Home » Business » Cocoa Prices Surge: Chocolate Makers Face New Challenges

Cocoa Prices Surge: Chocolate Makers Face New Challenges

Cocoa Prices Surge Chocolate Makers Face New Challenges

The surge in cocoa prices is posing a significant challenge for chocolate manufacturers, forcing them to consider new strategies to manage costs. Over the past year, cocoa prices have more than tripled, causing concern among candy makers and food companies that rely on cocoa for their products.

Historically, cocoa prices hovered around $2,500 per metric ton. However, recent reports of a weaker-than-expected harvest have triggered fears of a supply shortage, causing prices to skyrocket. In April, cocoa prices reached an all-time high of over $11,000 per metric ton before slightly easing but still remain well above the usual rates.

Major candy producers like Hershey, Mars (maker of M&M’s), Ferrero (owner of Kinder), and Mondelez (parent of Cadbury) are temporarily shielded from the immediate impact of these price hikes due to long-term contracts that lock in commodity prices. However, by 2025, these companies are expected to face significantly higher cocoa costs.

“This is definitely impacting the ways in which these companies are managing their businesses, just because the cost impact is so very important,” said Steve Rosenstock, the consumer products lead at Clarkston Consulting, a firm advising clients on such issues.

Companies including Mars, Mondelez, Ferrero, and Hershey declined or did not respond to CNBC’s requests for comments.

West Africa, responsible for the majority of global cocoa production, is experiencing a challenging season with crop diseases and farmgate pricing issues, prompting farmers to switch to more profitable crops like rubber. Rabobank reports that this season’s cocoa crop is expected to have the largest deficit in at least six decades. Additionally, Ghana, the second-largest cocoa producer, plans to delay delivery of up to 350,000 tons of beans, potentially driving prices higher.

Executives from Mondelez and Hershey have noted in earnings calls that market speculation is contributing to the cocoa price surge. While prices might stabilize in September with new crop information, a return to previous levels is unlikely.

The rising cocoa costs come at a difficult time for food companies, many of which have already increased prices to cope with broader inflation. This has made consumers more price-sensitive, leaving companies with limited options to manage cocoa’s escalating costs.

One response to these pressures is “shrinkflation,” where companies reduce product quantity or weight while maintaining prices. However, consumers have become increasingly aware of this tactic. A YouGov survey from October found that 72% of U.S. respondents noticed shrinkflation in food products.

To address these challenges, companies are exploring various strategies. Daniel Fachner, CEO of J&J Snack Foods, which produces chocolate-flavored treats, is considering reducing the number of chocolate chips in products or seeking substitutes. “It won’t stop us from using chocolate, but it will cause us to think about and say, ‘Now, if we do this innovation with that new pricing, is it sellable?’ And then when we sell it, ‘Is it at a low enough cost that customers could sell it and still make a good margin?'” Fachner explained.

RBC Capital Markets analyst Nik Modi pointed to Hershey’s new Jumbo Reese’s Cup, which features extra peanut butter, as an example of innovation that reduces reliance on cocoa while maintaining consumer appeal.

Non-chocolate-focused food companies might also reduce their use of chocolate in new products. “I think more or less, people will try to stay away from chocolate at this point,” Modi said.

Looking ahead, the cocoa crisis is likely to persist. Analysts predict another shortfall next year, albeit less severe. Long-term solutions may include reformulating recipes to incorporate more economical ingredients such as sugar, shea butter, or palm oil. According to Bank of America Securities analyst Antoine Prevot, recipe reformulation typically takes about nine months, with new products potentially appearing by August.

Some companies, like Mondelez, are not planning major changes to their recipes. “We will do some cost tightening, but we’re not going to change recipes or do things that are not necessarily the right thing for the business in the long run,” said Mondelez CFO Luca Zaramella.

Diversification into other snack categories is another strategy. For instance, Hershey acquired Amplify Snack Brands and Dot’s Homestyle Pretzels to reduce dependency on cocoa. “The ability to lean on some of the non-chocolate categories, whether it’s salty snacks, jelly beans or gummy products, I think that’s a good way to combat the cocoa crisis,” Rosenstock noted.

As the cocoa crisis continues to unfold, chocolate makers will need to innovate and adapt to sustain their businesses and meet consumer demand.