Chocolate prices have spiralled higher and higher over the past 6 months, leaving a bitter taste for consumers. Indeed, as the graph below from the Office of National Statistics shows, inflation for chocolate prices in the UK reached 12.9% in March 2023, a significantly higher rate than for the majority of the previous decade. The cost pressures of the chocolate industry are increasingly being passed onto consumers; according to the Independent, the average price of KitKats increased by 10% in the first 3 months of 2023. One of consumer goods giant Nestle’s flagship names, the rise in price may push customers to take a break from the popular item and turn to cheaper alternatives.
The same cost pressures that have led to Nestle bumping prices for KitKats have also affected their competitors. Galaxy chocolate bars, owned by Mars Wrigley, increased by almost 50% in the UK in March 2023, while rival Mondelez raised the price of its iconic Toblerone line by over 40% in January of this year. ‘Inflation’ is often used as a catch-all term to describe and explain such price increases, however this only provides limited insight into why chocolate has specifically been so affected. In this week’s blog, we’ll look at the recent price development of 4 key commodities which are, more importantly, 4 key ingredients in KitKats and other chocolate products.
While not used in every chocolate bar, wheat flour is a key ingredient in KitKats and other biscuit-type chocolate goods, and wheat had one of the most volatile years of any commodity in 2022. CME Chicago Wheat prices began 2022 trading near $8 per bushel, already significantly higher than the average from the previous 5 years. However, the situation fundamentally changed followed Russia’s invasion of Ukraine on 24th February 2022, at which point wheat prices skyrocketed upwards. While wheat prices have largely followed a downward trend since mid-October, and have now returned to a level last seen in June 2021, there is an inevitable lag in passing this price decrease onto consumers. Procurement teams at confectionery manufacturers will have locked in purchase agreements with wheat suppliers in 2022, and while the current price is now lower, they are likely still bearing the cost of last year’s higher prices. This lagging effect also applies to the following commodity.
CME Chicago Wheat prices since Jan 2022
Palm oil’s price chart from January 2022 onwards looks similarly volatile to the wheat chart, and there were some overlapping themes behind this. Russia’s invasion limited global access to sunflower oil, a key export from the Black Sea region, and therefore boosted the prices for alternative edible oils including palm. However, another key reason for the sky-high palm prices in 2022 was the back-and-forth export policy decisions from Indonesia, the world’s leading producer of the oil. A blanket ban on exporting palm oil, imposed on April 28th, was replaced by several policies which required Indonesian producers to reserve specific amounts of their produce for the domestic market; however, this specified amount kept changing throughout the year. The combined forces of the disruption to the global edible oil markets and Indonesia’s export uncertainty, led prices to rise higher throughout the first half of the year, before crashing back down during June as supply chains adjusted and exports finally resumed from Indonesia. Prices have since stabilised, but it is worth noting that they are still trading well above the average price for the majority of the previous decade.
BMD Palm Oil prices since Jan 2022
Unlike wheat and palm oil, the sugar market survived 2022 without the once-in-a-decade price movements. However, this does not mean that it has been all sweet for manufacturers either. Sugar prices have been on a steady rise since hitting lows in April 2020, with prices more than doubling since dipping below 10¢/lb in those early pandemic days. Rather than causing cost pressure through unpredictability then, it has been the relentless rise of sugar prices that has forced cost increases for chocolate and many other food products. This scenario shows no signs of weakening in the short-term either, with benchmark sugar prices recently climbing above 26¢/lb and marking a new highest level since Autumn 2011. Poor crops around the world, particularly for sugarcane in India and sugarbeet in Europe, have caused much of the upward pressure in prices recently and the market is now in need of a bumper Brazilian crop to ease the supply shortage.
ICE Sugar No.11 Prices since Jan 2022
Last but not least, cocoa prices since the start of 2022 have followed a pattern more similar to sugar than to wheat or palm oil. Cocoa prices are primarily tracked on two global benchmark prices, both of which are traded on ICE; US futures and their London counterpart. The US price moved up in Q1 2022, before declining again towards the middle of the year, but generally was trading within a reasonable range. Since the start of Q3, however, the price has pushed from around $2300/t up to over $2900 and reached its highest level since August 2016. Across the Atlantic, London cocoa prices have followed a sugar-like trend of steady increases since the start of 2022 and have also reached a highest point in almost 8 years. Much of the upwards pressure on cocoa costs comes from a downturn in export volumes from the Ivory Coast, the largest producer of cocoa beans in the world.
ICE US Cocoa prices since Jan 2022
The increased and unpredictable costs for key ingredients is part of the picture behind the increased price of KitKats and other chocolate products. There are plenty of other factors to take into account as well, such as energy costs relating to the manufacturing process. Companies face a complex challenge of understanding which costs can be absorbed by the business and which need to be passed onto consumers via price increases on supermarket shelves. Given how commodity markets have fared over the past few years, it seems this balancing act is only becoming more difficult.