Candy makers face steep cocoa prices, get creative

on Jun15
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Dried cocoa beans at the Somos Cacao farm and production facility in Ragonvalia, Norte de Santader department, Colombia, on Friday, March 22, 2024. 

Ferley Ospina | Bloomberg | Getty Images

There’s pricing pressure taking hold of a specific corner of global agriculture — and it’s bittersweet.

Prices of cocoa have more than tripled over the last year, creating a big headache for candy makers and other food companies that use the ingredient to make chocolate.

In recent years, the price of cocoa had hovered at around $2,500 per metric ton. But reports of a weaker-than-expected crop set off concerns about supply, sparking the commodity’s run-up in recent months. Cocoa hit an all-time high of more than $11,000 per metric ton in April. The price surge has since eased off slightly, but the crop is still commanding well above what food companies are used to paying.

For now, many of the largest candy companies — Hershey, M&M’s maker Mars, Kinder owner Ferrero and Cadbury parent Mondelez — are likely protected from higher cocoa costs, thanks to long-term contracts that lock in the prices they pay for key commodities to protect them from events just like this. That gives them some lead time to grapple with the issue. But come 2025, they’ll likely end up paying much more for their cocoa.

“This is absolutely impacting the ways in which these companies are managing their businesses, just because the cost impact is so incredibly significant,” said Steve Rosenstock, the consumer products lead at Clarkston Consulting, which advises clients on how to deal with problems such as the soaring cost of cocoa.

Mars declined to participate for this story. Mondelez, Ferrero and Hershey did not respond to CNBC’s requests for comment.

Costly cocoa

West Africa, which grows the majority of the world’s cocoa supply, has been hit by crop disease and lower prices paid to farmers at the point of sale, called farmgate pricing, that push them to grow more lucrative crops such as rubber instead of cocoa. This season’s cocoa crop is expected to experience the largest deficit in at least six decades, according to a Rabobank report from May.

Reuters reported Wednesday that Ghana, the second-largest cocoa producer, is looking to delay a delivery of up to 350,000 tons of beans to next season, sending prices higher again.

A worker picks cocoa fruit at the Somos Cacao farm in Ragonvalia, Norte de Santader department, Colombia, on Friday, March 22, 2024. 

Ferley Ospina | Bloomberg | Getty Images

Near-term workarounds

Chocolates are displayed on a shelf at Celine’s Sweets in Novato, California, March 22, 2024.

Justin Sullivan | Getty Images

RBC Capital Markets analyst Nik Modi cited Hershey’s new Jumbo Reese’s Cup as one creative workaround.

“This one has extra peanut butter, so it’s a nice way of trying to get innovation into the market at a premium price, let the consumer feel like they’re getting value, but just changing the product itself to lower the reliance on chocolate,” he said.

For food companies that don’t primarily deal in chocolate, they might start avoiding the flavor, especially when it comes to new products.

“I think more or less, people will try to stay away from chocolate at this point,” Modi said.

The long tail of the cocoa crisis

Why the price of chocolate's key ingredient skyrocketed in 2024

Justin Sullivan | Getty Images

Recipe reformulation takes about nine months on average, according to a research note published Thursday from Bank of America Securities analyst Antoine Prevot. He said he thinks fast-moving consumer goods companies have been looking at changing their formulas since the beginning of this year, which means the new candy could start trickling out as soon as August.

There are more extreme substitutes, too. Startups such as Voyage Foods and Win-Win have made cocoa-free chocolate using alternatives such as grape seeds and legumes.

At least one candy company isn’t planning any major changes to its formulas.

“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,” Mondelez CFO Luca Zaramella said June 4 at a Deutsche Bank conference.

There’s also the potential for diversification with other kinds of snacks. When Kraft spun out 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 have followed its lead, adding more salty snacks to their lineups to drive more growth. For example, Hershey bought Amplify Snack Brands in 2017, adding SkinnyPop to its portfolio, and Dot’s Homestyle Pretzels in 2021.

“I don’t think they did it to be less dependent on cocoa — they did it to more easily react to the ups and downs of consumer trends and to be able to really diversify their portfolio,” Rosenstock said. “But 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.”

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