The Easter Bunny might want to deliver his baskets with an armored truck this year. Cocoa, the bean that acts as the foundational ingredient for chocolate, is nearing $10,000 a metric ton thanks to plant disease and droughts in West Africa, and candy companies are running out of ways to deal with it.
“From a cocoa bean price point of view, it is an unprecedented price hike,” said Martin Hug, CFO of Lindt and Ghirardelli parent company Lindt & Sprüngli, during an earnings call earlier this month. The commodity has tripled in price from the same time a year ago in spot markets.
Chocolate companies typically seek to insulate themselves from the volatility of spot markets by buying delivery contracts in the future in order to bring some stability to their operational thinking. During a February earnings call, Hershey’s CFO Steve Voskuil told analysts that his company has its costs locked up a year out. Likewise, Lindt said it had long ago decided to go “long” on cocoa — buying cheap now with the expectation that things will get more expensive later — in order to keep price hikes manageable.
Still, the U.S. Bureau of Labor Statistics (BLS) reported that producer prices for chocolate and candy companies are 10% higher than they were a year ago, the first double-digit increase in a year after months of slowing inflation.
Cote d’Ivoire and Ghana in West Africa, which together account for more than half of all cocoa production, have been dealing with changing weather patterns and climate change. Periods of heavy rain have been followed by periods of not enough rain. On top of that farmers have been dealing with swollen root disease, which is typically combatted by cutting down trees and replanting them from scratch.
Bloomberg reports that the National Confectioners Association has noted that consumers are buying chocolate less often because candy companies haven’t been able to eat all the rising cocoa costs.
“Sales promotions took on a key role as fewer consumers perceive chocolate and candy to be as affordable as it has been traditionally,” the NCA study says (pdf). The BLS found that chocolate chip cookie prices have reached a record $5.25 in February.
And what happens when all those commodity hedges run out?
“I think it is important to remember that particularly in cocoa, given the current situation, it is common to industry price-increase,” said Luca Zaramella, CFO of Oreo and Toblerone parent Mondelez International. “Most likely, that will have to be taken.”