KitKat, Cadbury Egg makers feel pain of record-high cocoa prices

Cocoa costs make up about 10% of Lindt & Spruengli AGâs sales and typically take 6-12 months to filter through due to hedging, including stocks bought at lower prices. Picture: Sam Wasson/Sipa
The sudden and sharp rise in cocoa prices this year is taking a toll on chocolate stocks across the world as investors scramble to assess the impact that confectionery companies could face if costs of the key ingredient remain elevated.
Cocoa futures have more than doubled in 2024 and soared above an unprecedented $10,000 (âŹ9,251) a metric tonne this week. The commodity has even managed to best the dazzling performance of artificial intelligence darling Nvidia Corp, and it even became more expensive than copper.
Thatâs bad news for companies like NestlĂ© and Hershey. While manufacturers buy beans months ahead of time, Wall Street anticipates these companies could struggle to pass the higher costs on to consumers to defend their profit margins if cocoa prices remain high.
âPricing power has its limits,â said John Plassard, a director at Mirabaud Group. He adds that the meteoric rise in cocoa prices âwill undoubtedly affect the margins and sales of all producers in the industryâ.Â
Chocolate-related stocks around the globe are already feeling the heat. Switzerlandâs NestlĂ©, Cadbury and Milka chocolates maker Mondelez International Inc., and Barry Callebaut AG, the worldâs largest producer of bulk chocolate, have all declined this year.
Cocoaâs surge is driving input inflation among these companies, and chocolate makers need higher pricing this year than what analysts currently assume in order to limit the margin impact. For instance, Bloomberg Intelligence estimates cocoa costs make up about 10% of Lindt & Spruengliâs sales and typically take six to 12 months to filter through due to hedging, including stocks bought at lower prices.
Bad weather and disease have hurt the cocoa crop in West Africa, where most of the commodity is grown. Additionally, underpaid farmers in the Ivory Coast and Ghana lack the incentive to expand their output and new European Union regulations stand to add to costs for manufacturers.
âItâs not great to be a chocolate producer right now,â said Evgenia Molotova, senior investment manager at Pictet Asset Management. âIt depends a lot on weather and disease, but this year the harvest is severely affected, so these stocksâ decline probably has further to go.â
However, itâs a problem some packaged foods have managed to tackle in recent years, say some investors.
Mondelez should be able to pass on higher prices to consumers, said Kevin Dreyer, co-chief investment officer of value at Gabelli Funds, which owns shares in the company. He said Mondelez handled the inflationary environment of the last few years âas well as anyone in the food industryâ.