Key takeaways

  • Cocoa prices are rising due to a global supply shortage, chronic underinvestment in cocoa farms and investor speculation.
  • Chocolate brands are grappling with the impact of higher cocoa costs, and this is resulting in price hikes and shrinkflation.
  • J.P. Morgan Research projects cocoa prices will come down slightly over the medium term, tracking around the $6,000 mark.

Cocoa prices have skyrocketed in recent months, reaching historical highs of nearly $10,000 per metric ton in March 2024. What’s driving this unprecedented increase? How will this impact chocolate brands? And where is the market headed?  

Why are cocoa prices rising? 

The rise in cocoa prices is largely due to a global cocoa shortage. Climate change-induced drought has ravaged crops in West Africa, which contributes around 80% of the world’s cocoa output. According to the International Cocoa Organization, global cocoa supply will decline by almost 11% over the 2023/2024 season.

There are also deep-rooted structural issues at play, including chronic underinvestment in cocoa farms. Today, the crop is still largely cultivated by smallholder farmers, many of whom struggle to make a living income and lack the means to reinvest in their land — which translates to lower yields over time. “Cocoa is a market where the grower produces a very high-value good but receives a very low share of the actual value chain. As a result, replanting rates are very low and cocoa trees are ageing,” said Tracey Allen, an Agricultural Commodities Strategist at J.P. Morgan. 

This is all further compounded by investor speculation, which is driving prices up. “What was a structurally led, supply-side issue has been exacerbated by dry weather and a strong Harmattan [a season in West Africa]. It has now manifested in an investor-driven parabolic move in prices, especially over the last six weeks,” Allen added. “For instance, non-commercial investors now hold over 60% of total open interest across cocoa futures and options in the New York market, which is an historical high. Consumers are now scrambling to hedge forward exposure in thin liquidity.”

Chocolate sales have declined in recent months

Line chart showing that chocolate sales have declined while prices have risen since 2022.

“We have seen some shifting away from chocolate to other products, whether that’s cookies or salty snacks. We think chocolate’s losing a bit of share, so consumers are certainly reacting to higher prices.”

What’s the impact on chocolate makers? 

Chocolate brands are grappling with the impact of higher cocoa costs, and many are passing on the burden to consumers in the form of price hikes.

“In the U.S., Hershey has been very clear that list pricing is still one of the most important arrows in their quiver to offset inflation. Over the next year or two, they will probably pass on more cocoa inflation, and consumers will see higher prices for their chocolate as a result,” said Ken Goldman, Lead Equity Research Analyst for U.S. Food Producers and Food Retailers at J.P. Morgan. “I’m sure Hershey’s competitors like Mars and Lindt are going to do the same — it’s just a matter of time.”

This could, however, dampen consumer demand. “Companies will have to be careful about how they manage the elasticity of demand for chocolate, especially as consumers might not be able to take the price hikes needed to offset the huge increase in cocoa costs. We see an impact on volume whenever prices are raised, even in other categories that are deemed inelastic,” said Celine Pannuti, Head of European Staples & Beverages at J.P. Morgan.

Indeed, chocolate sales have already taken a hit. “In the U.S., snacks in general have been slumping a little bit over the last two months, likely because they are a little bit more discretionary in nature. Within the category itself, we have seen some shifting away from chocolate to other products, whether that’s cookies or salty snacks,” Goldman added. “We think chocolate’s losing a bit of share, so consumers are certainly reacting to higher prices.”

In a bid to regain market share, some manufacturers are innovating with recipes that call for less cocoa — for instance, chocolate bars containing a higher proportion of fruits and nuts — while others are reducing the size of their products. “We’ve seen cases of shrinkflation, so for the same price, the chocolate bar is much smaller,” Pannuti noted. “But while these are some avenues that companies are taking, consumers will ultimately have to face up to higher prices.”

“Companies will have to be careful about how they manage the elasticity of demand for chocolate, especially as consumers might not be able to take the price hikes needed to offset the huge increase in cocoa costs.”

Will cocoa prices continue to surge? 

While J.P. Morgan Research projects cocoa prices will remain elevated, they are expected to come down slightly over the medium term, tracking around the $6,000 mark.

“The market has been well overshot, so I wouldn’t be surprised if prices move off the peak before stabilizing at an elevated level, until there is a genuine supply-side response,” Allen noted.

