Cocoa Prices Dip as Demand Slows and Production Concerns Rise

Cocoa prices have declined sharply due to slowing demand, leading to major chocolate makers reformulating recipes. Concerns rise over production impacts as weather conditions affect yields. Adjustments may pressure stock values in industry players like Hershey and Mondelez.

Date: 07-02-2025

AI Rating: 4

Impact on Cocoa Prices: Cocoa prices are facing significant pressure, seeing declines of over 4% in recent trades. Factors influencing this drop include:

Demand Slowing: Cocoa consumption is reportedly declining, particularly in North America, as chocolate maker Hershey indicates recipe reformulation due to high cocoa prices. This is likely to affect perceptions of the product demand and subsequently stock valuations for chocolate companies.
Production Concerns: The report highlights beneficial rainfall in West Africa, which may improve crop development. However, the dry and dusty Harmattan winds are contributing to declining conditions of cocoa trees. Such mixed signals can lead to volatility in cocoa prices.
Global Cocoa Deficit: The International Cocoa Organization forecasts a significant cocoa deficit of 478,000 MT, reflecting reduced global stockpiles. This could float prices temporarily but also create long-term issues if demand destruction continues due to high prices.
Supportive Factors for Prices: Even amidst demand concerns, tight cocoa inventories in U.S. ports are noted, with numbers hitting a 21-year low. Hershey's intention to purchase a large quantity of cocoa amid tight supplies reflects an effort to combat expected difficulties in future sourcing.

Sector Implications: The potential for demand destruction—with European, Asian, and North American cocoa grindings all posting declines—coupled with rising prices may force adjustments in product strategies across major chocolate manufacturers. Such changes could affect net income and profitability margins, further influencing their stock prices.

Ratings: Ratings for relevant impacts are given as follows:

Earnings Per Share (EPS): Not discussed.
Revenue Growth: Slightly negative due to declining cocoa grindings (Rating: 5).
Net Income: Impacts uncertain, but with potential for decline (Rating: 4).
Profit Margins: Concerned due to potential recipe changes and cost pressures (Rating: 4).
Free Cash Flow (FCF): Not discussed.
Return on Equity (ROE): Not discussed.

Overall Ratings: The overall sentiment reflects a somewhat negative outlook mainly due to demand concerns drastically affecting future revenue and net income potential (Rating: 4).

Stocks: HSY MDLZ