How does the price of cocoa affect investors?

Every Easter, the price of eggs is a recurring topic. The most expensive sweets have to do with the high price of the main raw material for making chocolate: cocoa. To give you an idea, according to data from the Investing platform, prices in New York rose 63% in 2023. In 2024, prices more than doubled. Today the price of cocoa exceeds US$9,000 per ton.

To understand the current market situation, it is important to know how cocoa pricing works. The product is considered a commodity because it is an economic good with standardized characteristics, regardless of where it is planted and produced.

In a report produced for the Financial Intelligence, Investing explains that the producer is also the price taker. In other words, he is not able to determine the selling value of cocoa. “Thus, the price is determined through the negotiation of future purchase and sale contracts on the stock exchange. Something similar to the pricing of a share on the stock exchange.”

Cocoa futures contracts

Quotations for the main cocoa contract take place at the Intercontinental Exchange, in New York. “The price varies according to global supply and demand, influenced by factors such as weather conditions in producing regions, political issues and demand from industries that use cocoa, such as chocolate,” explains Nilson Marcelo, quantitative analyst at CM Capital.

João Fouad, founder and CEO of HiIghline Venture Builder, highlights that the quality of cocoa is an important factor and also affects the price of the item. “High-quality cocoa is more expensive than low-quality cocoa. The quantity available also affects the price of cocoa: if there is a lot of supply, the price will be lower. If there is little supply, the price will be higher. So, of course, as the demand”, he highlights.

What has caused the price of cocoa to rise?

Currently, Ivory Coast and Ghana are the largest global cocoa producers, with around 60% of supply. Climatic factors were mainly responsible for this jump in prices. In the report, Investing details this point. “Drought followed by excessive rain in 2023 damaged production last year, and the current 2023/24 harvest suffers from the drier and hotter climate caused by the El Niño phenomenon”.

Furthermore, logistics also change with the weather. “The occurrence of dry and cold winds in West Africa has negatively affected the delivery of cocoa by African countries. The consequence, which led to soaring prices, dropped cocoa deliveries in the annual harvest by 34% in Côte d’Ivoire and 35% in Ghana, according to the International Cocoa Organization (ICCO)”, highlights the report.

The impact beyond Easter eggs

The soaring price of cocoa on the international market is one of the biggest causes of the rise in chocolate prices this Easter, but the impact goes beyond that. In an earnings conference held at the beginning of the year, executives from chocolate maker Mondelez (MDLZ) stated that they plan to increase product prices to cover cocoa inflation.

Passing on rising costs to products is a common but risky move, as rising prices can cause a drop in sales. “It is worth mentioning that in 2023 inflation was high worldwide. This means that chocolate, a discretionary consumer good (which is not a basic necessity), ends up being impacted by the rise in price levels in the economy. Consumers stop buying or buy less chocolate as income decreases due to inflation. This reduces the ability of companies to pass on the high production costs of rising cocoa prices to consumers,” highlights Investing in the report.

Hershey’s, Mondelez and Nestlé: is the chocolate bitter?

One of the most impacted companies in the sector is Hershey’s (HSHY34), which suffered an accumulated drop of 19.5% in its shares in 2023. “In addition to the price of cocoa, the increase in sales and marketing costs, increase in investments and the strong dollar (which generates lower revenue in other countries) contributed to a negative outlook on the company”, highlights Investing.

According to the report, in the case of Nestlé (NESN), which suffered a drop in its shares of 8.99% in 2023 and 1.55% in 2024 on the Zurich stock exchange, the biggest impact was due to high inflation in the world, as the Swiss company has greater diversification in its product portfolio. “Regarding Mondelez, its shares rose 8.99% in 2023, despite high inflation and rising production costs. Mondelez’s sales performance in emerging economies contributed to the positive performance of its shares.”

What to expect from now on?

The outlook is not positive. “After raising prices by double digits last year, Mondelez reported that it should not increase its prices by more than one digit due to the rise in cocoa. This led the company to disclose lower sales and profit expectations in 2024 than expected by the market. As a result, its shares will operate downwards in 2024, accumulating losses of 3.47%”, highlights Investing.

In the case of Hershey’s, the company is suffering from a downgrade in the purchase or sale recommendation for its shares, in addition to a lower target price. “This is due to lower sales expectations for the coming months. According to InvestingPro, a fundamental analysis tool from br.investing.com, Hershey shares have recently undergone 14 downward revisions for its next balance sheet.”