Hershey Media Report 7/13/16

Local Coverage

1. Rising cost of ingredients hits chocolate makers

   Jul 13, 2016 | The Australian

   By Julie Wernau
   
   
   Hershey’s rebuff of a $US23 billion ($30.3bn) bid by Mondelez International this month comes as rising commodity prices are making it more expensive to produce a chocolate bar. The cost of two crucial ingredients in chocolate, cocoa butter and sugar, has risen sharply this year. It is an unwelcome development for chocolate makers, who already had raised prices on candy bars and other chocolate products following previous spikes in commodities. Increasing competition from snack bars and healthier treats also is crimping chocolate makers’ ability to raise prices ­further.

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Local Coverage

1. Rising cost of ingredients hits chocolate makers

   Jul 13, 2016 | The Australian

   By Julie Wernau

   Hershey’s rebuff of a $US23 billion ($30.3bn) bid by Mondelez International this month comes as rising commodity prices are making it more expensive to produce a chocolate bar.

   The cost of two crucial ingredients in chocolate, cocoa butter and sugar, has risen sharply this year. It is an unwelcome development for chocolate makers, who already had raised prices on candy bars and other chocolate products following previous spikes in commodities. Increasing competition from snack bars and healthier treats also is crimping chocolate makers’ ability to raise prices ­further.

   Chocolate still drove the bulk of sales at Hershey, said Erin Lash, senior equity analyst at Morningstar in Chicago. The company is by far the biggest player in US chocolate, with 45 per cent of the market, and about 88 per cent of its net sales are in North America. The company doesn’t break out chocolate as a percentage of sales, but Nielsen data indicate chocolate represents about 80 per cent of the company’s US sales.

   For Mondelez, 27 per cent of its business is tied to chocolate, or about $US8bn out of $US30bn in annual sales. Mondelez makes Oreo cookies and, outside the US, Cadbury chocolate bars.

   Cocoa butter prices are at multi­-year highs as cocoa bean processors struggle with unusually small cocoa beans in West Africa, where about 70 per cent of the world’s cocoa is grown.

   At the same time, a sharp drop in sugar production after years of glut has pushed world sugar futures up 38 per cent this year, driving up costs for a commodity that makes up about 50 per cent of the weight of most chocolate bars, according to chocolate makers and commodity-trading houses.

   Today, cocoa butter, the most crucial ingredient in a chocolate bar, costs 21 per cent more to procure than a year ago.

   “It’s been a tough time for the chocolate guys,” said Ken Lorenze, vice-president at Connecticut-based brokerage JSG Com­modities.

   Cocoa processors take the beans, remove the shells, cook and grind up the “nib” on the inside to turn it into a thick paste called cocoa liquor. The paste is then pressed to separate the fat (cocoa butter) from residual solids (a cake that is used to make cocoa powder).

   “You really can’t make chocolate without cocoa butter, and it’s getting more and more expensive,” Mr Lorenze said.

   Still, the bulk of the costs of making chocolate are in transportation and marketing costs. According to Cocoa Barometer, a consortium of non-profit groups focused on sustainability in the cocoa sector, purchasing cocoa beans from farms makes up about 6.6 per cent of the total costs of creating chocolate.

   Sustainability advocates long have argued for price increases to farmers, most of whom live below poverty levels.

   The recent rise in the price of a candy bar isn’t helping consumption, he added. Last year, Mars, Hershey, Nestle, Lindt & Sprungli and Mondelez increased prices as much as 8 per cent.

   The cocoa crop in Ghana, the world’s second-largest producer, experienced an unusually large drop in 2015, after farmers there applied key pesticides late in the crop’s development. Hershey said in its last earnings call that the price increases had hurt demand and were in part to blame for a 3.6 per cent drop in sales volume in the second quarter. Most multi­national chocolate companies were not anticipating further price spikes for cocoa butter and instead expected a recovery this year, said Jeff Rasinski, director of commodities and corporate procurement at Blommer Chocolate.

   Merchants have been shedding short positions in the cocoa market since May, when the US dollar-denominated contract had 78,810 net bearish bets, according to data from the US Commodity Futures Trading Commission. As of last Tuesday, the contract had 61,208 net bearish bets as merchants abandon those positions.

   “The industry has been scrambling,” Mr Rasinski said.

   Retail prices are expected to rise 2.2 per cent this year in the US, according to Euromonitor International, the lowest year-over-year percentage increase in a decade. That price increase is because chocolate makers feel they have to absorb rising costs because they can’t pass them on.

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