Candy makers face steep cocoa prices, get creative

Price pressures are building in certain sectors of global agriculture, and it’s not without bitterness.

Cocoa prices have more than tripled since last year, creating major headaches for candy makers and other food companies that use cocoa as an ingredient in chocolate.

In recent years, cocoa prices have hovered around $2,500 a ton. But reports of smaller-than-expected harvests have sparked supply concerns, sending the commodity’s price soaring in recent months. In April, cocoa hit an all-time high of more than $11,000 a ton. Prices have since subsided somewhat, but cocoa is still trading at far more than food companies would typically pay.

For now, most of the big candy companies HersheyM&M’s maker Mars, Kinder owner Ferrero and Cadbury’s parent company Mondelez — Farmers are likely protected from spikes in cocoa prices in this instance thanks to long-term contracts that lock in the price of their staple commodity, giving them time to fix the problem. But by 2025, farmers are likely to end up paying much more for cocoa.

“It’s definitely impacting how these companies operate because the cost impact is so significant,” said Steve Rosenstock, head of consumer products at Clarkston Consulting, which advises clients on how to deal with issues such as rising cocoa prices.

Mars declined to participate in this story. Mondelez, Ferrero and Hershey did not respond to CNBC’s requests for comment.

West Africa, which produces most of the world’s cocoa supply, has been hit by crop disease and lower prices paid to farmers at the point of sale (farm prices), forcing them to replace cocoa with more profitable crops like rubber. This season’s cocoa harvest is expected to post its biggest deficit in at least 60 years, according to a May report from Rabobank.

Reuters reported on Wednesday that Ghana, the world’s second-largest cocoa producer, is considering postponing deliveries of up to 350,000 tonnes of beans until next season, sending prices rising again.

On recent earnings calls, executives from Mondelez and Hershey said they believe at least some of the high cocoa prices are the result of market speculation. Prices could fall in September as more information becomes available about the new crop, but that doesn’t mean prices will return to normal.

Rising commodity prices have been a tough time for many food companies. Over the past two years, many companies have raised prices, Inflation affects a wider range of products, causing shoppers to become more picky about what they buy and dissatisfied with the prices they see at grocery stores. As consumers become more value-conscious, candy companies have little leeway in terms of pricing to keep up with the rising cost of cocoa.

And shrinkflation, a buzzword that has entered the public vocabulary over the past two years, involves companies reducing the quantity or weight of a product while keeping the price the same. But consumers are catching on to the trick: A YouGov survey conducted in October found that 72% of U.S. respondents had noticed shrinkflation in food products.

As a result, many businesses will have to get more creative.

J&J Snack Foods CEO Daniel Fachner keeps a close eye on cocoa and chocolate prices. The company owns brands such as Dippin’ Dots, Super Pretzels and Holla Churros, and also makes products for other companies, such as Subway’s one-foot churro. Chocolate is a common flavor in the company’s portfolio, which also includes treats such as chocolate-filled churros.

“It’s not like the use of chocolate will go away, but people will start thinking: ‘If I do this innovation at a new price point, will it sell?’ And then when they do sell it, ‘Is the cost low enough that customers can sell it and make a profit?'” Fachner told CNBC in May.

One hypothetical solution Fachner offered would be to reduce the number of chocolate chips in certain products from 12 to nine. He also said J&J is looking at alternatives that could work in some of its recipes.

RBC Capital Markets analyst Nik Modi pointed to Hershey’s new Jumbo Reese’s Cups as one creative workaround.

“There’s a lot of peanut butter in this product. It’s a great way to bring innovation to market at a premium price point and give consumers a sense of value while trying to change the product itself to reduce their reliance on chocolate,” he said.

Food companies that don’t primarily focus on chocolate may start to steer clear of chocolate flavors, especially for new products.

“I think more or less people will try to avoid chocolate at this point,” PM Modi said.

While this year’s spike in cocoa prices is historic, it won’t be the last time food companies increase prices of the commodity. Analysts are already predicting another cocoa shortage next year, though it will likely be less dramatic than this season’s.

However, bean harvests are likely to continue to deteriorate due to government controls on farm prices and structural issues such as climate change. Child labor and slavery on cocoa plantations in West Africa have led to lawsuits and scandals against candy companies.

In the long term, it means many companies will have to look for more permanent solutions – and in some cases, that might mean alternatives to cocoa.

“There are examples of companies increasing the amount of sugar and non-cocoa additives such as cocoa butter equivalents, shea butter, palm oil and coconut oil, which are more economical,” Rosenstock said.

On average, it takes about nine months to revise a recipe, according to a research report published Thursday by Bank of America Securities analyst Antoine Prevost, who believes FMCG companies have been considering formula changes since the beginning of the year, meaning new candies could trickle out as early as August.

And there are more extreme substitutions: Startups like Voyage Foods and Win-Win are making cocoa-free chocolate using substitutes like grape seeds and legumes.

At least one candy company isn’t planning any major changes to its formula.

“We will cut costs, but we’re not going to change our recipes or do anything that isn’t necessarily right for the business in the long term,” Mondelez CFO Luca Zalamella said at a Deutsche Bank conference on June 4.

It could also diversify into other types of snacks: When Kraft spun off Mondelez more than a decade ago, the company already had snacks like Triscuits, Sour Patch Kids and Wheat Thins in its portfolio, in addition to chocolate products Milka, Oreo, Toblerone and Chips Ahoy.

Other candy companies are following Hershey’s lead and adding salty snacks to their lineups in an effort to grow further. For example, Hershey acquired Amplify Snack Brands in 2017, adding Skinny Pop to its portfolio, and Dots Homestyle Pretzels in 2021.

“I don’t think they’re doing it to reduce their reliance on cocoa, so they can more easily navigate the ups and downs of consumer trends and really diversify their portfolio,” Rosenstock said. “But being able to lean into non-chocolate products like salty snacks, jelly beans and gummy products, I think that’s a good way to combat the cocoa crisis.”