Traders piled in to buy cocoa options this week as futures surged to record highs on concern global supplies will be tight after drought and disease ravaged crops in top West African producers.
Implied volatility—a key measure of options costs—doubled since mid-January, with an especially high premium being paid for calls protecting against higher prices over the next couple of months. Soaring raw-material costs already are weighing on chocolate makers and may force Hershey Co. to raise prices, the company’s CEO said Thursday.
Poor weather conditions have been a drag on output from Ivory Coast and Ghana, the world’s largest producers. Even if conditions improve in the next season, supply is unlikely to make a quick recovery: new trees take years to bear beans and West African farmers still need higher incomes to invest in their fields.
Some large speculators may have missed out on the last leg of the rally. Money managers cut net-long positions in futures and options to the lowest level in 17 weeks in the seven days ending Tuesday, Commodity Futures Trading Commission data showed. Futures rose 9.6 percent since then.
Cocoa prices are climbing fast, and chocolate makers like Hershey Co. may continue raising prices to keep up.
Prices for the all-important ingredient are reaching “historic” levels, Chief Executive Officer Michele Buck said in the company’s earnings statement last Thursday. While the company says its marketing plans, innovation and productivity efforts will help soften the blow, the higher costs are “expected to limit earnings growth this year,” she said.
New York cocoa futures hit a record Thursday morning, after a year that saw prices double as West African growers got hit with extreme weather.
The Reese’s maker said its fourth-quarter confectionery sales in North America increased 2.1 percent, with prices up but volumes down. It expects net sales to grow 2 percent to 3 percent in 2024, mostly driven by higher prices the company has already planned. And prices could go up still more.
Commodities are seeing low-double-digit percentage inflation, Chief Financial Officer Steve Voskuil said on the call with analysts, with cocoa and sugar as the most inflationary. Noncommodity inflation, he said, is much lower, at mid-single digits, putting the average inflation rate for the company at high single digits.
“We can’t talk about future pricing,” Buck said, but added, “given where cocoa prices are, we will be using every tool in our toolbox, including pricing, as a way to manage the business.” If prices do go up, the company will see that benefit in the second half of 2024 and into 2025, she said.
Hershey shares rose as much as 5.5 percent in New York trading, the most since July 2020. The stock is up 4.2 percent this year through Wednesday, outpacing the 2.7 percent gain of the S&P 500 consumer-staples index.
Corn ethanol
A corn ethanol boom that reshaped Brazil’s biofuel industry is nearing an end, according to São Martinho SA, one of the country’s largest producers of the fuel.
Weakness in prices is making it harder for companies to keep investing in new ethanol plants, São Martinho Chief Financial Officer Felipe Vicchiato told investors Friday. The company makes ethanol from sugar cane and recently started up a new corn plant, but the executive said plans for expanding into corn are no longer economical.
“The bill just doesn’t add up,” Vicchiato said. He added that corn ethanol production will still grow by about 2.5 billion liters in the coming years as some of the recently announced investments start to ramp up.
The pessimistic outlook is a big shift for Brazil, a country that saw an explosion of corn ethanol plants recently take over an industry that was traditionally dominated by sugar cane. That has hurt financial results of cane mills, which then shifted to produce increasingly more sugar.
Profitability of corn ethanol mills is also being hurt by lower prices of DDGS, a byproduct of corn ethanol used in animal feed. Recent declines in soymeal costs helped push down the price of such products, Vicchiato added.
Image credits: Bloomberg