Zhitong Finance learned that despite tight global supply and record prices, New York cocoa futures hit a new high due to the constant processing speed of chocolate factories. In early US trading on Friday, the most active futures contract surged 5%, hitting an all-time high of $1,1578 per tonne. As of press release, the increase in cocoa prices had narrowed to 3.4% to $11,405/ton; the price of similar futures in London rose 4.8%.

North America's processing speed is steady, and cocoa prices have reached a new high

Data released after the close of trading on Thursday showed that cocoa powder (cocoa powder processed into butter and cocoa powder used in candy) in North America increased by nearly 4% year-on-year in the first quarter. Processing volume in Europe fell by only about 2%, and processing volume in Asia also declined only slightly. This year, the price of cocoa futures has more than doubled since the beginning of 2024. After the data was released, the price of cocoa rose further, breaking through previous highs and continuing to reach record highs.

In response, John Goodwin, a senior commodity analyst at ArrowStream, said that these data “are far from the level of deterioration needed to end this round of gains. The elasticity of this data is incredible”.

Paul Joules, an analyst at Rabobank in London, said that grinding data shows that despite the current price, current demand is still being maintained, and demand disruptions will occur, but apparently it will take longer than market expectations to penetrate the milling data.

Bloomberg Intelligence analysts Diana Gomes and Ignacio Canals Polo wrote in a report on Thursday that due to strong data from the first quarter indicating that processors will need to replenish cocoa bean stocks at higher prices, the grinding speed is likely to “remain sluggish until 2025.” Analysts said that as the recent rise in cocoa prices spreads to retail shelves, consumer demand will also continue to be under pressure.

Previously, the International Cocoa Organization (International Cocoa Organization) estimated in February that due to a 7% drop in processing production in Africa, global grinding volume would drop by nearly 5% this year. Severe cocoa shortages and subsequent price spikes have forced some processors to intermittently stop production or pay premiums and reserve cocoa beans from small growers to ensure supply.

The supply prospects are still uncertain, and there is a high risk that cocoa prices will rise

Cocoa futures prices have more than doubled this year due to poor harvests from major farmers in West Africa, leading to shortages in global food supply for the third year in a row. Despite soaring prices, speculators have actually been pulling out of the market. As prices soared and hedge funds continued to cut bullish bets, net long positions in New York and London Cocoa Futures saw their biggest weekly decline in more than a year.

Lower net long bets and reduced open positions suggest that physical buyers may have played a role in the rebound. Analysts at Hightower Report said in a Monday report that the contraction of net commercial bears “further proves that commercial short recovery is driving Cocoa's rise.” Strategist Mike McGlone wrote Monday that New York futures “have never been so tight,” and pointed out that prices are more than three times the five-year average. “Our conclusion is that extreme pain is likely to occur, probably because producers' hedge contracts are being squeezed.”

However, there is still a risk that the supply situation will deteriorate. The supply situation is likely to deteriorate. The EU's upcoming regulations — aimed at stopping deforest-damaging products from being sold in stores — could make it harder for EU chocolate makers to get supplies. The International Cocoa Organization predicts that the global supply shortage may continue. The global cocoa supply gap is expected to reach 374,000 tons in 2023-2024, the largest supply deficit in more than 60 years, five times the supply gap of 74,000 tons last year.

Although this technical indicator shows that cocoa prices may have soared too fast, many analysts have yet to see the market peaking. For example, after correctly predicting recent highs, Citigroup analysts also said that prices are likely to remain high until the second half of 2025. Meanwhile, well-known chocolate manufacturer Bellagio said it is expected that the severe shortage of cocoa will continue until next season.

Chocolate makers' profits are being impacted

The sudden sharp rise in cocoa prices this year is having an impact on global chocolate stocks. Investors are evaluating the impact candy companies may face if the cost of this key ingredient continues to rise. Cocoa futures prices more than doubled in 2024 and surged to more than $10,000 per ton this week, which is unprecedented. The performance of this commodity even surpassed the impressive performance of Nvidia (NVDA.US), the darling of artificial intelligence, and was even more expensive than copper.

This is bad news for companies such as Hershey (HSY.US) and MDLZ.US (MDLZ.US). Although producers will buy cocoa a few months in advance, Wall Street anticipates that if the price of cocoa beans remains high, it may be difficult for these companies to pass on the rising costs to consumers to defend their profit margins.

“Pricing power has its limits,” said Mirabaud Group director John Plassard. He added that the rapid rise in cocoa prices “will undoubtedly affect the profits and sales of all producers in the industry.”

Global chocolate-related stocks are already feeling anxious. Switzerland's Nestle, Cadbury, and chocolate producer Mondelez, as well as the world's largest producer of bulk chocolate, have all experienced declines this year. Moreover, in addition to cocoa, the price of raw sugar has also risen recently. Raw sugar New York futures rose 0.6% on Friday

Soaring cocoa prices are driving investment inflation for these companies. To limit the impact on profit margins, chocolate producers need to price higher than analysts' current expectations this year. For example, analysts estimate that the cost of cocoa accounts for about 10% of the Lindt Group's sales, and it usually takes 6-12 months to digest due to hedging (including stocks bought at lower prices).

Meanwhile, Wall Street was the least optimistic time for candy makers Hershey in years. BNP Paribas, the latest company to downgrade Hershey's rating, downgraded its rating to “neutral” on Tuesday due to a recent spike in cocoa prices. Analyst Max Gumport lowered Hershey's 2025 adjusted earnings per share forecast by 9% in light of rising costs.

Evgenia Molotova, senior investment manager at Patek Asset Management, said: “It's not good to be a chocolate producer right now. It depends a lot on weather and disease, but this year's harvest has been severely affected, so these stocks are likely to drop further.”