the next two years, Marex estimates.

“Levels are already so extreme that it could lead to demand destruction if it persists,” said Aakash Doshi, Citigroup Inc.’s head of commodities for the Americas. “We know that the consumers haven’t received the full brunt yet.”