Hershey remains tight-lipped on potential cocoa-linked pricing beyond this year’s hedging contracts as the commodity continues to trade at record highs.

President and CEO Michele Buck was badgered with questions on cocoa as she discussed the confectionery and salty snacks maker’s first-quarter results, where an 8.9% increase in sales was buoyed by an inventory build-up from the roll out of a new enterprise resource planning (ERP) system.

Buck reiterated a previous observation that cocoa prices will remain inflationary into 2025 even as prices fell to around $8,000 a tonne. However, that level is still unprecedented despite coming off the high of $12,261 reached in April.

“While our 2025 planning is underway, it is premature to discuss potential financial scenarios or impacts, and for competitive reasons we will not be discussing our hedging policies or pricing strategies,” Buck said in a discussion of the quarterly results to 31 March.

“But we remain confident in the long-term outlook and the levers we have to help mitigate inflation and protect our margins over the long term.”

For 2024 at least, Buck gave assurances that Hershey is covered in terms of cocoa supply, with hedging contracts locked in.

“The current market is being impacted by factors beyond supply and demand. Lack of liquidity, new regulations, and market speculation have all contributed to the record-high prices we are experiencing,” she explained.

“We have robust processes in place to ensure continuity of supply and good visibility into our costs. We are well covered for 2024 and do not expect recent volatility to affect our financial outlook for the year.”

The sales growth guide was kept at a 2-3% range for fiscal 2024, although finance chief Steve Voskuil said Hershey’s gross margin will drop by around 200 basis points as “cocoa and sugar inflation more than offset net price realisation and supply chain productivity”.

That metric was down 170 points in the first quarter at 44.9% on an adjusted basis.

Cocoa price drivers

In a Q&A session, the CEO was asked what she thought might be driving the decline in cocoa as it comes off the April peak.

“I think first of all, that decline is just further evidence of the tremendous volatility that we're seeing in the marketplace,” Buck responded. “There are no new signals relative to supply and demand that are meaningful yet.”

She added: “Perhaps some early signs about the mid-crop, which leads us to believe that more of the decline is driven by some of the non-supply-demand economic factors but some of those other factors that we've discussed relative to speculators, thoughts on regulation, etc.”

Voskuil gave further insight when asked about the potential price impact and strategies around cocoa derivatives such as cocoa butter.

“Cocoa is the big headline, but when you look at the cocoa derivatives, they are also increasing,” he explained. “We won't comment about percent increase relative to cocoa price increases, but they are inflationary just as cocoa itself is.”

Voskuil added with respect to sourcing options for 2025: “Obviously, the hedging programme and the financial side is one way to deal [with it] and then the supply chain side, making sure we've got diverse sourcing.

“We've done a good job of that over the years of really trying to diversify that supply chain footprint. No doubt, looking back at the last few years, we'll continue to move that diversification forward, but that does give us some flexibility on sourcing.”

Dirk Van De Put, the CEO of Hershey’s peer Mondelez International, was also pressed on cocoa prices last week as the Cadbury chocolate owner issued its first-quarter results.

“Record costs for cocoa ingredients and the resulting current and future price increases for customers and consumers, obviously, are generating substantial discussion,” he said. “Despite this near-term headwind, chocolate volume continues to grow and within this growing category, we remain structurally advantaged with large opportunities still ahead.”

Mondelez, too, is covered in terms of 2024 hedges and is “well-protected heading into 2025”, Van De Put added.

Buck, meanwhile, emphasised how cocoa is “critical to our long-term business resilience and success, and as such, we have dedicated resources and strong investments in place to ensure we have a resilient supply chain for the future”.

She was asked to comment on remarks made by Mondelez CFO Luca Zaramella last week, who said cocoa prices “are the result of a series of accidental circumstances that over time we believe should go away”.

Buck said in response: “Overall, our views about what has driven the market are somewhat consistent with what that large competitor shared earlier. As we think about it, we think both structural and transient forces have been at play impacting prices over the past several months.”

The Hershey chief continued: “It certainly started with poor weather, poor weather that impacted crop, and then concerns about supply. But as we've mentioned previously, it's also about much more than just supply-and-demand economics, but rather the impacts of regulation, like the EU deforestation regulation, market speculation and also the lack of liquidity.”