Ah Valentine’s Day. The time of year when swooning sentimental souls overspend on flowers and candy while the cynics use this time of year for Olympic-level eye rolls at the silly waste of money. Wherever you fall on the romance spectrum, we are all going to be paying a lot more for chocolate this February 14th.
Fueled by hostile weather conditions for cocoa beans in western Africa the price of cocoa futures on the New York Mercantile Exchange has skyrocketed. After bouncing around between $2,157 and $3,050 between 2019 and 2023, the price of the confection more than doubled between March 2023 to the present where it last traded at $5,600/metric ton.
In Hershey’s (NYSE:HSY) latest quarterly earnings report, the world’s fifth largest candymaker warned that historically high cocoa prices would hinder earnings growth this year. While Hershey (HSY) will continue to take measures to mitigate the higher cost of ingredients, prices for consumers will continue to increase.
We all know that inflation has had a dramatic impact on prices, but chocolate remains the outlier within the food category.
The culprit is heavy rains in Cote d’Ivoire and Ghana, Africa, the two countries which supply two-thirds of the global cocoa beans. Where rain would typically be welcome, too much can be as damaging as too little. The deluge has affected farming activities, spread diseases, and undermined transportation operations.
According to data from the International Cocoa Organization, since October 2023, the official start of the cocoa season, main crop cocoa arrivals at ports in Cote d’Ivoire were down 35% year-over-year and down 51% YoY in Ghana.
Because of the heavy rains, soil leaching is another hardship faced by cocoa farmers as fertilizers to replenish the soil adds to production costs. And as the war between Russia and Ukraine continues to disrupt supplies of fertilizer from Russia — the world’s leading exporter — costs continue to accelerate.
Then again, it’s not just cocoa beans that makes chocolate taste so good. Sugar prices have also been going up, though much less dramatically than cocoa. Since 2020, the price of sugar futures on ICE increased by as much as 111% before coming down by 16% from the high in late December.
Like cocoa, the sugar shortage is also a result of weather conditions, but this time it’s the lack of rain in India and Thailand that’s crimped sugar production. With number two and three out, the leaves Brazil, the world’s largest sugar producer, to pick up the slack. Brazil is expected to increase production by 25% in 2024, but it’s unlikely to compensate for the loss elsewhere.
While Hershey (HSY) CFO Steve Voskuill assured investors that Hershey has got “a lot of tools at [its] disposal to manage the impact of cocoa,” the company is still prepared for price hikes and cost-cutting measures to preserve margins.
Mondolez (NASDAQ:MDLZ) — the world’s third-largest chocolatier — said it will only raise prices as a “last resort” in an effort to provide customers without compromising on taste or quality. CFO Luca Zaramella cautioned that the company expects “a high single-digit [inflation] increase for 2024…driven by significant increases in both cocoa and sugar.”
The good news for Mondolez (MDLZ) and Hershey (HSY) is that the demand for chocolate is resilient and has typically been considered an affordable luxury, the bad news is that it’s still luxury, and its diminished affordability will ultimately lead consumers to reallocate spending on other, more affordable indulgences.