Cocoa futures surged above an unprecedented $10,000 a metric ton on Tuesday before erasing gains and taking a breather from a historic rally that has seen prices of the key chocolate ingredient double this year.
The market is being rattled by poor crops in key West African growers that has put the world on course for a third straight annual supply deficit. The industry is grappling with the legacy of poor returns paid to cocoa farmers and fears are mounting about being able to source enough beans.
As well as concerns about scarce physical supplies, pressures are also building in the financial market, where some traders have sold futures to hedge against physical holdings. But as they wait for the contracts to mature they need cash to meet margin calls on losses on derivatives, and in a rising market can be forced to close out short positions, helping to fuel the rally.
The most-active cocoa futures jumped as much as 4.5 percent to $10,080 a ton in New York before settling 0.3 percent lower at $9,622. Cocoa futures in London and New York have more than doubled this year.
The rally has pushed a technical gauge of prices into overbought territory for much of the last couple of months, though cocoa has continued to soar.
“When we’re at this price, it’s hard to tell whether these prices are justified,” said Paul Joules, an analyst at Rabobank in London. “Whenever we have a dip in the market, it seems to shoot straight back up, which is more to do with the commercials, they’ve been net buyers.”
Reaching the $10,000 level could spur some profit taking, as price action “has gotten very steep, and traders could be concerned that the rally has reached exhaustion,” analysts at the Hightower Report said in a Tuesday note.
There’s a risk the supply situation may worsen. Incoming European Union rules— aimed at stopping products that destroy forests from being sold in shops — may make it even harder for the bloc’s chocolate makers to secure supplies.
Focus is now turning to West Africa’s upcoming mid-crop, the smaller of two annual harvests. Top grower Ivory Coast’s regulator expects that to shrink this season, Bloomberg has reported.
“The West African supply situation remains extremely tight going into the start of the mid-crop harvest next week,” the Hightower Report said in a note.
Other growers, like Brazil and Ecuador, are seeking to ramp up production, but it takes a few years before newly-planted cocoa trees bear beans—delaying the relief to strained global supplies. A ratio of stockpiles-to-grindings will fall to the lowest in more than four decades this season, the International Cocoa Organization has forecast, reflecting the market’s precarious position.
Higher cocoa costs are pressuring profits of chocolate manufacturers, and cocoa’s advance is also bad news for consumers if companies keep passing on costs or sell products that are smaller or have less chocolate in them. The looming Easter holiday is a peak period for candy consumption, and the lag between commodity and retail markets mean the brunt of the impact for shoppers still lies ahead.
Downgrade
Hershey Co. was downgraded at BNP Paribas Exane to neutral from outperform on Tuesday, citing the recent surge in cocoa prices that suddenly looks less transitory in nature.
Cocoa futures have more than doubled this year, climbing above $10,000 per ton for the first time ever on Tuesday before erasing gains and taking a breather from a historic rally. The commodity is outperforming the stock market’s highest fliers, including Nvidia Corp. Hershey shares, meanwhile, have gained just 2.4 percent since the start of January, underperforming the S&P 500 Index and the large-cap consumer staples index.
“The implementation of the EU Deforestation Regulation is adding structural costs into the system,” BNPP Exane analyst Max Gumport wrote in a note to clients, following his firm’s expert call with Marc Donaldson, former executive director of the Cocoa Association of Asia and managing director of Asia Pacific at Barry Callebaut.
“A meaningful portion of the cocoa inflation we are currently seeing could well be structural” due to the EU regulation, he said. This is a “step change” in his stance, which had previously been that the “vast majority” of the cocoa price surge was likely due to a “temporary supply demand imbalance” related to unfavorable weather in West Africa.
Gumport reduced his 2025 adjusted earnings per share estimate for Hershey by 9 percent to $9.59 due to structurally higher cocoa prices. This represents a Street low, according to data compiled by Bloomberg, which has a consensus target for next year’s EPS of $10.19.
On a Feb. 8 earnings call, Hershey Chief Executive Officer Michele Buck said the company will use “every tool in our toolbox,” including boosting prices, to fight the input inflation. Finance chief Steve Voskuil added that “further price increases should they come would benefit more the back half of the year and probably more so ‘25.”
However, those comments weren’t enough to ease concerns at Morgan Stanley, which a few days later downgraded the stock to underweight from equal-weight, citing several risks impeding Hershey’s mid-term outlook, including the “outsized” cocoa inflation.
Hershey has six buy-equivalent ratings, 19 holds, and one sell, according to data compiled by Bloomberg.
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