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Chocolatiers face bitter Christmas as cocoa surges

Costs for European chocolatiers have jumped almost a third in the past year because of a surge in key ingredient prices, raising prospects of a further squeeze in margins in a supply scramble ahead of Christmas, Valentine’s day and Easter.

Cocoa butter, which provides the melting quality in chocolate, surged almost 70 per cent in the year to August, while milk powder jumped 50 per cent, leading to a 31 per cent rise in the cost of making a bar of milk chocolate, according to commodity data specialists Mintec.

The cost pressures on chocolatiers are not expected to let up any time soon, according to Liliana Gonzalez, analyst at Mintec.

Cocoa bean prices, closely watched by chocolatiers such as Nestlé and Mars, have continued to rise.

Benchmark cocoa prices in London hit a two-year high of £1,743 a tonne on Thursday, up 21 per cent since the start of the year. Cocoa butter has outperformed bean prices as demand for luxury chocolates have recovered in the US and Europe.

Sugar prices, which have been sluggish over the past year, seem to have bottomed out.

Raw materials, including cocoa butter, milk and sugar, account for about 80 per cent of the total cost of a bar of chocolate, while packaging accounts for the rest, according to Mintec.

Some chocolatiers have noted the rise in the cost of materials. In its latest results statement, Switzerland’s Lindt said the “price of cocoa butter began to rise substantially in the late fall of 2012”, adding that prices for milk, hazelnuts and almonds had also been rising in the recent months.

While larger manufacturers, especially with long supply agreements, can absorb the costs, smaller chocolate makers would need to pass the costs on to consumers, said analysts.

Francisco Redruello, senior analyst at Euromonitor International, said there could be an impact on retail prices.

“It depends very much on the size of the manufacturer but the period a company can maintain prices in the face of rising costs is on average about six months.”

Weather disruption has been the main contributor to the price increases in chocolate ingredients.

Dry weather in west Africa has led to the sharp rise in cocoa bean and cocoa products.

Milk prices have been affected by last year’s US drought, which drove up feed prices, a drought in New Zealand, the largest exporter of milk, as well as rising demand in Russia and China.

“The world has been very short of milk,” said Kevin Bellamy, senior analyst at Rabobank, who expects prices to remain high until the second quarter of 2014.

In cocoa, the market is expected to move from a balanced supply and demand situation in 2012-13, turning into a deficit the following year, supporting prices.

One concern among analysts is that many companies have not done enough forward buying of cocoa beans, making them vulnerable to further price increases.

Jonathan Parkman, co-head of agriculture at commodities brokers Marex Spectron said although in the past chocolatiers have had forward cover of about seven to eight months, the current figure was about four to five months.