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
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,
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
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
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
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.