KEY TAKEAWAYS
- The price of cocoa has been hitting all-time highs this year as bad weather hurts crops.
- Institutional investors can buy cocoa futures to bet on cocoa, while retail investors have more limited options.
- Analysts say exposure to Hershey stock may be the best option for retail investors if they want to get in on the cocoa trade.
- The chocolate maker said it will struggle with tighter margins this year, but analysts say the stock has some distinct advantages.
The price of cocoa has repeatedly hit record highs in recent months, with cocoa futures surging above $11,000 per metric ton this week, nearly a four-fold increase from a year ago.1 The bad news for retail investors is that the options to trade cocoa are few and far between.
Cocoa harvests are coming up short for the third year in a row as above-average rain in key growing regions has resulted in more crop disease. The plants themselves are also only able to grow only within 10 degrees north and south of the equator, in hot and humid regions, limiting production largely to Africa.2
Analysts expect cocoa prices to remain high at least through this year. For retail investors to get into the trade, the best option tends to be chocolate makers.
The Trouble With Investing in Cocoa
Institutional investors can tap into cocoa futures to bet on the rising cocoa prices, and while retail traders can, in theory, do the same, it’s not so easy.
Futures are contracts to buy or sell a commodity or financial instrument at a predetermined price at a specific time in the future. However, not all retail brokers offer futures trading, and it is a little more complicated than buying traditional stocks.
“Futures products generally use leverage, allowing investors to control a large amount of the underlying asset with a relatively small amount of capital,” Adam Koprucki, founder and CEO at Real World Investor said in a message to Investopedia. “This could allow retail investors to unexpectedly take large positions which could lead to significant losses if not managed correctly.”
Futures can also be cash or physically settled, meaning retail investors could unintentionally enter into a futures contract with physical delivery. “If the trade is in your favor, you expect to receive actual cocoa beans—which is probably not what people want,” he said.
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The price per metric ton now above $11,000 is another barrier for retail investors who may not want to sink that much money in a single investment.
Two exchange-traded cocoa products were discontinued in the U.S. in recent years, while the London-based WisdomTree Cocoa (COCO), an exchange traded commodity, is not available to U.S. investors.34
Chocolate Companies Can Provide Cocoa Exposure
That leaves chocolate-exposed companies as the best way for retail investors to get exposure to cocoa price movements.
While Mondelez (MDLZ) and Nestle (NSRGY) do sell chocolate products, the company most directly tied to cocoa prices is Hershey (HSY), analysts say.
The surge in cocoa prices has hurt the dominant chocolate company in the U.S., which hasn’t been able to raise prices at the same rate that its key ingredient has increased in cost. If Hershey raises prices too fast, demand will suffer, while if it doesn’t raise prices enough, profit margins will be eroded.
During the company’s earnings call in February, Chief Executive Office Michelle Buck said that the historic highs in cocoa prices—which at the time were around $5,300 per metric ton—would “limit earnings growth this year.” She noted that the company would be “using every tool in our toolbox, including pricing, as a way to manage the business.”5
That said, any price increases would be more likely into 2025, said Steve Voskuil, chief financial officer at Hershey, on the same call.5 The company’s “not banking on cocoa relief” but it’s “seen cycles like this before. We’ve got a lot of tools at our disposal to manage the impact of cocoa, and we plan to use all of those,” Voskuil said. Hershey’s also hedges cocoa to protect itself from price volatility.
Hershey, whose share price has lost about a quarter of its value over the past year, will release its first-quarter earnings report on May 3.
How Will Hershey Weather the Cocoa Price Surge?
Despite the cocoa cost pressures, analysts note that Hershey has a few things working in its favor.
For one, according to Jonathan Freeney, an analyst and managing partner at Bravium Partners, once chocolate companies raise prices on their products, they never lower them, even when cocoa prices drop.
Also, consumers tend to be loyal. “It’s not easy to trade down,” Feeney said in an interview. “These are candy products that are typically purchased for personal consumption based on personal preference, and they’re deeply ingrained habits.”
Erin Lash, director of consumer equity research at Morningstar Research Services, said that chocolate remains an affordable luxury that consumers won’t likely forgo even with further price increases.
Given that backdrop, Hershey benefits from its strong position in the U.S. market. “It’s a competitively advantaged business because of the market share positions that they possess,” Lash said in an interview, noting that Hershey’s leading market share of chocolate in the U.S. is over 30%.
The company also has been investing deeply in cost savings and innovation—like how to get more packages on the shelf at a time—and it has strong existing relationships with retailers, Lash said.
“Hershey is a name that, in terms of where shares are trading, is known to have historically been viewed as expensive,” Lash said. “It’s not a name that we’ve recommended very often. The current trading levels look more attractive than they probably have in four to five years or more.”
Through Thursday’s close, Hershey shares had fallen 27% over the past 12 months.
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