Dried cocoa beans at the Somos Cacao farm and production plant in Ragonvalia, Norte de Santader department, Colombia, Friday, March 22, 2024.
Ferley Ospina | Bloomberg | Getty Images
Price pressures are affecting a specific corner of global agriculture – and they are bittersweet.
Cocoa prices have more than tripled in the last year, causing a major headache for candy makers and other food companies that utilize the ingredient to make chocolate.
In recent years, the price of cocoa has fluctuated around $2,500 per tonne. However, reports of a weaker-than-expected harvest have raised concerns about supply, which has pushed up prices of the commodity in recent months. In April, the price of cocoa reached an all-time high of over $11,000 per metric ton. Since then, price increases have moderated somewhat, but harvests are still well above what food companies are accustomed to paying.
For now, many of the largest confectionery companies – Hersheymanufacturer of M&M’s Mars, owner of Kinder Ferrero and parent of Cadbury Mondelez — are likely protected from higher cocoa prices by long-term contracts that lock in the prices they pay for key commodities to protect them from such events. This gives them some time to deal with the problem. But in 2025 they will likely pay much more for cocoa.
“This absolutely has an impact on the way these companies run their businesses, precisely because the impact on costs is so incredibly significant,” said Steve Rosenstock, director of consumer products at Clarkston Consulting, who advises clients on how to deal with problems such as rising cocoa prices.
Mars declined to participate in this story. Mondelez, Ferrero and Hershey did not respond to CNBC’s requests for comment.
Dear cocoa
West Africa, where most of the world’s cocoa supply comes from, has been hit by crop diseases and lower prices paid to farmers at the point of sale, called farm-gate prices, which force them to grow more profitable crops such as rubber instead of cocoa. Rabobank’s May report shows that this season’s cocoa harvest will see its biggest deficit in at least six decades.
Reuters reported on Wednesday that Ghana, the second-biggest cocoa producer, intends to delay deliveries of up to 350,000 tonnes of beans for next season, pushing prices up again.
A worker picks cocoa berries at the Somos Cacao farm in Ragonvalia, Norte de Santader department, Colombia, Friday, March 22, 2024.
Ferley Ospina | Bloomberg | Getty Images
In recent earnings calls, Mondelez and Hershey executives said they believed market speculation was at least partly responsible for the escalate in cocoa sales. Prices may drop in September as more information about the fresh crop becomes available, but that doesn’t mean they will return to normal.
The rising cost of this commodity comes at a challenging time for many food companies. Many have raised prices over the past two years to cope with inflation that has hit a wider range of goods. As a result, shoppers have become pickier about what they buy and more dissatisfied with the prices they see in grocery stores. Consumers’ focus on value leaves confectionery manufacturers with little leeway in pricing to meet higher cocoa costs.
Then there’s shrinkage, a buzzword that has entered the layman’s lexicon over the past two years. Companies will reduce the quantity or weight of a product while leaving the price the same. But consumers understood the trick. A YouGov survey conducted in October found that 72% of U.S. respondents noticed grocery shrinkage.
Tiny-term solutions
As a result, many companies will have to become more innovative.
J&J Snacks CEO Daniel Fachner keeps an eye on cocoa and chocolate prices. The company owns brands such as Dippin’ Dots, SuperPretzel and Hola Churros, and also makes products for other companies such as Subway’s footlong churro. Chocolate is a common flavor in its range, which includes treats such as chocolate-stuffed churros.
“It won’t stop us from using chocolate, but it will make us think and ask, ‘Now if we introduce this innovation at the fresh prices, will it be possible to sell it?’ And once we sell it, we ask ourselves, “Is the price low enough that the customer can sell it and still get a good margin?” – Fachner told CNBC in May.
Fachner’s hypothetical solution could be to reduce the number of chocolate pieces in a given product from 12 to 9. He also said that J&J is looking for any possible substitutes that might work for some of its recipes.
Chocolates displayed on a shelf at Celine’s Sweets in Novato, California, on March 22, 2024.
Justin Sullivan | Getty Images
RBC Capital Markets analyst Nik Modi cited Hershey’s fresh Reese’s jumbo cup as one of the innovative solutions.
“This one has an extra amount of peanut butter, so it’s a good way to bring innovation to the market at a higher price point. It allows the consumer to feel they are getting value, but it only takes a change to the product itself to reduce their dependence on chocolate,” he said.
For food companies that don’t primarily deal in chocolate, they may start shying away from flavor, especially with fresh products.
“I think at about this stage people will try to stay away from chocolate,” Modi said.
The long tail of the cocoa crisis
While this year’s escalate in cocoa prices is historic, it likely won’t be the last time food companies pay more for the commodity. Analysts are already predicting another cocoa shortage next year, although it will likely be less dramatic than this season.
However, systemic problems such as government-controlled farmer prices and climate change will likely continue to harm the bean crop. Additionally, the utilize of child labor and slavery on cocoa plantations in West Africa led to lawsuits and scandal among candy companies.
In the long term, this means that many companies will have to look for more enduring solutions. In some cases, this may mean an alternative to cocoa.
“There are examples where companies are increasing the amount of non-cocoa additives like sugar, more economical products like cocoa butter equivalents, shea butter, palm oil, coconut oil and things like that,” Rosenstock said.
Justin Sullivan | Getty Images
On average, it takes about nine months to change a recipe, according to a research note published Thursday by Bank of America Securities analyst Antoine Prevot. He said he thinks fast-growing consumer goods companies are considering changing their recipes starting this year, which means the fresh candies could start appearing as early as August.
There are also more extreme substitutes. Startups like Voyage Foods and Win-Win have produced cocoa-free chocolate using alternatives like grape seeds and legumes.
At least one candy company doesn’t plan to make major changes to its recipes.
“We will do some cost tightening, but we will not change the formula or do things that are not necessarily right for the company in the long run,” Mondelez Chief Financial Officer Luca Zaramella said on June 4 at a Deutsche Bank conference.
There is also the potential to diversify with other types of snacks. When Kraft founded Mondelez over a decade ago, its portfolio already included Triscuit, Sour Patch Kids and Wheat Thins snacks, as well as Milka, Oreo, Toblerone and Chips Ahoy chocolate products.
Other candy companies followed suit, adding more salty snacks to their products to escalate growth. For example, Hershey purchased Amplify Snack Brands in 2017, adding SkinnyPop and Dot’s Homestyle Pretzels to its portfolio in 2021.
“I don’t think they did it to reduce their dependence on cocoa – they did it to more easily respond to the ups and downs of consumer trends and to be able to really diversify their portfolio,” Rosenstock said. “But being able to utilize some product categories other than chocolate, such as salty snacks, jellies and gummies, I think that’s a good way to combat the cocoa crisis.”