Benzinga - by Benzinga Neuro, Benzinga Staff Writer.
The price of cocoa has doubled in the past year, reaching an all-time high and potentially leading to a surge in chocolate prices.
What Happened: The cost of cocoa has doubled over the past year, with the most active futures contract reaching $5,600 a metric ton on Thursday, according to Bloomberg. This is the highest price the contract has reached in 65 years of Bloomberg data, reported Business Insider.
The primary cause of this shortage is extreme weather conditions in West Africa, the source of most of the world’s cocoa beans. These conditions have led to a crop disease and now, dry weather is further hampering production.
Paul Davis, the president of the European Cocoa Association, warned that prices could rise to $6,000 a ton. The situation is expected to persist for another 18 months to three years, with no immediate solution in sight.
“We’ve got headwinds all over the place at the moment,” he said. “Very expensive fertilizers, tough conditions for farmers, tough conditions for consumers.”
This shortage is expected to impact chocolate manufacturers like Hershey Co (NYSE:HSY), which stated in its recent earnings report that “historic cocoa prices” are likely to impede earnings growth in 2024.
Why It Matters: The surge in cocoa prices is likely to have a significant impact on chocolate manufacturers, especially those who are heavily reliant on cocoa. This situation could lead to an increase in the cost of chocolate products for consumers.
Earlier in September, Piper Sandler analyst Michael S. Lavery cautioned that Hershey might face margin pressure due to soaring cocoa and sugar costs. He noted that cocoa costs were up by approximately 50% in the third quarter of 2023, reaching record levels. He also suggested that these price levels were likely unsustainable and driven more by speculation than fundamentals.
In its recent earnings report, Hershey reported stable Q4 earnings amid slow sales growth and rising cocoa costs. The company’s fourth-quarter fiscal 2023 sales were $2.66 billion, a slight increase of 0.2% year-over-year, missing the consensus of $2.70 billion. Adjusted EPS was $2.02, flat year-over-year, above the consensus of $1.95.
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