Lower cocoa sugar prices weigh on milk chocolate bar index

by Ron Sterk
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While much of the nation’s attention has focused on record high prices for corn and soybeans this summer as the result of the worst Midwest drought in more than 50 years, sharply lower sugar and cocoa powder prices have more than offset recent higher milk values and sent chocolate prices down about 25% from a year earlier, as reflected in the Food Business News milk chocolate bar index.

The milk chocolate bar index in early September stood at 168.3% of the March 2005 base of 100, down 55.8 percentage points, or 25%, from 224.1% a year earlier. The milk chocolate bar index, along with the other 12 food and bakery ingredient indexes on Page 69, use standard industry formulas for ingredients and prices gathered by Sosland Publishing Co. and in some cases from other sources, including the U.S. Department of Agriculture, to arrive at a weekly value intended to reflect the impact of price changes on the production of certain food products.

The key ingredients in milk chocolate are milk (dry milk products), sugar and various forms of cocoa (powder, butter or liquor), depending on the quality of the chocolate. In Europe, the world’s largest per capita chocolate consuming region, most chocolate is made with cocoa butter.

Cocoa powder prices moderate
In the United States much of chocolate is made with cocoa powder blended with vegetable oil to create lower-price “compounds.” Cocoa powder also is widely used in baking mixes, ice cream, chocolate milk, coatings and many other applications, in addition to chocolate bars and candy.

Cocoa powder prices climbed to historic highs near and above $2.50 a lb (for 10% to 12% butterfat powder) in late March 2011. Prices were at their apex of $2.50@2.55 a lb during most of May 2011. Some easing began in late May before falling below the $2.50 mark in October of last year. Powder prices began climbing in 2008 as sinking economic conditions, especially in Europe, dampened demand for high quality chocolate. As a result, cocoa butter supplies grew burdensome and processors lowered production. Since cocoa bean processing results in about equal amounts of cocoa butter and cocoa powder, production of the latter also fell. At the same time, cocoa powder demand increased as food processors in some cases switched to lower-priced compounds in place of cocoa butter.

Resistance to high priced cocoa powder, the use of substitutes and the elimination of some cocoa-containing products contributed to the decline in powder prices, allowed the market to begin moving back toward a more normal cocoa butter-powder relationship, although it’s still not at traditional levels.

Other key ingredients
At about the same time cocoa powder prices were rising in 2011, sugar prices also were on their way to near historic levels. After finally falling from late 2005 Hurricane Katrina-inspired gains, sugar prices fell to “traditional” levels around 25c a lb in January 2008. But domestic sugar prices have never seen that level since as the result of a string of events, beginning with a cane refinery explosion in February 2008, supply concerns in much of 2010 and 2011 and a late beet crop harvest last year.

Bulk refined sugar prices rose to highs near and above 65c a lb f.o.b. Midwest in September 2010 and to near and above 60c a lb in September 2011. Since then, the U.S.D.A. has allowed additional sugar imports into the United States (after April 1, 2012), and the U.S. sugar beet crop is early and appears to be one of the best ever and supplies currently are adequate if not abundant. Prices for the fourth quarter around 38@40c a lb f.o.b. Midwest are down about 35% from a year ago and the lowest since August 2009.
The price for the other key ingredient, milk (or milk products).

has been going in the opposite direction recently, but also contributes a smaller percentage to the total cost of the milk chocolate bar index than do cocoa and sugar. While price changes for various milk products vary, many have been rising fairly steadily since June or July, but most also remain below year-earlier values, with some more than 20% below September 2011 levels.

The milk chocolate bar index, meanwhile, climbed to its highest level ever of 225.5% in April 2011 and was at or above 200% for all of last year. The index was below 100% for much of 2006, the only such year since its inception in 2005. The index dropped below 200 in January 2012 and has been declining since, reflecting falling prices for cocoa and sugar and for a while milk. At its current level of 168.3%, the index is the lowest since November 2009.

Going forward, cash cocoa powder and sugar prices are nearly flat with current levels through 2013, despite strong gains in cocoa bean futures prices. The U.S.D.A. expects milk and milk product prices to increase over the next several months due to drought-related high feed prices and herd culling because of negative profit margins for milk producers, but that should have the least impact on the index.
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