The latter could materialize thanks to global climate patterns, which could increase yields in some cocoa-producing regions. The ongoing El Niño phenomenon (the warming of sea surface temperatures) is gradually weakening, which could herald a transition to La Niña (the cooling of sea surface temperatures) in the summer. “Under this scenario, weather threats would diminish and we should receive improved rainfall across West Africa and Asia,” Allen said. “This would be supportive of main crop output from over 80% of the world’s cocoa-producing countries including Côte d’Ivoire and Ghana, paving the way for cocoa prices to ease off the historic highs. Increasing cacao plantings will be critical to boost longer-term supply.”


How are rising cocoa prices impacting chocolate brands?

Cocoa prices have soared to an all-time high due to a global supply shortage. What’s the impact on chocolate makers, and what are they doing to adapt? Here, Ken Goldman, Lead Equity Research Analyst for U.S. Food Producers and Food Retailers, and Celine Pannuti, Head of European Staples and Beverages, share their thoughts with Shirley Wang, a credit analyst covering the investment-grade and high-yield consumer and retail sector.

How are Rising Cocoa Prices Impacting Chocolate Brands?


Shirley Wang:
Cocoa prices have reached multi-decade highs due to a global supply shortage. How is this effecting chocolate makers? And is consumer demand suffering as a result? Welcome to Research Recap on J.P. Morgan's Making Sense Podcast channel. I'm Shirley Wang, a credit analyst covering the investment-grade and high-yield consumer and retail sector at J.P. Morgan. Today, I'm joined by my colleagues, Ken Goldman, lead equity research analyst for US food producers and food retailers, and Céline Pannuti, head of European staples and beverages, and we're here to discuss all things chocolate. Ken and Céline, thanks so much for joining us today.

Ken Goldman:
Thank you for having us.

Céline Pannuti:
Thank you so much.

Shirley Wang:
To kick things off, Ken, can you start us off by providing some context? How is the ongoing cocoa shortage affecting the prices of chocolate on supermarket shelves?

Ken Goldman:
Up and about to go up more. Chocolate prices are high, obviously, like every other food item, but whereas most food inflation, we're probably done with and prices will remain high, because cocoa is rising so much, chocolate prices will have to rise more. Now, this may take some time. Hershey, for example, has said that right now they are not taking a lot of incremental list pricing, meaning it won't raise the actual price that they charge pre-discount to their customers. But they've also been very clear recently that list pricing is still one of the most important arrows in their quiver to offset inflation. And so, I think over the next year, two years, they will pass on as much as they possibly can of cocoa inflation. And as a result we as consumers we'll see higher prices for our chocolate. And I'm sure Hershey's competitors like Mars and Lindt and everyone else who's big in the United States is going to do the same. It's just a matter of time.

Shirley Wang:
And Céline, what are you noticing from some of the companies you cover?

Céline Pannuti:
From my standpoint, I concur with what Ken said. Nestlé, which I cover, is active in chocolate. They own Kit Kat, for example. We've seen pricing for them really accelerating by the last two years, but what you're referring to is really a huge spike in cocoa prices that we are seeing now in the last four, five months. And that will take time to work its way through. But effectively, there will be more pricing to be taken. At the same time, I think companies will have to be careful on how they manage the elasticity because I presume consumers won't be able to take as much pricing as what they probably need to take to offset this huge increase in cocoa prices.

Shirley Wang:
Great, thanks for that. So, both of you mentioned pricing. But, apart from that how else are companies within your coverage being affected by the higher cocoa prices. Are they using less chocolate in their recipes for example?

Ken Goldman:
So, some of the companies that I cover, I think you will see them lean a little bit in their marketing away from some chocolate items, right? And it's tough for Mondelēz because most of what they sell outside the US is chocolate. But Hershey has items like Twizzlers and Jolly Ranchers, and they can certainly try and shift some of their consumer consumption toward those confectionery items that are not based on chocolate. And as we think about the ingredients themselves and the products themselves, yeah, it's possible, right? It's possible to use a little bit less cocoa. I don't think these companies really wanna do that, but at times in the past, maybe the distant past, some of these companies that we cover have shifted that mix a little bit. There's also a way to lean people more toward the chocolate bars that have nuts in them and fruit in them, or add more fruit and nuts. So if you're a fan of chocolate bars that have all those sorts of croutons in them, that's the kind of side benefit you get from this. But in general, I think it's safe to say that there's only so much the companies can do in terms of the product itself to offset cocoa inflation.

