New York, Feb. 13 - It looks close to panic time for chocolate manufacturers, who may be forced to chase a rallying cocoa market to lock in prices for the key ingredient in their confections.
Some chocolate companies, which traders say have about half the usual amount of coverage for this time of year, appear to have waited too long to buy cocoa as prices in New York charged to multi-decade highs during the speculative fund frenzy in commodities this year.
Traders question how much longer manufacturers can hold out before they are forced to buy. Hershey Co, the biggest U.S. chocolate maker, has already started passing the increased cost along to candy bar lovers.
Last year, many expected the world's 2007/08 cocoa bean supply would be at a surplus. But strong demand has caused the International Cocoa Organization to project a close balance between global supply and demand. This follows a 2006/07 deficit.
"Many at the start of the year were rather optimistic on production, too much so, and so they expected prices to pull back," said Judy Ganes-Chase of J Consulting in New York.
"Specs have been running with the market and not giving manufacturers an opportunity to cover comfortably."
Major U.S. chocolate companies either did not return Reuters phone calls or stated they did not comment on specific commodities.
Raw sugar futures, chocolate's sweetener, also have gotten a recent boost from the bulls. They vaulted to a 17-month high in mid-January after investment buying flooded the market.
Chocolate manufacturers are usually covered nine to 12 months into the future at this time of year, but many companies have only fixed cocoa prices three to six months ahead as they have waited for prices to fall, traders estimated.
"Chocolate prices will have to go up but part of this is also due to other ingredient costs rising," Ganes-Chase said.
In late January, Hershey announced an average increase of 13 percent on wholesale prices on roughly one-third of its U.S. candy products to offset rising costs.
A steady flow of fund dollars has buoyed commodities across the board since early January, as investors shifted their focus away from the shaky stock market and looked to commodities as a hedge against inflation.
U.S. cocoa futures are up 22 percent since the end of December. Seasonal dry weather in West Africa and quality issues also helped lift prices in January.
On Wednesday, ICE's benchmark May cocoa futures contract rose $33 to close at $2,488 a tonne, a level dating back to June 1984 for the second month contract. On the London International Financial Futures Exchange (Liffe),the May contract settled up 11 pounds at 1,294 pounds per tonne Tuesday, a five-year high.
"Possibilities for $2,600 are strong. I really can't believe it can (move) straight up, but the funds have the money," one trader said, referring to the spot March contract.
The U.S. highs surpass those seen in early 2003, when a civil war in top cocoa producer Ivory Coast created supply concerns and caused prices to soar.
"I think it's starting to get away from some people. Even though the news out of Ivory Coast hasn't been spectacularly bullish, they've had some recent rains. Cocoa's just chugging right along," said Jack Scoville, a vice-president for Price Group, a brokerage in Chicago.
"(Manufacturers) could start to reach," he said.