Dried cocoa beans at the Somos Cacao farm and production facility in Lagunvaría, Norte de Santade department, Colombia, Friday, March 22, 2024.
Ferry Ospina | Bloomberg | Getty Images
One particular segment of global agriculture is facing pricing pressure – and it’s bittersweet.
The price of cocoa has more than tripled in the last year, causing major headaches for confectioners and other food companies that use the ingredient to make chocolate.
In recent years, cocoa prices have hovered around $2,500 per ton. But reports of a weaker-than-expected harvest have stoked supply concerns, fueling gains in the commodity in recent months. Cocoa prices hit a record high of over $11,000 per ton in April. Price increases have since slowed slightly, but crop prices remain well above what food companies are used to paying.
Currently, many of the largest candy companies— Hershey’sM&M maker Mars, Kinder parent Ferrero Rocher and Cadbury parent Mondelez – They may be protected from rising cocoa costs as long-term contracts lock in the prices they pay for key commodities to protect them from such events. This gives them some time to resolve the issue. But by 2025, they may end up paying more for cocoa.
“This will absolutely impact the way these companies manage their business because the cost impact is very significant,” said Steve Rosenstock, head of consumer products at Clarkston Consulting. The cost of cocoa has soared.
Mars declined to participate in this report. Mondelēz, Ferrero and Hershey’s did not respond to CNBC’s requests for comment.
expensive cocoa
West Africa, the region that supplies most of the world’s cocoa, has been hit by crop diseases and lower prices paid to farmers at the point of sale, known as farm-to-sale pricing, forcing them to grow more profitable crops such as rubber instead of rubber. Not cocoa. This season’s cocoa crop is expected to see its biggest shortage in at least six decades, according to a May report from Rabobank.
Reuters reported on Wednesday that Ghana, the second largest cocoa producer, is planning to postpone the delivery of up to 350,000 tons of cocoa beans until next season, sending prices higher again.
A worker picks cocoa fruits on Friday, March 22, 2024, at the Somos cocoa farm in Lagunvaría, Norte de Santade department, Colombia.
Ferry Ospina | Bloomberg | Getty Images
On recent earnings calls, executives at Mondelez and Hershey’s said they believed market speculation was driving cocoa’s gains at least in part. Prices may drop in September once more information is available about the new crop, but that doesn’t mean prices will return to normal.
The rising cost of the commodity comes at a difficult time for many food companies. Over the past two years, many companies have raised prices in response Inflation hits a wider range of commodities. As a result, shoppers are becoming more picky about the items they buy and less satisfied with the prices they see at the grocery store. Consumer focus on value leaves confectionery companies with little leeway in pricing to account for the higher cost of cocoa.
Then there’s contractionary inflation, a buzzword that has entered the layman’s lexicon in the past two years. The company will reduce the quantity or weight of the product while keeping the price the same. But consumers already understand this. An October survey by YouGov found that 72% of U.S. respondents had noticed a contraction in food prices.
Near term solution
As a result, many companies will have to become more creative.
Johnson & Johnson Snack Food Chief Executive Daniel Fachner has been keeping an eye on cocoa and chocolate prices. The company owns brands such as Dippin’ Dots, SuperPretzel and Hola Churros, and makes products for other companies, such as Subway’s foot-long churros. Chocolate is a common flavor in its product portfolio, which includes snacks like chocolate churros.
“It won’t stop us from using chocolate, but it will make us think and say, ‘Now, if we do this innovation at the new pricing, will it sell?’ And then when we sell it, ‘Is the cost low enough? , can the customer sell it and still make a good profit?
One hypothetical solution proposed by Fachner might be to reduce the number of chocolate chips in a product from 12 to 9. He also said Johnson & Johnson is looking for any alternatives that might work for some of its formulas.
Chocolates are displayed on the shelves of Celine’s Sweets on March 22, 2024 in Novato, California.
Justin Sullivan | Getty Images
RBC Capital Markets analyst Nik Modi sees Hershey’s new giant Reese’s Cup as a creative solution.
“This product has extra peanut butter, so it’s a great way to try to bring innovation to market at a premium price point so consumers feel like they’re getting value, but just changing the product itself makes it less dependent on chocolate,” He said.
For food companies that don’t primarily deal in chocolate, they may start to avoid chocolate flavors, especially in new products.
“I think people are more or less trying to stay away from chocolate at this point,” Modi said.
The long tail of the cocoa crisis
While this year’s spike in cocoa prices is historic, it likely won’t be the last time food companies pay higher prices for the commodity. Analysts are already predicting another cocoa shortage next year, although it may not be as severe as this season.
However, systemic issues such as government-controlled farm pricing and climate change may continue to harm legume crops. Also, use Child labor and slavery on West African cocoa farms have led to lawsuits and scandals by candy companies.
In the long term, this means many companies will have to look for more permanent solutions. In some cases, this could mean a substitute for cocoa.
“There are some examples of companies increasing their use of non-cocoa additives such as sugar, cocoa butter equivalents, shea butter, palm oil, coconut oil and other more economical additives,” Rosenstock said.
Justin Sullivan | Getty Images
Reformulation takes about nine months on average, according to a research note released Thursday by BofA Securities analyst Antoine Prevot. He said he believed FMCG companies had been considering changes to their recipes since the start of the year, meaning the new candies could start hitting the market as soon as August.
There are more extreme alternatives. Startups such as Voyage Foods and Win-Win have produced cocoa-free chocolate using alternatives such as grape seeds and beans.
At least one candy company doesn’t plan to make any major changes to its recipes.
Luca Zaramella, chief financial officer of Mondelēz Group, said at a Deutsche Bank conference on June 4: “We will take some cost-tightening measures, but we will not change the formula or do something that is not good in the long run. Something that must be appropriate for the business.
Other types of snacks also have potential for diversification. When Kraft spun off Mondelez more than a decade ago, it already had Triscuit, Sour Patch Kids and Wheat Thins snacks in its portfolio, in addition to chocolate products Milka, Oreo, Toblerone and Chips Ahoy.
Other candy companies are following suit, adding more salty snacks to their product lines to drive more growth. For example, Hershey acquired Amplify Snack Brands in 2017, adding SkinnyPop to its product portfolio, and acquired Dot’s Homestyle Pretzels in 2021.
“I don’t think they’re doing it to reduce their reliance on cocoa, I don’t think they’re doing it to be able to react more easily to the ups and downs of consumer trends and to be able to really diversify their portfolios,” Rosenstock said. “But being able to lean on some non-chocolate categories, whether it’s salty snacks, jelly beans or gummy products, I think is a good way to deal with the cocoa crisis.”
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