The Commercial-News, Danville, IL

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July 18, 2014

Your chocolate addiction is only going to get more expensive

WASHINGTON — For nearly two years, cocoa prices have been on the rise. Finally, that's affecting the price you pay for a bar of chocolate - and there's reason to believe it's only the beginning.

American chocolate giant Hershey's announced this week that it was raising the price of its chocolate to compensate for abnormally high global cocoa prices. "Commodity spot prices for ingredients such as cocoa, dairy and nuts have increased meaningfully since the beginning of the year," Michele G. Buck, president of the company's North America operation, said in a statement. The price increase, which amounted to roughly 8 percent, was effectively immediately.

Cocoa prices have indeed been on the rise. They are up more than 45 percent since early 2013.

Cocoa prices are but one of several factors that together dictate the price you pay to satisfy your chocolate craving - sugar, milk, packaging, processing, and shipping costs all contribute, too - but they are an important one. They are also one that chocolate makers can reasonably expect to fluctuate, because they tend to be fairly volatile.

Everything from poor weather to pests, and even political turmoil in major cocoa producing countries can affect its price. Which is why chocolate makers like Hershey's rarely pass on cocoa price swings to consumers. They factor the volatility into their pricing, assuming that pinched profits today will be followed by swollen profits tomorrow.

But this is precisely why Hershey's chocolate price hike should raise a few (million) eyebrows. Cocoa isn't getting more expensive these days because of a short-term supply and demand imbalance; it's getting pricier because of what is likely going to be a long and sustained inability to make as much chocolate as the world wants to eat. Global chocolate demand is expected to soar in the coming years, but cocoa farmers aren't likely going to be able to pick up the pace commensurate with the world's growing appetite.

Developing countries (ahem, China) will drive the bulk of chocolate demand growth. China is already eating twice as much chocolate as it did only twelve years back - and chocolate is still slated to be the country's fastest-growing confectionary sector through at least 2016, but likely longer. And Brazil and India have seen significant increases in their chocolate appetites, too.

"Emerging-market demand is the principle reason behind the steady and consistent rise that we've seen in the cocoa market," Sterling Smith, a futures specialist at Citigroup told the Wall Street Journal last week. "Is that demand enough to propel it higher? Oh, yes."

If America's largest chocolate company feels the need to adjust its chocolate prices, and specifically cites the rising price of cocoa, that likely means the industry is anticipating a gradual and sustained increase, rather than the usual up and down. Meaning that an industry-wide chocolate price-hike is virtually guaranteed. "Usually it's [Hershey's price hikes] followed by their competitors announcing price increases as well," Erin Lash, a senior equity analyst for Morningstar, told Reuters earlier this week.

 

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