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

Last updated: October 10, 2013 10:56 pm

Chocolatiers face bitter Christmas as cocoa surges

By Emiko Terazono in London

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.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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