The global agriculture sector is experiencing pricing pressure with cocoa prices more than tripling over the last year. This surge has created challenges for candy makers and food companies that use cocoa as an ingredient in chocolate production. The price of cocoa hit an all-time high of over $11,000 per metric ton in April due to concerns about supply and reports of a weaker-than-expected crop. While the price has slightly eased off since then, it remains significantly higher than what food companies are used to paying.
Many of the largest candy companies, including Hershey, Mars, Ferrero, and Mondelez, are protected from the higher cocoa costs for now due to long-term contracts that lock in commodity prices. However, these contracts are set to expire by 2025, resulting in increased costs for cocoa for these companies. West Africa, the leading cocoa supplier, has been affected by crop disease and lower prices paid to farmers, leading them to focus on more lucrative crops like rubber instead of cocoa. This season’s cocoa crop is expected to have the largest deficit in at least six decades.
The rising cost of cocoa comes at a challenging time for food companies, as many have already raised prices to deal with inflation. Consumers are becoming more discerning about their purchases and dissatisfied with grocery store prices, leaving candy companies with limited options to cope with the higher cocoa cost. Shrinkflation, where the quantity or weight of a product is reduced while the price stays the same, is further complicating the situation for companies as consumers are becoming more aware of this tactic.
To address the challenges posed by higher cocoa prices, many companies are exploring creative solutions. For example, J&J Snack Foods is considering reducing the number of chocolate chips in its products and seeking alternative substitutes for certain recipes. Companies may also avoid using chocolate flavor in new products or develop innovative offerings to reduce their reliance on cocoa. Analysts predict that there will likely be another cocoa shortfall next year, pointing to systemic issues like government-controlled farmgate pricing and climate change that continue to impact cocoa production.
In the long term, companies may need to consider permanent solutions, such as alternatives to cocoa, given the ongoing challenges in the cocoa industry. Recipe reformulation, which takes about nine months on average, could be one approach for companies to reduce their reliance on cocoa. Startups have also introduced cocoa-free chocolate alternatives made from grape seeds and legumes. While some companies may opt for these alternatives, others like Mondelez are planning to focus on cost tightening without changing their recipes. Diversifying into other snack categories, such as salty snacks, is another strategy that some companies are adopting to mitigate the impact of higher cocoa prices on their businesses.
