Cocoa Prices Hit Record High: How Does The Market React

Valentine’s Day is over with chocolate being one of the most popular gifts once again. Chocolate sales usually go up this time of year as demand is high. What wasn’t expected was the unprecedented surge of cocoa prices in the commodity market.

As milk and dark chocolate have cocoa beans as basic ingredients, it would be interesting to review the performance of cocoa as a trading commodity in the last few months and what the forecasts are.

Cocoa Futures Prices Break Record 

On February 12th, cocoa prices reached a record-high level trading at $6,030 per ton. In the next days, cocoa prices slightly retreated but still hovered quite close to the Feb.12 figure. Cocoa futures prices have surged more than $1,000 or nearly 40% since the start of the year.

As some may wonder why cocoa prices jumped like that, the answer lies with weak supply. Bad weather conditions have taken a toll on the cocoa crops in West Africa that produce 75% of the global cocoa beans supply. The El Nino weather phenomenon that affects the cocoa cultivation areas since January, and is expected to last through March 2024, has brought drier temperatures in the region, hurting crop yields in two of the of the largest cocoa producer countries in the world, Ghana and Ivory Coast.

According to the International Cocoa Organisation,  Africa accounts for three quarters of global cocoa production, while the American continent make up 20%, leaving 5% to Indonesia and Papua New Guinea.

Commenting on elevated cocoa prices, ING analysts noted that “the cocoa market was already in a deficit environment in the two previous seasons, which has meant that global inventories are already at their lowest levels since the 2015/16 season.” In their report, published on Feb. 15th, they stressed that the Ivory Coast cocoa regulator “has halted forward sales for the 2024/25 season until there is some clarity on how next season’s crop may play out.”

Mondelez And Hershey Express Fears Over Cocoa Prices

Two of the largest chocolate producing companies in the world,  Mondelez International and Hershey Company, have already noted that rising cocoa prices are likely to play a significant role in the future pricing of products based on cocoa beans.

Mondelez International: Raising Prices, Profits Exceed Expectations In Q4 2023

Mondelez International is a multinational confectionery, food, holding, beverage and snack food company based in the US. Its company portfolio includes popular chocolate brands such as Milka, Côte d'Or, Toblerone, Cadbury, Green & Black's, Freia, Marabou, and Fry's.

On January 30th, the company published its Q4 2023 earnings report. The report surpassed market analysts’ expectations as Mondelez International posted $950 million profit in the fourth quarter of 2023. The company's revenue for the last quarter of the previous year was reported as $9.31 billion, once again exceeding expectations.

Mondelez International will continue raising prices on some of its products in 2024 to combat cocoa inflation. Company CEO Dirk Van de Put told reporters that increasing prices of cocoa and sugar would force Mondelez International to evaluate prices although the latest sales reports showed a 5.5% drop in sales in North America.

Price hikes are not something new on the table. Prices of Mondelez chocolate in Europe, its biggest market, rose 12% to 15% in 2023, CEO Dirk Van de Put said last month in a call with Wall Street analysts. Mondelez International shareholders, such as Parnassus Investments, have stressed that the company should “be strategic about passing the price increase to consumers this year.” 

The Hershey Co.: Pricing As A Tool To Help Manage Business

Mondelez International is not the only company that is considering raising product prices. Hershey Co management has also expressed the will to adjust prices on the back of elevated cocoa costs. Hershey Co. CEO Michele Buck said last week that “given where cocoa prices are, we will be using every tool in our toolbox, including pricing, as a way to manage the business.”

Hershey Co. is a multinational confectionery company with headquarters in Pennsylvania, US. Some of the company’s products, including licensed ones, are Kit Kat, Hershey bar, M&M, Dream, Dagoba Organic Chocolate and others.

According to a Reuters report, Hershey Co. has “outlined a new two-year restructuring program that would generate about $300 million in pre-tax savings after projecting annual sales and profit below Wall Street expectations.” The company’s fourth quarter earnings report revealed that Q4 2023 net sales came in at $2.66 billion, missing estimates of $2.71 billion. Organic sales volumes fell 6.6% as consumers impacted by high inflation figures cut back spending on expensive chocolates and candies. 

Hershey Co. management forecasts 2024 net sales to increase between 2% and 3% year-on-year, compared with analysts' estimates of a 3.4% figure.

Trading Cocoa With Admirals

Prices of commodities like cocoa are subject to supply and demand rules. Price surges such as the one observed involving cocoa could make commodities appear appealing to beginner traders. Nevertheless, making the right decisions requires experience and a thorough knowledge of how trading works.

Beginner traders should make up for the lack of experience by studying how to build a solid trading strategy. Brokers usually offer access to educational materials such as articles, how-to guides, webinars that help traders strengthen their skills. Studying trading mechanisms is one of the pillars of designing a comprehensive trading plan that beginner traders should take into consideration.

Traders who just start their journey should learn to use risk management tools such as the stop loss and take profit orders. These tools are available on the most popular platforms such as the MT4 and MT5. While risk management tools can’t eradicate risk, they can mitigate it helping beginner traders limit their losses in case markets move against their plans.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.