Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Chocolate Stays Expensive When Cocoa Crashes
Transcript
- Lucas: Here's a paradox for a Monday morning: cocoa futures have been sliding for months, but the chocolate bar you picked up at the checkout counter last week probably cost the same — if not more. Luna: It's something I've been noticing too. The headline says cocoa's easing, but my grocery bill sure isn't. What's going on? Lucas: Well, let's look at the numbers. As of July 26, cocoa futures are down about 20 percent from their peak earlier this year. The headline you just read — 'Cocoa prices are easing. So why is chocolate still so expensive?' — that's exactly the question. Luna: Right, and it's not just cocoa. Coffee futures have cratered 10 percent in just the last five days. Are we seeing a broad soft-commodity deflation? Lucas: To some extent, yes. Coffee's down because of good rains in Brazil and a strong harvest. Corn, on the other hand, is up 7.6 percent in the same period — weather concerns in the U.S. Midwest. So it's mixed. But the chocolate puzzle is instructive because it shows how commodity price moves get filtered before they reach you. Luna: Filtered by whom? The farmer? The processor? The retailer? Lucas: All three, but the biggest filter is the big chocolate companies. Think Hershey, Mars, Nestlé. They buy cocoa months or even years in advance through futures contracts and hedging programs. So even if spot cocoa drops today, the cocoa going into your chocolate bar was purchased at higher prices months ago. Luna: So it's a lag effect. But how long does that lag last? Lucas: Typically six to twelve months, depending on the company's hedging strategy. Hershey, for example, reported first-quarter earnings in April and said they expected cocoa costs to remain elevated through the second half of the year. They locked in prices. That means even if cocoa keeps falling, their cost of goods sold stays high for a while. Luna: But eventually the cheap cocoa should show up, right? Or are there other factors? Lucas: There are. Processing margins — turning cocoa beans into cocoa butter and powder — have their own dynamics. Plus, brands have pricing power. When does a company like Hershey actually cut the shelf price? They'd rather use the margin to invest in marketing or buybacks. And consumers have shown they'll pay up for chocolate, especially premium bars. So the incentive to pass through savings is weak. Luna: It sounds like the same story we saw with coffee a few years ago. When arabica futures tanked, Starbucks didn't slash latte prices. They just enjoyed bigger margins. Lucas: Exactly. And that's why this matters beyond the candy aisle. It tells you something about how sticky inflation can be. Look at the macro data: the June CPI released last week showed headline inflation easing to 332.6 from 333.98, a modest decline. But core PCE, which the Fed watches more closely, actually ticked up a bit — from 129.67 to 130.1. That's largely services, but it shows that even when commodities fall, it doesn't automatically bring down consumer prices. Luna: Especially for branded goods. The ten-year breakeven inflation rate is at 2.26 percent, down a touch from 2.28. Markets are betting inflation stays contained, but if commodity deflation isn't reaching consumers, that's a different story. Lucas: Right. So the chocolate paradox is a microcosm of a bigger question: how much of the commodity price swing actually gets passed through? For cocoa, it's limited. For oil, it's more direct — you see it at the pump within weeks. That's why crude above 89 dollars this morning has a more immediate impact on the consumer price index than a drop in cocoa. Luna: But chocolate is still a big category. And there's a headline today about Imax and a new Nolan film — that's not commodities, but it reminds me that consumers are spending on experiences. Maybe the chocolate companies are worried that cutting prices won't drive more volume because people are spending on travel or movies instead. Lucas: That's a good point. Demand for chocolate is relatively inelastic. A price cut might not sell many more bars, so why bother? The companies will eventually have to lower prices if cocoa stays low for a sustained period and competition heats up. Private label chocolate from store brands could force the issue. Luna: So when should we expect to see a change? Any clues in the futures curve? Lucas: Cocoa futures are in contango — deferred contracts are higher than spot. That suggests the market expects prices to recover somewhat. So the window for cheap cocoa might be short. If I were a chocolate maker, I'd be locking in now for next year. That could keep retail prices high even longer. Luna: And meanwhile coffee continues to crash. That's a completely different dynamic. Lucas: Yeah, coffee's down over 10 percent in five days — that's a huge move. But again, the retail price of a bag of beans or a latte hasn't changed much. Roasters like Starbucks and J.M. Smucker hedge heavily too. So consumers aren't feeling the deflation. Luna: It almost feels like the commodity price signal is being jammed by corporate strategy. But for the average person, that matters because it affects their cost of living. Lucas: Absolutely. And that's why understanding these mechanics is valuable. If you know that cocoa's drop won't show up in your grocery bill for a year, you're not waiting for a sale on chocolate. But you might adjust your expectations for inflation overall. Luna: You know, this whole conversation — it's the kind of thing that makes the economy click. And honestly, if today's episode was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that helps us keep the show ad-free and focused on topics like this. We don't do sponsors, so listener support is what keeps us going. Luna: Exactly. And we'll keep digging into these puzzles. So, back to the chocolate question — let's bring it home. What do you watch for as the signal that chocolate prices might actually crack? Lucas: I'd watch the quarterly reports from Hershey and Mars. If they start mentions deflationary cocoa costs and increasing promotional spending, that's the first sign. Also, retail shelf prices at your local store. If private label chocolate drops, the big brands will follow. But my bet is we don't see a meaningful decline until early 2027. Luna: So keep an eye on those candy aisles. And if you want to understand more about how commodity markets affect your wallet, we'll keep talking about it. Lucas: Right. And if you want to help us keep doing that, you know where to find us. For now, thanks for listening.