Céline Pannuti:
Yeah, I think the innovation will be a way to try to re-engineer some of those recipes. What we've seen as well is shrinkflation. So for the same price of a chocolate bar, the size of that bar will be much smaller. So that sometimes has infuriated consumers. Those clearly could be some of the avenues that our companies are going to take, but agreed that ultimately you will have to face up to a much higher price nonetheless.

Shirley Wang:
So looking at the consumer, are people buying less chocolate products as a result, or is demand still resilient?

Ken Goldman:
So snacks in general in the United States have been slumping a little bit for the last two months. Both sweet snacks and salty have been off a little bit more than usual as a percentage of total food at home sales in the US. It's a little surprising. And there's some controversy or some questions about why that is. Some people might think that it's because these are a little bit more discretionary in nature, right? It's not a meal to have a chocolate bar or a bag of potato chips. And if you as a consumer go into a grocery store and you have $50 to spend, and the cost of everything else that you must have in your basket has gone up, you may not have an extra dollar for a candy bar. So that's a broader answer. In terms of chocolate specifically, we have seen a little bit of shifting away within snacks in general, from chocolate to other products, whether it's cookies or salty snacks a little bit. So within snacking in general, we think that chocolate's losing a little bit of share as well. So consumers are certainly reacting to higher prices. It's one of the reasons why I think some of the companies that we cover are a little hesitant to take as much pricing as they normally would at this time. In a typical environment, either Hershey or Mars may have already taken more price. Now, Hershey has other reasons not to take price right now. They're implementing a new ERP system. They don't wanna complicate things as they do that, but it's a little surprising that some of their competitors haven't taken pricing either. And I think that's a large part because of some of the elasticity we've seen in the category.

Celine, do you have anything you’d like to add on that?

Céline Pannuti:
What I would say concerning, the volume performance for Nestlé specifically, we've seen that post-COVID where the chocolate or their confectionery business had been impacted by less impulse obviously during COVID, we've really seen a re-acceleration with the reopening. So we have had two good years of better volume growth and at the same time companies have raised prices. So probably the category on the global basis has been quite resilient. But like Ken said, the question mark going forward is how much more consumers can take in terms of price increases. It is true that it's a treat. But what we've seen in other categories, like coffee for instance, is that even in categories that are deemed inelastic, when prices are raised so much, we started to see this impact in volume. So I think we have to be a bit careful about what seems to have been quite resilient volume over the past couple of years if our corporates need to raise prices further. And I would expect that yes, maybe consumers could be a bit more choosy because price points ultimately would lead to them looking at alternatives, some other categories could benefit in that.

Shirley Wang:
Great. So, Ken, and Céline, you've mentioned somewhat uncertain volume and strong pricing for chocolate by manufacturers passed through cost inflation, as well as mixed consumer sentiment. As we wrap up today’s podcast, how do you see the overall impact for food manufacturers?

Ken Goldman:
Well, I think, you know, higher inflation in general for food producers presents a challenge, right? It's not always easy to pass on all of your higher costs to your customers. They don't wanna always take it because then they have to pass it on to their consumers. And especially when you have recession-like symptoms for lack of a better word, among lower-end consumers, it creates even more of a challenge. So, certainly we've seen Hershey guide to flat earnings for 2024. A large part of that is because of cocoa inflation and potentially because of their limited ability to pass it on immediately. As we look to 2025, a lot of my clients, institutional investors, have become concerned that higher cocoa will affect Hershey's EPS in 2025 as well. And the, the, the reason it's so far out is Hershey and other food companies, including Mondelēz, typically don't buy most of their cocoa needs on spot markets. They will buy them on future markets. Hershey has said they will go anywhere from 3 to 24 months out in terms of their purchases. So it's difficult for us to be precise in forecasting exactly when a higher inflation will hit their income statement, but at some point down the road, and a lot of investors think it's 2025, they will have another headwind incrementally above what they have this year, and they'll have to figure out how to deal with that, but it's not going to be something they can fully offset.

Céline Pannuti:
Yeah. And, and as far as I'm concerned, Nestlé only has 10% of their sales tied to confectionery, so it's not exactly relevant on the overall EPS growth, but effectively they have been constrained in terms of their EPS delivery in the past for higher cost inflation. So I would imagine that the confectionery profit pool is probably going to be constrained even if it's only a certain percentage of the total for Nestlé.

Shirley Wang:
Ken and Céline, thanks so much for sharing your thoughts today.

Ken Goldman:
Thank you.

Céline Pannuti:
Thank you.

Shirley Wang:
And thank you to all our listeners for tuning in. We hope you join us again next time.




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