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Cocoa Slump Signaling Hershey Chocolate Profit: Chart of the Day

Cocoa Slump Signaling Hershey Chocolate Profit:
Cocoa futures have dropped on forecasts for record crops from Ivory Coast and Ghana. But an industry analyst said Hershey increased prices just before cocoa spot prices began to fall precipitously, so this is working out well in their favor. Photographer: Scott Eells/Bloomberg

Dec. 5 (Bloomberg) -- A slump in cocoa futures to a 32-month low may mean profit gains for chocolate makers including Hershey Co. that raised prices for consumers earlier this year as ingredient costs escalated.

The CHART OF THE DAY shows cocoa has plunged 41 percent from a 32-year high of $3,775 a metric ton on ICE Futures U.S. in New York on March 4, while the Hershey, Pennsylvania-based food company company rallied 23 percent this year to $57.84 a share in New York, the biggest gain among the 14 companies tracked by the Standard & Poor’s 500 Packaged Foods Index.

Slowing economic growth has done little to curb Americans’ appetite for chocolate. U.S. sales rose 6.7 percent in the 52 weeks ended Oct. 30, with prices on average climbing 6 cents to $1.56 per unit, according to SymphonyIRI Group, a Chicago-based research firm. Hershey, the maker of Hershey’s bars, Kit Kat and Reese’s, raised prices 9.7 percent in March.

“Pricing is holding up,” said Robert Moskow, an analyst at Credit Suisse Group AG in New York, who has an “outperform” rating on Hershey shares. “The stickiness in pricing is definitely a good thing” for the profit outlook, Moskow said.

Cocoa futures have dropped on forecasts for record crops from Ivory Coast and Ghana, the world’s biggest growers. The commodity settled at $2,228 on Dec. 2. The impact on companies may not be immediate because many purchase supplies months in advance to hedge against the risk of a jump in prices, Moskow said. His 12-month price target for Hershey is $68.

“Hershey increased prices just before cocoa spot prices began to fall precipitously, so this is working out well in their favor,” Ken Shea, a senior industry analyst at Bloomberg Industries in Princeton, New Jersey, said in a telephone interview. “It’s intuitive to think that their margins are going to benefit over the next few quarters.”

To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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