Rising Cocoa Prices Squeeze Candy Makers

Soaring world cocoa prices may signal a profit squeeze for Hershey Foods Corp., Mars Inc. and other chocolate makers as they gear up for Halloween, their busiest sales season.

In trading Thursday in New York, near-term cocoa futures jumped $40 to $2,023 per metric ton, the highest price in 15 years. The price has leaped 54% this year after rising 73% last year.

Cocoa has rocketed as the Ivory Coast, the world’s top grower, and other countries have failed to produce enough to meet demand from chocolate manufacturers. World demand has exceeded supply for two years.

“If cocoa prices stay at this level, everybody will have to charge more for their products,� said Dennis Roney, president of Baraboo Candy Co., the Wisconsin-based maker of Moo Chews, Udderfingers and other candies. “You don’t like to raise prices during a bad economy, but we’ll have to if prices stay this high.�

Rising cocoa costs also are hurting profits of cocoa processors. Archer-Daniels-Midland Co., the largest cocoa bean processor in the U.S., has increased prices over the last three months for the cocoa butter, liquor and powder it sells to Hershey and other manufacturers.

“The rise hasn’t been as much as what we’ve seen in cocoa prices,� said Larry Cunningham, ADM’s head of corporate affairs.

Most candy makers are holding off on raising retail prices because they don’t want to lose market share, analysts said.

“Producers of branded chocolate like Hershey’s will hesitate to pass on price increases to consumers in the supermarket because the chocolate market is very competitive and they don’t want to lose consumers,� said Pascal Pruess, an analyst with Zuercher Kantonalbank in Zurich, Switzerland.

Baraboo, which sells about 1 million pounds of chocolate a year, has not raised prices in two years, Roney said.

A spokeswoman for closely held Mars said the company had not raised retail prices in six years but would not say whether it was considering an increase now. A Hershey spokesman declined to comment.

The latest surge in cocoa prices is expected to put profit margins under pressure at all candy companies, experts said. Cocoa was at $1,630 per ton in late June.

Speculation that the next growing season will bring another crop deficit may push prices as high as $2,400 a ton in coming months, said Luis Rangel, a cocoa broker at Fimat USA Inc. in New York.

But some traders expect prices to fall once the Ivory Coast’s crop starts arriving at export docks in October. Cocoa may fall as low as $1,600 a ton, said John Gibbons, senior cocoa trader at Atlantic Cocoa Co. in New York.

Meanwhile, the charitable trust that controls Hershey is facing an additional legal challenge to its authority to sell the candy maker, this time from the alumni of the school founded by Milton S. Hershey and financed by the trust.

The trust said last month that it would put the company up for sale, driving the stock price up as investors bet on a rich bid. Swiss chocolate giant Nestle’s is said to be interested, and Kraft Foods Inc. also may bid, analysts said.

The Milton Hershey School Alumni Assn. filed a petition with the Dauphin County Orphans Court on Thursday, said Ric Fouad, the association’s president.

The petition seeks to have the association appointed as the representative of the school’s pupils, who are the trust’s sole beneficiaries. The school caters to economically disadvantaged youths.

The move follows an attempt by Pennsylvania Atty. Gen. Mike Fisher to halt a possible sale, arguing it could do irreparable harm to the community supported by the nation’s largest candy maker.

Hershey in July reported second-quarter net income of $63.1 million, or 46 cents a share, 20% higher than a year earlier. The maker of York peppermint patties, Reese’s peanut butter cups and other brands is selling more to convenience stores and is eliminating less-profitable candy sizes and items to boost sales and cut costs.

Hershey shares eased 6 cents to $76.20 in trading Thursday on the New York Stock Exchange.

Some reports have estimated that the bidding for Hershey could reach $85 a share. But if the sale is delayed, the stock could tumble. It traded at about $57 before the company was put up for sale.