US Markets
Monday, June 17th, 2024 2:32 pm EDT
Key Points
- Cocoa prices have surged over the past year, tripling from around $2,500 to over $11,000 per metric ton due to a weaker-than-expected crop, causing significant cost increases for candy makers and food companies.
- Major candy companies are currently shielded from the price surge by long-term contracts, but they will face higher costs once these contracts expire in 2025, leading them to explore strategies like reducing cocoa content in products, using substitutes, and diversifying product portfolios.
- Systemic issues such as climate change, government-controlled pricing, and labor concerns in West Africa are likely to keep cocoa prices high, prompting food companies to consider more permanent solutions, including recipe reformulation and the use of non-cocoa additives.
The global agricultural sector, specifically the cocoa market, is experiencing significant pricing pressure. Over the past year, cocoa prices have more than tripled, causing major challenges for candy makers and food companies reliant on chocolate production. Previously, cocoa prices hovered around $2,500 per metric ton, but concerns over a weaker-than-expected crop have driven prices to over $11,000 per metric ton in April, marking an all-time high. Although prices have slightly eased, they remain significantly higher than what food companies are accustomed to paying. Major candy companies like Hershey, Mars, Ferrero, and Mondelez are temporarily shielded from these costs due to long-term contracts. However, these companies will likely face much higher cocoa prices once these contracts expire in 2025, which is already impacting their business strategies due to the substantial cost increase.
West Africa, the primary cocoa-producing region, has been hit by crop diseases and low farmgate prices, leading farmers to shift to more profitable crops like rubber. This season is expected to see the largest cocoa deficit in at least six decades. Ghana, the second-largest cocoa producer, is even delaying the delivery of up to 350,000 tons of beans to the next season, further pushing prices up. Executives from companies like Mondelez and Hershey have attributed some of the price surge to market speculation, with the hope that prices might stabilize once new crop information becomes available in September. Despite this, the current prices are unlikely to revert to previous norms.
This price surge comes at a challenging time for food companies that have already raised prices to cope with broader inflation, making consumers more price-sensitive and limiting the companies’ ability to further increase prices. Companies might resort to shrinkflation—reducing product quantity or weight while maintaining prices—though consumers are increasingly aware of this tactic. Firms are exploring creative solutions, such as altering product formulations to use less cocoa or substituting cocoa with other ingredients.
J&J Snack Foods, for example, is considering reducing the number of chocolate chips in its products or finding alternative ingredients. Hershey has introduced the Jumbo Reese’s Cup, which has more peanut butter to reduce reliance on cocoa. Companies might also avoid introducing new chocolate-flavored products during this period. Long-term, systemic issues like farmgate pricing and climate change continue to affect cocoa production, suggesting that high prices might persist. Some companies are exploring cocoa-free chocolate alternatives made from ingredients like grape seeds and legumes.
Despite these challenges, some companies, like Mondelez, have stated they will not compromise on product quality and recipes. Diversifying product portfolios to include non-chocolate items, such as salty snacks, has also been a strategy for some companies to mitigate dependence on cocoa. Hershey, for instance, has expanded its portfolio by acquiring brands like SkinnyPop and Dot’s Homestyle Pretzels. This diversification helps companies manage consumer trends and mitigate the impact of cocoa price fluctuations, offering a more balanced approach to their product offerings amidst the ongoing cocoa crisis.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/06/15/candy-makers-cocoa-prices.html
