We return to talking about agricultural raw materials, with the price of cocoa skyrocketed in these first months of 2024.
With inflation kept under global control and central banks trying to reduce the cost of money after record interest rates, upward movements in raw materials are a cause for concern. The transfer of higher costs from the producer to the consumer, in fact, could cause inflation to rise again.
THE cocoa prices have more than tripled over the past year, creating problems for candy makers and other food companies that use the ingredient to make chocolate. In recent years, the price of cocoa was around $2,500 per ton. In April, it reached an all-time high of more than $11,000 per ton.
Ever higher cocoa price? The reasons for the increase
There is a price pressure which is taking over a specific sector of global agriculture: that of cocoa beans.
The raw material is under pressure for several reasons. West Africa, which produces the majority of the world’s cocoa supply, has been hit by crop diseases and by lower prices paid to farmers at the point of sale, called “farmgate pricing”, which push them to choose more profitable crops like rubber instead of cocoa. According to a Rabobank report from May, this season’s cocoa crop is expected to record largest deficit in six decades.
Reuters reported on Wednesday that the Ghanathe second-largest cocoa producer, is trying to delay the delivery of up to 350,000 tonnes of beans for next season, pushing prices up again.
While this year’s surge in cocoa prices was historic, it likely won’t be the last time food companies find themselves paying more for the commodity. Analysts are already predicting another cocoa shortage next yearalthough it will probably be less dramatic than this season’s.
However, systemic issues, such as government-controlled producer prices and climate change, will likely continue to harm the crop. Additionally, the use of child labor and slavery on West African cocoa plantations has led to lawsuits and scandals for candy companies.
In the long term, this means that many companies will have to look for more permanent solutions. In some cases, this may mean alternatives to cocoa.
More bitter desserts? What can change with rising cocoa prices
For now, many of the largest candy companies such as Hershey the maker of M&M’s Mars, the owner of Kinder Ferrero and Cadbury maker Mondelez are likely protected from rising cocoa costs, thanks to long-term contracts that lock in the prices they pay for key raw materials to protect them from events just like this.
This gives them some time to deal with the problem. But in 2025, they will probably end up pay a lot more for their cocoa.
In recent earnings calls, Mondelez and Hershey executives said they believe market speculation is at least partly driving cocoa’s surge. Prices may drop in September once more information about the new crop becomes available, but that doesn’t mean they will return to normal.
J&J Snack CEO Daniel Fachner is keeping an eye on the cocoa and chocolate prices. The company owns brands including Dippin’ Dots, SuperPretzels and Hola Churros. Chocolate is a common flavor in its portfolio, which includes treats like a chocolate-filled churro. A hypothetical solution, proposed by Fachner, could involve reducing the number of chocolate chips from 12 to nine in a given product. He also said J&J is looking for possible substitutes that might work for some of its recipes.
RBC Capital Markets analyst Nik Modi cited Hershey’s new Jumbo Reese’s Cup as a creative solution.
“This has more peanut butter in it, so it’s a nice way of trying to bring innovation to the market at a premium price point, giving the consumer a sense of getting value, but just changing the product itself to reduce the reliance on chocolate,” has explained.
Food companies that don’t primarily deal with chocolate may start to shun the flavor, especially when it comes to new products.
Startups like Voyage Foods and Win-Win have made cocoa-free chocolate using alternatives like grape seeds and legumes.
There is also the option of diversifying production with other types of snacks. When Kraft founded Mondelez more than a decade ago, it already had Triscuit, Sour Patch Kids and Wheat Thins snacks in its portfolio, as well as Milka, Oreo, Toblerone and Chips Ahoy chocolate products.
Other candy companies have followed suit, adding more savory snacks to their lines to drive more growth. Leaning into some categories other than chocolate, be it salty snacks, gummies or gummy products, could be a good way to combat the cocoa crisisaccording to Steve Rosenstock, head of consumer products at Clarkston Consulting.
