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Cocoa price spike may favor Kraft over Cadbury

By Guy Montague-Jones , 28-Sep-2009
Last updated the 28-Sep-2009 at 16:41 GMT

World cocoa prices have just hit record highs sparking suggestions that the resulting cost changes could aid the Kraft bid for Cadbury.

Cocoa prices in London reached a 24-year high last week over fears that the market is about to experience the worst period of shortages in 40 years. Concerns over future supply were sparked by an announcement from major cocoa producer Ivory Coast that the 2009/2010 crop will be flat or down on last year because of disease and dying trees.

So what does the rising price of cocoa have to do with Kraft’s £10.2bn ($16.7bn) bid for Cadbury?

Kraft is trying to convince Cadbury and the marketplace that its bid is fair, and Cadbury is trying to persuade investors that the British confectionery company is better off alone. In this setting, how higher cocoa prices are interpreted takes on added relevance.

Cocoa price impact

If an increase in cocoa prices affects Cadbury more than Kraft, the news would suggest that Cadbury is better off with Kraft than it is as stand alone company.

The Financial Times in the UK reported late last week that Kraft is claiming to be better placed to manage the cocoa cost increases than Cadbury.

Kraft told FoodNavigator-USA.com: “We are a $42 billion company and cocoa affects a very small part of that total.”

But the Financial Times said the size and spread of the companies are not the only relevant points. Traders told the newspaper that Kraft had hedged less of its cocoa needs than Cadbury, making the US company more vulnerable to short term price rises.

Price increases

Cadbury has made no announcement about cocoa prices in relation to the Kraft takeover bid but the company has said it may have to increase prices if cocoa costs remain high.

At an investor conference earlier this month Andrew Bonfield, Cadbury's chief financial officer, said: “We are reviewing that situation as we put our 2010 plans together, but based on current prices we would have to see some price rise.”

Implementing prices hikes may be difficult in an environment where prices are generally falling. Bonfield said: “But obviously in an area, particularly in developed markets, where we are seeing consumer price deflation in the food space, putting price increases through in chocolate is going to be a challenge but one we think there are opportunities for us to work on.”

Instead of just increasing headline prices Bonfield said Cadbury could introduce new pack sizes, reduce bar size, and use price points and the promotional strategy.

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