(Bloomberg) — Chocolate makers looking to lock in prices for next year’s cocoa are finding a frustrating reality: The runaway market has become disjointed from fundamentals, according to several of the sweet industry’s top executives.
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Although big chocolate companies like Hershey Co., Nestle SA and Mondelez International Inc. said they are either largely or fully covered in cocoa by 2024, company executives said prices today are inflated and don’t reflect the true physical situation.
“We truly believe that current cocoa prices are the result of a series of accidental circumstances that over time we believe should go away,” Luca Zaramella, chief financial officer of Toblerone and Oreo maker Mondelez, said earlier this week on an earnings call. “The current market structure does not warrant the current market prices.”
Cocoa has whipsawed in recent weeks, hitting an all-time high above $11,000 per metric ton on April 19 before losing about a third of its value.
That decline is “just further evidence of the tremendous volatility that we’re seeing in the marketplace,” Hershey Chief Executive Officer Michele Buck said on a call with investors on Friday. “There are no new signals relative to supply and demand that are meaningful yet.”
To be fair, there are physical drivers at play in the market, specifically a cocoa production shortfall in Ivory Coast and Ghana, which accounts for more than half global output. The world’s biggest producers have been grappling with drought and disease as well as structural problems, like underinvestment and a lack of resources, that could last for years to come. But a lack of liquidity is exacerbating any price moves beyond pure supply and demand.
Because big cocoa users are well hedged for supply in 2024, they’ve been mostly able to weather the latest market craziness. Many, though, are now in the market for 2025 protection.
Read more: Chocolate Makers Want to Sell You Anything But More Chocolate
“The key news here for the remainder of the year is that we are largely covered as part of our forward contracting,” Nestle’s CEO Mark Schneider said last week on a call with analysts. “We’ll now need to see where the prices go, so that we can articulate and work out our strategies for the year ’25.”
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Hershey said its planning for 2025 is “underway” and declined to discuss hedging policies or pricing strategies, although Chief Financial Officer Steve Voskuil added that diversifying sourcing is another way it’s dealing with volatility.
Mondelez, which says it is well-protected heading into 2025, is “looking at all possible scenarios,” Zaramella said. That includes putting in place flexible structures, including call options. “In the end, we are going to be managing ’25 in light of what we think a more plausible cocoa level is, despite the fact that it might feel very high, because we fundamentally believe that in a couple of years’ time tops, “the cocoa price will be correct.”
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