While broader food inflation measures have eased, sharp rises in sugar and cocoa prices will hit the wallets of lovers with a sweet tooth as extreme weather conditions hamper production.
This month, sugar prices hit their highest level in 12 years and cocoa futures hit a four-year high, a move that analysts said could lead to higher prices for hot drinks and sweets.
Mintec price reporting manager Andrew Moriarty said chocolate manufacturers and processors had been “praying for prices to come down throughout the year, but they haven’t”. Instead, prices will rise further, he said: “We expect costs to start being passed on to consumers soon.”
Consumers can also expect further “shrinking” in product size and ingredients to reduce costs, he added.
The price rise is driven by supply concerns as the El Niño sea temperature phenomenon, combined with rising temperatures due to climate change, brings extreme heat to parts of Asia and reduced rainfall in West Africa, threatening production of sugar, cocoa and coffee.
“What’s really driving prices higher is the prospect of (supply) shortages in 2023-24,” said John Stansfield, senior sugar analyst at DNEXT.
Food manufacturers have said they will pass on the latest cost increases. François-Xavier Roger, chief financial officer of Nestlé, the world’s largest food maker, told investors this month that the company did not plan to significantly raise prices except “selectively in certain categories.” prices, we still see increases in some input costs, such as cocoa, sugar, robusta, coffee.”
UK candy prices rose 15% in the year to June, while US candy prices rose 9.4% in the year to August.
Still, sales showed resilience. Analysts say that even as shoppers cut back on other spending, they tend to view food items such as candy as affordable luxuries.
This has proven to be a boon for manufacturers. Cadbury maker Mondelez and Hershey both raised their profit forecasts for this year.
“The advantage of cocoa and confectionery is that it’s a very resilient market,” said Bernstein analyst Bruno Monteni. “People eat chocolate all the time.”
Unusually dry weather in the southern states of Karnataka and Maharashtra has affected output in India, the world’s largest sugar producer, causing sugar prices to rise. Analysts predict that production in the 2023-24 season will be 4 million tons lower than the 32.8 million tons in the same period last year.
Stansfield said India was limiting exports to 6.1 million tonnes in the 2022-23 season, down from 11 million tonnes the previous year, and was considering a blanket export ban from October, which would further curb supplies.
He added that given that “sugar is extremely political in India”, upcoming elections in five states and national elections next year make export restrictions more likely.
Sugar prices have eased slightly from peaks earlier this month after a bumper corn harvest in Brazil prompted ethanol producers to switch to grain production, freeing up sugar supplies.
However, cocoa prices have a more direct impact on consumer goods than sugar, said Andy Duff, global sugar strategist at Rabobank.
Yves Brahima Koné, president of Côte d’Ivoire’s coffee and cocoa board, said the country, which produces 70 percent of the world’s cocoa beans, expected a “mediocre harvest” and blamed “rainfall” Too much, not enough sunlight”.
Analysts expect output in the West African country to fall by about 15% in the next quarter.
Moriarty said chocolatiers have restricted purchases as prices have remained high over the past 18 months.
“The entire industry is facing shortages,” he said, adding that some manufacturers will only have supplies until the end of the year. As a result, buyers are now forced to take the hit and buy at higher prices, Moriarty said.
In addition to raising prices, manufacturers are also reducing the size of their products to cushion the impact of rising costs, said Rabobank cocoa analyst Paul Joules.
French supermarket chain Carrefour this month put labels on reduced-size products such as Unilever’s Viennetta ice cream and Lindt chocolate, warning consumers of “shrinking inflation”.
Joules said chocolate makers were also offsetting higher cocoa prices by adjusting other ingredients to reduce costs, such as increasing palm oil content or using cheaper milk powder instead of anhydrous butterfat.
Unstable weather in recent months has also affected robusta coffee production in Vietnam and Indonesia, the world’s second and third largest producers. If El Niño causes a prolonged drought, it could further reduce yields.
That’s bad news for espresso drinkers, especially in Italy, where robusta beans dominate. Instant coffee drinkers may face a bigger hit, Moriarty said. This product uses robusta raw materials, and the production process is energy intensive, so it is affected by high energy prices.
Professor Tim Benton, a food security expert at Chatham House, said that while chocolate and coffee may seem like luxury items in the food basket, rising costs of basic commodities illustrate the fragility of the global food system.
Analysts at HSBC warned this month that rice prices surging to their highest levels since 2008 could drive up the cost of other commodities and spur inflation in Asia as El Niño and bad weather threaten output.
Benton said more severe broad-based food inflation could easily return. He added that agricultural markets were complacent about the risks associated with El Niño, “but we have never had an El Niño in a hot world like today”.
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