Weekly Insights with John Plassard I Chocolate Crisis: Prices Skyrocket

Описание: If your loved ones and children are expecting chocolate for Easter, celebrating it may prove not-so-sweet for your wallet.

The price of cocoa—chocolate's main ingredient—just touched a new all-time high surpassing 10’0000 usd per metric ton, rising more than 130% since de beginning of the year. It should be remembered that Chocolate is made from the fruit of the cacao tree, native to Central and South America. The fruits are called pods, and each pod contains around 40 cocoa beans. The beans are dried and roasted to produce cocoa paste.

Adverse weather and tree disease in West Africa, which produces about two-thirds of the world's cocoa, has decimated output in Ivory Coast and Ghana, the world's two largest cocoa bean producers. Chocolate makers grind cocoa beans to make liqueur and butter used in product formulations.

El Niño brought heavy rains in December, leading to crop damage and the spread of black pod disease. Subsequent extreme heat, aging cocoa trees, and illegal mining further reduced production.

Likewise, cocoa inventories at U.S. ports fell to near a three-year low in January, and U.S. chocolate makers processed 3% fewer cocoa beans in the fourth quarter than they did in the period a year ago.

Meanwhile, prices for sugar, the other key ingredient in chocolate, also have risen about 25% in the past year.

Some analysts project the global cocoa supply shortage will stretch into its fourth year by 2025 amid increasing forecasts for El Nino patterns to dominate global weather.

In terms of economic impact, Chocolate makers around the world have swallowed some of the increase. But not all. The rise of the cocoa prices will have an impact on some companies.

Hershey for example, the largest U.S. chocolate maker, last month said its fourth-quarter profit fell 11.5% from a year ago.

The company's operating margin dropped 240 basis points to 17.5%, reflecting higher costs.

The CEO of Hershey's, said surging cocoa prices will continue limiting the company's earnings growth in 2024. The company announced plans to cut up to 5% of its workforce as part of a strategy to slash $300 million in annual expenses.

On the other hand, some companies are still having a strong pricing power.

In 2023, Lindt for example recorded sales up 10.3% year-on-year, while net income was up 17.9%. But the Switzerland-based company admitted saw most of its growth come from price increases. It put prices up by 10.1% in 2023.

Nestlé acknowledges that they are taking all possible steps to manage rising costs. However, to maintain the highest quality standards, they may sometimes need to adjust the price or weight of certain products.

Other products that use cocoa as an ingredient, such as cosmetics and pharmaceuticals, may see price increases or supply chain disruptions.

Remember that, on average, a company only replicates a rise or fall in the price of cocoa on chocolate after 6 to 12 months (like the chemicals sector with the price of a barrel of oil).

However, that the pricing power has its limits, and if cocoa prices continue to rise, this will have an obvious impact on the margins or sales of ALL producers.
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