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High cocoa costs continue to plague industry

By Laura Crowley , 18-Aug-2008

Confectionery manufacturers are facing increasing cost pressures as cocoa prices reach their highest in over 20 years as cocoa futures prices soared by 3 per cent.

In July, cocoa futures continued their upward spiral and swelled to £1,703 (€2,160) in London, the highest for 22 years, according to the International Cocoa Organization’s (ICCO) monthly report.

The story was similar in New York, where futures achieved a 28-year high, reaching $3,245 (€2,203) per tonne, after last month crashing though the $3,000 barrier as demand outstripped supplies.

Meanwhile, the ICCO daily prices averaged $2,954 (€2,005) per tonne, down by $68 compared to the average price recorded in the previous month.

However, during this time, a major correction to the costs occurred, according to the ICCO July report, because of a lack of purchasing interest from the processing and manufacturing sector as a result of the relatively high price of cocoa and from news related to a global slow down in the demand for cocoa beans”.

This briefly brought down cocoa futures by 15 per cent in the fourth week of July compared to their record highs at the start of the month, but it was apparent that this just signalled brief relief for manufacturers who have been struggling to cope with rising costs.

ICCO said: “It should be noted that this development in the cocoa market was not isolated. Most commodities experienced a similar price decline in July.”

Upward spiral of ingredient costs

These increases mirror the upward trend that has been recorded since the beginning of the 2006/07 cocoa season, with costs doubling by June 2008.

It also reflects the rise in general raw material prices witnessed across the food industry, because of high energy costs, poor harvests, growing populations and emerging markets, and diversion of grains for use in biofuels.

This period also saw some major corrections. In July and August 2007, prices dropped for a month as a result of “fundamentals” related to the cocoa market, and influenced by the start of the US subprime mortgage market crisis.

Then, this March, concern over the impact of the American financial crisis caused investment funds to reduce their risks by taking their profits from all their assets, resulting in the decrease in cocoa prices that lasted for three weeks.

Overcoming cost pressures

Major confectionery companies, such as Barry Callebaut, have seen profits suffer under increased input costs, leading them to respond with actions such as raising retail prices.

As cocoa prices show no signs of attaining any long term decrease, it is evermore essential for confectionery makers to develop strategies to absorb the prices.

Last month, Cadbury signalled it would take all measures necessary to deliver its 2008 performance promises, and is not taking any chances on factors that are affecting the food industry, such as high costs.

Chairman Roger Carr said: “Against a background of more challenging economic conditions, we will take whatever measures are necessary in costs, prices, organisation structure and business portfolio to underpin and deliver the performance commitments we have made for 2008 and beyond.”

And in June, confectionery giant Mars linked up with the US government and IBM in a $10m five-year project to sequence cocoa’s double helix genome to find solutions that will relieve the risk to the cocoa supply chain, which is currently impacted by shortages, as well as to produce better chocolate.

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