Valentine's Day has come and gone. About 92 percent of American consumers were planning to share chocolate and other candies for Valentine's Day this year, according to the National Confectioners Association, but the price tag for that heart-shaped box of chocolates may have left a bad taste in many a mouth this year.

 

Last year, chocolate sales exceeded more than $4 billion. It feels like I paid my fair share of that total. You see my wife, Barbara, loves chocolate, so giving a gift on Valentine's Day was easy. Along with flowers and a card, a generous amount of dark chocolate (but not milk chocolate) in any form — hearts, cups, dipped pretzels, bonbons, truffles — is sure to win the day. Her craving, however, transcends that one day, so chocolate is my go-to source for gift-giving on birthdays, and most holidays. As such, in this era of inflation, I have kept track of how much these sweet dark delights are costing me.

 

This year, I was not surprised to see candy prices continue higher. Retail chocolate prices have risen about 17 percent over the last two years, according to a report by CoBank, and I expect they will continue to do so. Why?

 

Cocoa, a main ingredient in chocolate, is responsible for much of the price rise. The price of cocoa hit record highs last week, just in time for Valentine's Day. Prices have doubled over the past year and are up 40 percent since January. This week cocoa futures prices continued higher to $6,030 per ton, another record high. The outlook for the 2024 growing season is worsening, which is leading to fears of a larger global deficit.

 

Cocoa, you see, is another victim of climate change. Poor weather and crop disease have afflicted the world's main cocoa-growing region, which is in West Africa. Massive rains followed by severe drought, coupled with wind, devastated the cocoa crop. Insects and disease followed shortly thereafter. This has led to the third year in a row where cocoa harvests have been coming up short.

 

But don't think that higher prices in the futures markets are making growers in Ghana and the Ivory Coast rich. Ghanaian farmers are receiving between $1,800 and $1,900 per ton and Ivorian growers even less ($1,600/ton), according to the Ghana Cocoa Marketing Co. In both countries, the government controls prices that farmers receive, which are based on prices that were current anywhere from 12 to 18 months ago. That is an unworkable system but that is another story.

 

It is the world's hedge funds that have reaped most of the benefits of this surge in prices. At the end of 2023, speculative traders began massing billion-dollar bets on cocoa futures contracts, gambling that this year's harvests would be poor as well. At this point, the hedge fund community has the largest risk exposure ever, according to the Commodity Futures Trading Commission, with more than $8 billion in futures positions.

 

Of course, with all these new traders jumping into the market, prices have soared, but so has volatility, making it even more difficult for processors to hedge their purchases. They need cocoa beans to make cocoa butter to supply chocolate makers. As a chocolate buyer throughout this period, I have noticed that big companies like Nestle and Cadbury have been raising prices consistently for the last two years.

 

Hershey, one of America's most loved chocolate makers, said product prices rose 6.5 percent in the fourth quarter, and 9 percent in all of 2023. The company is planning on cutting 5 percent of its workforce because price inflation is forcing consumers to pull back on purchases.

 

The bad news is that not only are cocoa prices continuing to rise, but so too are the price of sugar and wages. Both are key components in just about every chocolate factory including Willi Wonka's, where even Oompa-Loompas demand raises. I would expect that by Easter we will see yet another hike in chocolate prices and by Halloween, well, who knows? So, unless you discover a golden ticket inside your chocolate bar, I would buy it early.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.