By Roshan Fernandez

Record-breaking cocoa prices have left a bitter taste for candy companies, and show why derivatives markets can offer some relief.

Pennsylvania-based Hershey said it booked a $460 million pretax gain last year from its commodity derivative positions, which the chocolatier uses to help price future inventory needs. More than half of that accounting gain came in the fourth quarter. Its full-year profit totaled $2.22 billion.

Cocoa is one of the biggest commodity costs for Hershey, which makes products like Reese's Peanut Butter Cups and Kit Kats. It works to make its business less volatile by entering contracts to buy goods at certain prices in the future, knowing it will benefit if prices skyrocket.

A large run-up in price, like what is happening with cocoa, can create a big swing in earnings. Wall Street analysts typically aren't interested in these derivatives-related swings, since they don't reflect the health of the underlying business, and companies often present earnings on an adjusted basis to exclude that volatility.

Cocoa futures prices roughly tripled last year, a sharper rally than major U.S. stock indexes and even bitcoin. Torrential rains in West Africa last fall delayed cocoa harvests and created mold. Producers have struggled with crop disease, and more recently an early onset of the region's dry season.

"Cocoa markets remain volatile," Hershey Chief Executive Michele Buck said on a conference call Thursday. "We continue to believe that current high prices are not reflective of market fundamentals."

Hershey reported adjusted profit and sales for the fourth quarter that surpassed analysts' expectations, helping send its shares about 4.3% higher.

Mondelez International, the supplier of Chips Ahoy and Oreo cookies, said this week it expects its adjusted earnings per share to decline about 10% this year due to cocoa cost inflation.

Swiss chocolate company Barry Callebaut last month scaled back its forecast for the current fiscal year, in part because efforts to raise prices to account for escalating cocoa costs are denting demand.

Hershey has said it uses futures, options and other financial instruments, along with forward purchasing, for commodities ranging from cocoa and sugar to dairy products and natural gas.

"One of the benefits of a great hedging and commodity team is we're not paying the market price," Chief Financial Officer Steve Voskuil said Thursday.

Hershey has found new cocoa suppliers as part of efforts to diversify its supply chain. The Ivory Coast and Ghana produce about half of the world's cocoa. Diversification will give the chocolatier -- and the global cocoa market -- "an inherent resilience" against weather and geopolitical factors, Buck said.

She said that alternatives to cocoa are also in growing demand in the confectionary business. Some companies feeling that pressure have switched to cocoa butter alternatives, reducing global demand for the commodity.

"We do that where possible, but we're pretty precious about the brands and what they stand for with consumers," Buck said.

--Jacob Bunge contributed to this article.

Write to Roshan Fernandez at roshan.fernandez@wsj.com

(END) Dow Jones Newswires

February 06, 2025 16:12 ET (21:12 GMT)

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