Record cocoa prices leave a bitter aftertaste for chocolatiers

Supply disruptions have sent cocoa bean prices to remarkable heights this year. Chocolate makers are melting. Shares in the world’s largest, Switzerland’s Barry Callebaut, have lost a third since the start of 2023.

Some relief arrived for the group’s investors on Wednesday with better than expected first-half results. Yet commodity volatility means the sweet taste is unlikely to last long.

The biggest concern for investors, of course, is consumers buying less chocolate.

Traditionally, that has not been a problem at Barry Callebaut. It is well known for its inelastic demand even though its prices have been rising for years. Its prices are up some 20 per cent since the start of 2021. Volumes over that time have been flat. Surprisingly, volumes remained resilient in the six months to February, rising 1 per cent. Full-year volumes should be flat, the company expects. That is impressive given the financial pressure from bean prices to pass on higher costs to customers. 

Elsewhere, though, there are definite signs of strain. Working capital in particular is squeezed. This jumped by Sfr0.8bn over the six months and contributed to negative free cash flow of Sfr1.1bn. As a result, net debt jumped to Sfr2.6bn — almost 3 times ebitda. Barry Callebaut has refinanced its debts and expanded revolving credit facilities in case further resources are needed. 

Cost savings put in place before the dramatic rise in cocoa prices are under way. This includes closing factories and optimising product lines with 2,500 job cuts under way.

Cocoa prices may remain high even though fears of inadequate supply look overblown. A stocks-to-use ratio of over 30 per cent is high compared to the previous bull market in 1977 when that figure fell to 18 per cent, notes Jonathan Parkman of broker Marex.  

The cocoa market has since evolved, though. Big chocolate makers now seek out premium grades to make good on sustainability promises to customers, adds Parkman. Even at today’s spot prices, these higher-quality grades can trade at as much as a 10 per cent premium to the benchmark.

Spot prices are stuck at record levels because of producers’ fears of running out of the right kinds of higher-quality beans. On top of that, buyers are staying out of forward markets in Ghana due to the country’s financial crisis and debt default.

Both factors will keep spot prices higher for longer. Expect that to continue dripping debt on to chocolatiers’ financials.

andrew.whiffin@ft.com