Hershey's Warns of Price Increases as Cocoa Crops Threatened

Cocoa futures touched a more-than-decade high as heavy rains and crop disease in West African nations producing the key ingredient for chocolate make it more expensive for consumers to buy the confectionery.

So far, NYMEX September Cocoa Futures (CJ:NMX) have risen nearly 40% year-to-date. Cocoa prices reached a 12-year high in June, hitting $3,562/metric ton before they eased back slightly in July. Prices of cocoa on August 8 traded at $3,333/metric ton.

Heavy rains in West Africa have accelerated the spread of black pod disease, which causes cocoa pods to turn black and rot, and may further disrupt prices in the global chocolate trade, which is estimated to be worth more than $1 trillion. The spread of the disease from the extreme wet weather could result in lower cocoa crop quality and production, exacerbating the deficit in supplies.

Supply Uncertainties

The heavy rains that occurred in the Ivory Coast have raised concerns that cocoa plantations were at risk of being flooded, which could in turn exacerbate the reduction in cocoa production in the West African country during the latter part of the 2022/23 mid-crop, the International Cocoa Organization said in its monthly report for June. The 2022/23 cocoa season is heading towards a supply deficit, the organization said in its monthly report for April.

“The market was mostly constrained by the uncertainties surrounding the supply side due in part to the adverse meteorological conditions that prevailed” in the Ivory Coast, the International Cocoa Organization said in June. “The potentially harmful effect that the floods could have on the country’s production generated strong tension and thereby contributed to bolstering cocoa futures prices.”

Ivory Coast's cocoa bean harvest will fall by 20% in 2023 compared to last year, according to Bloomberg estimates. In Ghana, it is projected to fall below the historical average. The two countries account for more than 60% of the world’s cocoa production.

“The major production regions, particularly in Ivory Coast, which accounts for more than 40% of global cocoa production, have had very wet conditions and flooding, which has been causing rotting and disease in the trees,” Rabobank associate analyst Pia Piggott said.

The arrival of the El Nino weather phenomenon is forecast to bring lower than average rainfall and powerful Harmattan winds to West Africa, another factor that is likely to disrupt cocoa production. Cocoa prices rallied to 12-year highs in 2016 after an El Nino weather event caused a drought that hampered global production.

Prices of sugar, another chocolate ingredient, are likely to remain elevated through the year with the world’s supply surplus forecasted to dip sharply from regions, including Europe, China, Thailand and India, as shifting weather patterns related to El Nino raise concerns about production. Prices of cocoa butter, a large part of what goes into the making of a chocolate bar, have increased 21% year-to-date, CNBC reported, citing data from food commodity price database Mintec.

Chocolate prices

International chocolate makers Lindt & Sprungli AG (LDSVF) and Hershey Co. (HSY) have issued warnings about price increases. Swiss chocolate maker Lindt said on July 26 that it has offset some of the cost increases incurred so far through efficiency improvements and long-term hedging for cocoa and other raw materials.

“In some cases, however, these increases also had to be passed on to trade partners through price adjustments made over the past few months,” it said. Lindt posted a first-half operating profit above consensus and raised its full-year revenue forecast, signaling strong chocolate demand.

Hershey’s Senior Vice President and CFO Steve Voskuil said that the company expects “slightly higher price realization” in the second half of the year after reporting net price realization of 7.7% in the second quarter, which was in line with expectations.

“We now expect slightly higher price realization in the second half of the year as our previously announced confection price increase begins to take effect,” Voskuil said. “We continue to expect the majority of this pricing impact to hit in 2024.” Hershey’s net sales of $2.49 billion in the quarter fell short of analyst expectations of $2.50 billion. The company still expects to meet its previous forecast of approximately 8% net sales growth in 2023.

“I believe that consumers should brace themselves for the likelihood of higher chocolate prices,” S&P Global Commodity Insights’ Principal Research Analyst Sergey Chetvertakov told CNBC in an email, as chocolate producers are compelled to pass on higher production costs to consumers.