Hershey lifts prices, blaming cocoa, dairy costs

Chocolate giant Hershey issued a reminder that not all agricultural commodity markets are on the back foot by raising the prices of its confectionery for the first time in three years, citing strong raw material costs.

The US-based group, whose brands include Reese's and Kit Kat, said it was raising the wholesale prices of "the majority" of its products, in both US and export markets, by 8%, with immediate effect.

The price rise "will help offset" the extra costs to the group from fuel raw material prices which "have been volatile and remain at levels that are above historical averages", the group said.

Michele Buck, the Hershey president, North America, said: "Commodity spot prices for ingredients such as cocoa, dairy and nuts have increased meaningfully since the beginning of the year.

"Given these trends, we expect significant commodity cost increases in 2015."

Cocoa price resilience

The announcement actually came shortly after prices at GlobalDairyTrade, the dairy auction run by New Zealand's Fonterra, fell by 8.9% to a 21-month low, led by a 10.9% tumble in whole milk powder values, although US dairy markets have proved relatively firm.

However, cocoa futures have remained around their highest levels in three years despite the mid-crop harvests in West Africa, the top producing region, proving stronger than had been expected.

Commerzbank said: "Cocoa has gained in price by a third within a year. The price rise was even somewhat more pronounced in New York, despite the fact that production is faring better than expected."

Unofficial data suggest a rise of about one-quarter in cocoa shipments from Ivory Coast, the top growing country.

Nonetheless, many believe that world cocoa production will fall behind demand in 2013-14 for a second successive season, "and the outlook for 2014-15 also leads many market observers to anticipate a deficit".

Long-term market prospects "will now depend on whether the price rises on the international markets are also reflected in higher prices for growers at the local level", which would stimulate investment in plantations, Commerzbank said.

Consumption dynamics

Meanwhile, on the demand side data due on the Asian and North American cocoa grind in the second quarter will give an insight into consumption rates, after some disappointing European data, showing a 0.2% decline, last week.

Hershey said that its overall sales appeared to have risen by 4.5% in the April-to-June quarter, including a 0.75-point headwind from foreign exchange.

That is below the company's long-term target of 5-7% growth, which Hershey said its 2014 sales looked like falling within this year, but at the bottom of the range, including foreign exchange effects.

Swiss-based Lindt & Sprüngli, which owns the Ghirardelli brand popular in the US and is buying Russell Stover Candies, on Monday said that its North American sales had shown "double-digit organic growth" in the first half of 2014.

Barry Callebaut, which produces chocolate for confectioners such as Hershey, Kraft and Nestle, earlier this month reported sales for the Americas as a whole up 6.2% by volume, and 7.4% in Swiss franc terms, for the nine months to May.

Hit from commodity costs

Hershey added its underlying earnings for the April-to-June quarter looks liked coming in at about $0.74-0.76 per share.

Investors have forecast a figure of $0.75 per share.

For 2014 as a whole, the company said it expected "adjusted earnings per share-diluted growth to be around the low end of its long-term target of 9-11%", weighed by pressure on margins.

"The company expects commodity costs, primarily dairy, to be greater than its previous estimate resulting in adjusted gross margin that is slightly down versus last year," Hershey said.

JP Morgan on Wednesday trimmed to $99, from $100, its target price for Hershey shares, but kept an "overweight" rating.

The stock closed on Tuesday at $94.66.

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