Big Chocolate Splits On Cocoa Price Outlook

As cocoa prices continue to trade at near-record highs, chocolate manufacturers are increasingly divided on how to manage the risks. A deep split is emerging within the industry between firms that are cutting back on their price hedging strategies and others that are maintaining or even increasing their protection against further volatility.

This divergence signals a broader disagreement over whether the cocoa bull market is nearing exhaustion — or only just entering a more volatile phase. For now, the stakes are high. The cost of hedging has soared, prompting some companies to reduce their exposure to futures contracts in the hope that prices will stabilise. Others are unwilling to take that gamble, preferring to pay the premium to secure predictable input costs. The result is a risk management divide that could reshape margins, pricing, and competitiveness across the sector.

Cocoa Prices at Multi-Decade Highs

Cocoa prices have climbed dramatically since early 2024, driven by multiple converging factors. Poor harvests in Côte d’Ivoire and Ghana — which together account for over 60% of global supply — have sharply reduced output. Political disruptions, port bottlenecks, and extreme weather have worsened the situation.

On the speculative side, increased fund activity in agricultural commodities has fuelled additional volatility, pushing prices even higher. As of mid-2025, benchmark cocoa futures have surged more than 60% year-on-year, with prices exceeding $5,000 per metric tonne — levels not seen in nearly five decades.

This steep rise in raw material costs has added pressure on chocolate makers, whose margins are already strained by high energy, packaging, and transport costs.

Hedging Costs Have Become Prohibitive

To manage raw material risk, chocolate manufacturers typically use futures contracts or options to lock in cocoa prices months in advance. But as prices rise, so do the costs of these hedging instruments.

Margin requirements have increased, forcing firms to post more collateral to maintain positions. Meanwhile, options premiums have risen sharply due to elevated volatility. For some producers, particularly mid-sized and regional players, the cost of hedging now rivals — or exceeds — the price risk itself.

This has prompted a growing number of firms to reduce or abandon their hedging activity altogether, betting instead on a near-term market correction or stabilisation in supply.

Two Camps Emerging

The industry is now clearly split between those taking a more aggressive stance on hedging and those adopting a more defensive posture.

Group A: Scaling Back on Hedges

A number of mid-tier European and Asian producers have reportedly reduced their cocoa hedge books significantly over the past quarter. Some have ceased new futures purchases altogether. Their rationale is simple: current hedging costs are viewed as unsustainable, and there is a belief that the cocoa rally is nearing its peak.

Executives at several privately held chocolate companies have described the hedging environment as “unworkable” and expressed confidence that a global supply recovery — possibly from Latin American exporters — will relieve market pressure by late 2025 or early 2026.

The risk with this approach is obvious: if cocoa prices rise further, these firms could face significant input cost shocks, squeezing margins and forcing price hikes that may not be easily absorbed in competitive retail environments.

Group B: Holding or Increasing Hedges

Larger global players, including Nestlé, Hershey, and Mondelez, appear to be maintaining disciplined hedging strategies despite the cost. These firms tend to have more financial flexibility and often use more sophisticated risk management tools, including structured hedging products and multi-year supply contracts.

Their strategy reflects a more cautious market outlook. With supply disruptions showing little sign of immediate resolution and speculative positioning still high, these companies are willing to pay the price for predictability and protection.

This divide in strategy may lead to divergent financial results in the coming quarters, as unhedged firms face higher cost volatility while hedged firms maintain more stable margins.

Sector-Wide Implications

The hedging divide has broad implications. Firms that are unhedged or lightly hedged will be more exposed to cocoa price swings, which could lead to significant earnings variability. This may, in turn, affect investor sentiment, credit ratings, and pricing power in both wholesale and retail markets.

Companies heavily exposed to private label contracts or discount markets may struggle to pass on price increases, potentially resulting in profit warnings or reduced product ranges.

At the same time, well-hedged firms could gain competitive advantage, particularly in price-sensitive markets. These firms may also be better positioned to sustain promotional activity and marketing investment during periods of commodity inflation.

Historical Lessons

This is not the first time cocoa prices have surged. In 2010 and again in 2015, prices spiked due to similar supply disruptions. Each time, firms that maintained disciplined hedging emerged with more stable performance, while those that took speculative or short-term views faced margin compression.

However, some critics argue that the scale and structure of today's rally are different. The role of climate volatility, speculative financial flows, and shifting global demand patterns may mean the past is less predictive than in previous cycles.

ESG and Regulatory Pressures

An added layer of complexity comes from sustainability commitments. Many chocolate makers are locked into ethical sourcing programmes or long-term contracts that include premiums for certified cocoa. These arrangements can limit flexibility and further increase input costs, making hedging even more important for financial stability.

Meanwhile, regulators in both the EU and North America are pressing for greater transparency in commodity risk disclosure. Firms reducing hedge activity may come under pressure to explain their strategies more clearly in financial filings and investor communications.

What’s Next

• Price outlook: Markets will be watching West African mid-crop data, South American harvest updates, and weather patterns for clues about future supply conditions.

• Company earnings: Expect clearer hedging disclosure and cocoa cost updates during upcoming Q2 and Q3 earnings calls.

• Strategic shifts: Firms may revisit vertical integration strategies — such as direct farm sourcing or processing investments — to reduce reliance on volatile external pricing.

• Risk management: The divergence in strategy will likely become a focus for institutional investors assessing operational resilience and forecasting accuracy across the industry.

Author: Ricardo Goulart