Confectionery manufacturers face high cocoa prices, get creative

There is price pressure affecting a specific corner of global agriculture – and it’s bitter.

Cocoa prices have tripled over the past year, creating a major headache for confectioners and other food companies that use the ingredient to make chocolate.

In recent years, the price of cocoa was around $2,500 per metric ton. But reports of a weaker-than-expected crop fueled concerns about supply, fueling the commodity’s run in recent months. Cocoa hit an all-time high of more than $11,000 per metric ton in April. The rise in prices has moderated a bit since then, but production is still well above what food companies are used to paying.

Right now, many of the biggest candy companies – Hersheymaker of M&M Mars, owner of Kinder Ferrero and parent Cadbury Mondelez — are likely to be protected from higher cocoa costs, thanks to long-term contracts that lock in the prices they pay for the key commodity to protect them from events like this. This gives them some time to deal with the matter. But in 2025, they will likely end up paying a lot more for their cocoa.

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

March declined to be interviewed for this story. Mondelez, Ferrero and Hershey did not respond to CNBC’s requests for comment.

West Africa, which grows most of the world’s cocoa supply, has been hit by crop disease and lower prices paid to farmers at the point of sale, called farm prices, which push them to cultivate more profitable crops like rubber instead of cocoa. According to a Rabobank report from May, cocoa production this season is expected to experience the biggest deficit in at least six decades.

Reuters reported on Wednesday that Ghana, the second-largest cocoa producer, is looking to delay a shipment of up to 350,000 tonnes of beans for next season, pushing prices higher again.

In recent earnings calls, executives from Mondelez and Hershey said they believe market speculation is driving at least some of the cocoa growth. Prices may drop in September, once more information is available about new production – but that doesn’t mean they’ll return to normal.

The rising cost of goods comes at a difficult time for many food companies. Over the past two years, many have raised prices to cope with inflation that affected a wider range of goods. As a result, shoppers have become more selective about what they buy and are more dissatisfied with the prices they see in grocery stores. Consumers’ focus on value leaves confectionery companies with little leeway when it comes to pricing to accommodate the higher cost of cocoa.

And then there’s shrinkage, a buzz word that’s entered the common man’s lexicon over the past couple of years. Companies will reduce the quantity or weight of a product while the price remains the same. But consumers have known this trick. A YouGov poll conducted in October found that 72% of American respondents had noticed shrinking inflation in food products.

As a result, many companies will have to get more creative.

J&J Snack Foods CEO Daniel Fachner has been keeping an eye on cocoa and chocolate prices. The company owns brands including Dippin’ Dots, SuperPretzel and Hola Churros and makes products for other companies, such as Subway’s long-legged churro. Chocolate is a common flavor in her portfolio, which includes treats such as a chocolate-filled churro.

“It’s not going to stop us from using chocolate, but it’s going to make us think and say, ‘Now, if we do this innovation at that new price, can it sell?’ And then when we sell it, ‘Do is it at a low enough cost that the customer can sell it and still make a good margin?'” Fachner told CNBC in May.

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 any potential 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 one has extra peanut butter, so it’s a good way to try to bring innovation to the market at a premium price, let the consumer feel like they’re getting value, but just change the product itself to reduce the chocolate addiction,” he said. he.

For food companies that don’t primarily deal in chocolate, they may start to shy away from 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.

While the rise in cocoa prices this year has been 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 year, though it will likely be less dramatic than this season’s.

However, systemic issues, such as government-controlled farm prices and climate change are likely to continue to hurt bean crops. Plus, the use of child labor and slavery on cocoa farms in West Africa 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.

“There are examples where companies are increasing the amount of non-cocoa additives, like sugar, more economical things like cocoa butter equivalents, shea butter, palm oil, coconut oil, those types of things,” Rosenstock said.

Prescription reformulation takes about nine months on average, according to a research note published Thursday by Bank of America analyst Antoine Prevot. He said he thinks fast-moving consumer goods companies have been asking for their formula changes since the beginning of this year, meaning the new candies could start rolling out as early as August.

There are also more extreme substitutes. Startups like 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’re going to do some cost tightening, but we’re not going to change recipes or do things that aren’t necessarily the right thing for the business in the long term,” Mondelez CFO Luca Zaramella said June 4 at a Deutsche Bank conference.

There is also the possibility of diversification with other types of food. When Kraft launched Mondelez more than a decade ago, it already had triscuit snacks, Sour Patch Kids and Wheat Thins in its portfolio, in addition to Milka, Oreo, Toblerone and Chips Ahoy chocolate products.

Other candy companies have followed suit, adding more salty foods to their lineups to drive more growth. For example, Hershey acquired 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 being able to tap into 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.”