Posted on: Tuesday, September 3, 2002

Affording treats may be tricky

By Matthias Wabl
Bloomberg News Service

Candies containing chocolate may soon cost more because manufacturers must meet sharp increases in cocoa prices as the Halloween sales season approaches. Cocoa prices, up 56 percent, are at a 15-year high. Bloomberg News Service

BARABOO, Wis. — The rising price of cocoa 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.

The price of cacao beans, the unprocessed form of cocoa, is at a 15-year high.

"If cocoa prices stay at this level, everybody will have to charge more for their products," said Dennis Roney, president of Baraboo Candy Co., 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."

Prices have soared as the Ivory Coast, the world's top grower, and other countries failed to produce enough to meet demand from chocolate manufacturers. Demand has exceeded supply for two years, traders said.

The 56 percent rally in cocoa prices this year is also hurting processors' profits. This year's rally followed a 73 percent surge last year.

Archer Daniels Midland Co., the largest U.S. processor of cacao beans, has increased prices over the past three months for the cocoa butter, liquor and powder it sells to Hershey and other manufacturers.

Candy makers are holding off from 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.

Wisconsin-based Baraboo, which sells about 1 million pounds of chocolate a year, hasn't raised prices in two years, Roney said.

A spokeswoman for closely held Mars said the company has not raised retail prices in six years and wouldn't say whether it was considering an increase now. A Hershey spokesman declined to comment.

Earlier this summer, Hershey reported second-quarter net income of $63.1 million, or 46 cents a share — 20 percent higher than a year earlier. The maker of York peppermint patties and Reese's peanut-butter cups is selling more to convenience stores and is eliminating less profitable candy sizes and items to increase sales and cut costs. The charitable trust that controls Hershey said last month that it would put the company up for sale.

Pierson Clair, president of Tacoma, Wash.-based chocolate manufacturer Brown & Haley, said: "We are under enormous pressure to raise prices because our profit margins are squeezed."

Decatur, Ill.-based ADM has closed plants in Georgia this year this year as the price of cacao beans rose and processors were left with a glut of cocoa butter. Overseas, it also closed facilities in Poland.