Does Hershey’s Trigger Another Chocolate Squeeze?
The Commodity Report #188
Does Hershey’s Trigger Another Chocolate Squeeze?
During last week, cocoa prices surged again after Hershey’s reportedly was asking the US commodity regulator for permission to buy a huge amount (more than currently allowed) of cocoa through the New York exchange in the midst of high prices and an ongoing cocoa deficit in the market.
Bloomberg reported that the maker of Reese’s Peanut Butter Cups wants to take a position that will allow it to purchase more than 90,000 metric tons of cocoa on ICE Futures US, citing people familiar with the matter. This is an order that equates to about 5,000 20-foot containers. This massive order once again highlighted the uncertainty that the cocoa market is currently facing, with cocoa heading into the fourth consecutive year of supply shortages.
The record prices have thinned out liquidity to the lowest in over a decade, as margin calls climbed and positions became increasingly pricey to hold. That low futures liquidity has added to the wild swings, with prices moving more than a thousand dollars on some of the most volatile trading days.
The high input costs of cocoa currently provide a major headwind for publicly traded chocolate companies like Hershey’s, Lindt or Barry Callebaut. As a direct consequence of high prices, consumers cut back on their chocolate product offering resulting in demand destruction. Current price increases aren’t able to fill that hole.
If the consumer stays strong, but cocoa prices come down, this should work as an investment case for chocolate producers with a high actual chocolate product offering share of total sales once cocoa futures revert to the mean.
As always - timing is here still the issue and what will distinguish a bad trade from a great trade. We haven’t taken any positions yet.
“Recent weather reports point out that temperatures in Côte d’Ivoire and Ghana are currently higher than average temperatures for this time of the year and could pose a risk to crop development. Moreover, with the approaching Harmattan season whose intensity could affect cocoa, there are expectations of a decline in humidity. Dryness has also been reported in Ecuador, the third-largest producer. The weather in cocoa growing areas will continue to be monitored”, the International Cocoa Organization wrote in its latest cocoa market review regarding weather patterns to watch.
In Other News…
How Trump’s tariffs hit industrial metal prices back in 2018 according to UBS. It may be an important roadmap further down the road.
This week, look out for the following:
CPI data as well as Empire State Manufacturing Index on Wednesday
Retail Sales data as well as Philly Fed Manufacturing Index on Thursday
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Till next Monday, Lukas
If you have any questions in the meantime, please feel free to contact me via X or Mail.