Cocoa Prices Have Eggs-Ploded. Which Stocks Will Benefit?

The price of cocoa beans has surged to over $10,000, but which chocolate producers are set to gain or lose?

Christopher Johnson 28 March, 2024 | 11:07AM
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UK Chocolate Main

As the Easter bank holiday approaches, Brits across the country are splurging on their favourite chocolate goodies. From Cadbury's Mini Eggs to boxes of Lindt's Lindor, the coming days will be sweet. Enjoy it while it lasts, because chocolate is about to get more expensive.

This week the price of cocoa surged past $10,000 (£7,924) a tonne, beating record highs, as poor weather brought on by the El Niño climate phenomenon, disease, and poorly-invested plantations reduced crop yields on the Ivory Coast and in Ghana, which produce more than two-thirds of the world's chocolate.

Will Chocolate Get More Expensive?

Ben Laidler, global market strategist at eToro, says the frenzy around cocoa prices will not be felt by the consumer just yet, however.

"If you look at sweets and chocolate inflation in the UK, it's up 9% in the last year," he says.

"If you look at cocoa prices, they are up 230%. So, consumers have not really seen the surge yet and that is because the producers have not passed it on."

"They are still producing chocolate with these lower price inventories from six to 12 months ago. The problem will come when those inventories run out and they start making chocolate with the cocoa priced at $10,000. So, we will all have these price hikes still to come."  

Hershey (HSY), the Morningstar 4-Star-rated chocolate producer, is feeling the pinch already. It has begun to promote "non-chocolate" treats for Easter as surging cocoa prices threaten margins.  

"The chief executive of the company [Michele Buck] just spoke about higher cocoa prices, and he said it will limit the company’s earnings growth in 2024," says John Plassard, investment specialist at Mirabaud Group. 

"That announcement went together with the fact that they announced a plan to cut up to 5% of the workforce because they want to slash $300 million in annual expenses."

Plassard is very pessimistic about Hershey because of its limited pricing power. The business has already seen a dip in profitability. Its 2023 fourth-quarter profit and operating margins have already fallen 12% and 18%, respectively.

At the other end of the spectrum, he believes Morningstar 2-Star-rated Swiss chocolate producer Chocoladefabriken Lindt & Spruengli (LISN) will benefit from the price surge. 4-Star-rated Nestlé (NESN), meanwhile, will avoid any detrimental impact.

"Lindt saw its sales in 2023 jump up 10.3% year on year. The company admitted that most of the growth came from price increases. So, they are using their pricing power to implement the higher cocoa prices," he says.

"Hershey is more like what you would call fast food. Lindt is looked upon as luxury. Nestlé is a much more diversified business – they are not only selling chocolate. So, they will feel less pain from the rise in cocoa prices."

Nevertheless, Laidler now has his eye on how Barry Callebaut (BARN), the Swiss-Belgian chocolate producer – and the world's biggest buyer of chocolate – will cope with higher bean prices.

"The problem it has right now is how does it go and buy all this chocolate," he says.

"It's just had to raise money to bring cash in. It's going to have to raise more money to fund what is basically them buying another harvest's-worth of cocoa at extraordinarily high prices."

Will my Chocolate Bars Get Smaller?

For consumers, the surge will lead to shrinkflation, as companies use less cocoa and reduce the size of their products. This has already been a visible part of life under higher inflation. 

Nonetheless, for Plassard, despite the inevitable increase in chocolate prices, he does not see consumers shying away from the tasty treats.  

The health benefits of chocolate, with studies showing its consumption helps to relieve stress, as well as growth opportunities in China and India, where chocolate has a low penetration with consumers, point to demand continuing. And that too dims the likelihood that prices will return to normal.

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Christopher Johnson  is data journalist at Morningstar

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