Cocoa Prices Soaring to Record Highs, Leading to More Expensive Chocolate
Cocoa prices have surged to unprecedented levels, more than doubling from a year ago and reaching the highest point since the 1960s. The impact of this surge on chocolate lovers has yet to be fully felt, but that is about to change. With cocoa prices remaining elevated, chocolate makers will soon bear the brunt of this cost hike, with potentially severe consequences.
The majority of the global cocoa supply, over 70%, comes from West Africa. Unfortunately, adverse weather conditions, including heavy rains during the 2023 growing season and strong winds caused by El Niño, have wreaked havoc on cocoa production in the region. These weather conditions have led to the spread of diseases, crop yield reductions, and the drying out of numerous cocoa pods. As a result, global cocoa production is expected to be 8% lower than the previous year. Furthermore, cocoa farmers in West Africa have been receiving prices for their produce that consistently fall below the commodity market rates, making it even harder for supply to recover quickly.
The situation is further complicated by the fact that cocoa trees affected by diseases need to be replanted, which takes between four to six years for the new crop to mature and be harvested. Meanwhile, the demand for chocolate has steadily increased over the past decade. Therefore, a deficit in the cocoa market is predicted for the third consecutive year.
Cocoa prices are expected to continue surging over the next few months, with futures contracts for upcoming crops currently priced higher than the average of the past five years. The impact of these rising cocoa prices on chocolate prices has been delayed thus far because chocolate manufacturers typically secure their cocoa beans or processed cocoa products in advance. However, the cost of other chocolate ingredients, such as sugar and butter, has also been rising. Sugar prices have climbed by 31% over the past two years, while butter is 12% more expensive than it was a year ago.
One major player in the chocolate industry feeling the pinch is Hershey. As it heavily relies on chocolate for the majority of its revenue, Hershey is particularly vulnerable to the rising costs. Depending on the company’s remaining inventory or futures contracts, Hershey could face significant increases in cocoa expenses this year. To mitigate some of the risk, Hershey has been diversifying its revenue sources by introducing salty snacks like pretzels and popcorn. However, this segment presents its own challenges, with salty snack sales dropping 25% compared to the same period in 2022 and only contributing 8% to the company’s total revenue.
In summary, the price of chocolate, a beloved sweet treat, is set to rise even further due to the soaring costs of its main ingredient, cocoa. Although chocolate prices have increased by 20% over the past two years, this jump is not disproportionate given the general inflation in grocery prices. However, as cocoa prices continue to remain high, chocolate makers will feel the impact more significantly. With a reduced cocoa supply driven by weather-related difficulties, disease outbreaks, and low prices for farmers, the cocoa industry is facing challenging times. Cocoa prices are projected to peak in the coming months, with futures contracts reflecting this anticipation. The rising costs of other chocolate ingredients, such as sugar and butter, add to the industry’s woes. Hershey, a major player in the chocolate market, is particularly exposed to these rising costs and will need to navigate carefully to maintain its profitability.
Analyst comment
Negative news
Analyst statement: The market for cocoa and chocolate is expected to face significant challenges in the coming months as cocoa prices continue to surge due to weather-related difficulties, disease outbreaks, and low prices for farmers. Chocolate makers will bear the brunt of the cost hike, leading to higher chocolate prices. Hershey, a major player in the industry, will face increased cocoa expenses and will need to navigate carefully to maintain profitability.
