|Sandhya Anand, Staff Writer|
Everything sweet comes at a price. So what happens if the future market transforms sweet to bittersweet?
Hershey’s has resorted to buying cocoa on the futures market. This is an unprecedented step for the company, as normally Hershey’s purchases their cocoa from traders. A cocoa contract is the world benchmark for the global cocoa market. It prices the physical delivery of cocoa to any of the five delivery ports in the United States from African, Asian, Central, and South American origins.
“While we do not discuss details of our specific buying and hedging activities, we buy cocoa from a variety of suppliers and sources to meet our ongoing business needs,” Hershey’s stated.
Ever since the world’s top two producers, the Ivory Coast and Ghana, have added a premium on the beans in the physical cocoa market, buyers have resorted to other, cheaper options to purchase their precious cocoa. Ivory Coast and Ghana have imposed a charge of $400 per tonne to support the livelihood of farmers whose labour has been continuously unpaid in the cocoa production and consumption process. The premium is called LID and has garnered the wide support of chocolate makers. Physical buyers also have to shell out a “country premium” from their pockets to purchase the higher quality cocoa from these producers. Ivory Coast and Ghana’s cocoa beans are considered the highest quality among African producers.
Hershey’s has faced some criticism for going to the futures market instead of paying the new prices and supporting the cocoa producers. The company has claimed it has “long supported initiatives that improve the incomes and livelihoods of farmers” and that it has bought beans in physical markets and contributed to the living income differential premiums set by the two top cocoa producers of the world.
The futures market is consulted by buyers for judging, and trading by speculators. It is considered rare to see physical buyers taking the delivery of the commodities from the futures exchange, as normally actual products are not exchanged using the market.
“It’s been a hell of a rally,” said Jack Scoville, a commodities broker Price Futures Group in Chicago, referencing the spike in cocoa prices on the market. “It is not a fundamental strength,” he added. He also mentioned that it was these policies established by Ivory Coast and Ghana that are continuously on traders’ minds.
Consequently, many cocoa traders and chocolate companies are willing to pay the extra cost of the premium to provide a living wage for the farmers. However, they do want a bargain on the local “country premium” costs based on the demand from the local areas. The middlemen have made it clear to the African states that the premium has an abysmal effect on the market. They have been struggling to sell nonstaple goods such as chocolate due to the recession that was induced by the pandemic, as well as the effects of increased costs due to the living wage premiums.
According to several market sources, Hershey’s had accepted deliveries of thousands of cocoa lots before the cocoa contract had expired in December 2020. It was estimated to have been over 30,000 tonnes. Traders had mentioned that Hershey’s obtained an exemption from ICE to exceed the delivery limits set by the United States.
“An unprecedented delivery for a branded company that will push the continued problem of unsold LID premium cocoa back further,” claimed a European trader.
All in all, this was an unexpected move executed by Hershey’s. If anything it signifies the range of the turbulences and unusualities that we may experience on the cocoa market during the upcoming year.