You may notice that the taste of chocolates on Halloween this time is slightly different; less chocolatey and some even more sugary. Chocolate makers collectively this year admit that they reduce the cocoa composition in their chocolate, but not with confectionery giants Hershey's (HSY, Financial) and Mondelez (MDLZ, Financial).
The prices of the benchmark cocoa futures have risen more than 300% from less than $3,000 per metric ton in April 2023 to its all time high in April 2024 at $11,722 per metric ton. Although the price has fallen to $7000s in November, it's still 80% higher than last year's. This dramatic increase has been driven by a combination of factors, including supply shortages and climate change:
- Supply Shortages: 60% of world cocoa beans are produced in West Africa and Central Africa and these countries have reported to reduce production and cause global shortage of cocoa. The rising expenses for fertilizers and pesticides have gone up and cost towards transport has put extra pressure for cocoa producers.
- Climate Change: Natural events like droughts have adverse effects on yield and available area for cocoa cultivation, its production and profits.
These challenges cause cocoa prices to surge and the chocolate firms have been forced to cut their cocoa content as a means of protecting their profit margins. Mondelez in their Q3 earnings call admitted that the anticipated cocoa cost headwinds might press their margins.
But as for now things are well manageable as Hershey's and Mondelez are reported using their cocoa reserves that they bought two years ago at $2,500 and $3,000 per metric ton (mt). And they have the power to hedge longer periods to pay $3,250 mt in 2024 and $5,000 mt in 2025.
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