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Cocoa prices spell challenge for chocolate makers, though Americans are still snapping candies up

For savvy gift givers, it might be time to choose roses over chocolates this Valentine's Day.

Cocoa futures (CC=F) have shot up over 100% in the last year, and up nearly 70% in the last six months alone. It's all the result of a climate pattern known as an El Niño, which is leading to a lower supply of cocoa production, David Branch of Wells Fargo told Yahoo Finance over the phone.

"Concerns are that the harmattan winds in West Africa are more extreme than average ... drying up cocoa fields and just overall reducing yields," Branch said. Cocoa futures hit an all-time high of 5,891.37 last Friday.

"You can look at a couple of years of elevated prices," Mizuho Securities managing director John Baumgartner told Yahoo Finance, given the life cycle of the trees and the time it take to get new trees to produce.

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The disruption in supply is creating a bitter problem for chocolate makers like Mondelēz International (owner of Cadbury, Toblerone, and others) and Hershey's (HSY), especially since inflation of sugar prices remains "a little sticky," per Branch.

According to the latest CPI print, prices of sugar and sugar substitutes are up 7.2% compared to a year ago. Overall prices of sugar and sweets are up 4.4% year over year.

And the average cost of chocolate over the past year has jumped 11% compared to 2022, per Nielsen data (NIQ).

Mondelēz (MDLZ) CEO Dirk Van de Put called cocoa prices "an issue," adding that the company is "well covered for the year," but would need to enact another round of price increases in Europe, as the continent "faces more inflation than any other market."

CFO Luca Zaramella said chocolate pricing will play into the company's 2024 revenue guidance, which is expected to increase on the higher end of the 3%-5% range.

Prices for Mondelēz's North America business increased 7.4% last year, while volume dropped 5.5% overall.

Hershey's chocolate packaging are seen in a shop in United Arab Emirates on November 24, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Hershey's chocolate packaging are seen in a shop in United Arab Emirates on Nov. 24, 2023. (Jakub Porzycki/NurPhoto via Getty Images) (NurPhoto via Getty Images)

Hershey's CEO Michele Buck told investors that "cocoa is expected to limit earnings growth this year" in a call following the company's earnings results. Buck later added the company plans to use "every tool in our toolbox, including pricing, as a way to manage the business."

"The confection business is going to bear the brunt of the margin impact due to cocoa," CFO Steven Voskuil said on the call.

In the company's Q4 earnings report, Hershey's North America confectionary business saw a 2.1% increase in sales, driven by a 7.2% price increase and offset by a 5.1% drop in volume.

Yet, Americans are still willing to indulge their sweet tooth. More than half of consumers plan to give candy as a gift for Valentine's Day this year, per the National Retail Federation. Spending on sweets for the holiday is projected to total $2.4 billion.

Brands are feeding into the holiday craze too, Baumgartner said.

"I've actually been surprised at how much more aggressive these brands have been for Valentine's Day ... it used to be a Russell Stover-dominated holiday," he said. Hershey's only "started getting involved a couple years ago," with more premium brands joining the fray as of late.

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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