The Latest In The Candy Wars

LONDON -- Irene Rosenfeld must wish she had a crystal ball. The chief executive of Kraft Foods has stood firm in the last few weeks on her $16.3 billion hostile takeover offer for Cadbury, even as the British chocolate maker has rebuffed it as "derisory." The latest twist in the candy wars is the cost of cocoa--and whether rising prices will eat into Cadbury's profits.
Here is where Kraft and Cadbury are placing their bets. Cadbury on Monday forecast improved margins of 16%-18% by 2013, up from the "midteens." But Kraft Foods (KFT-news-people), which appears unwilling to raise its offer price for Cadbury, questioned that prediction on Tuesday, pointing out that key input costs like cocoa were expected to remain high in 2010 and that Cadbury hadn't provided guidance on these cost. One of Kraft's main contentions is that its combination with Cadbury would lead to "significant" savings on costs like cocoa.
What does the market think about cocoa prices next year? On Tuesday cocoa contract futures for December 2010 were trading at $3,379, which was in line with spot prices, while May 2010 contract futures were up only about 0.6%. This suggests the market (for now) expects cocoa prices to be flat in both the first and second half of 2010.
Even so, there's good reason to believe that prices will keep rising. Most analysts expect a fourth year of supply constraints to follow the last three years of consecutive deficits in the cocoa market, something that hasn't been seen since the 1960s.
The supply problems have partly stemmed from difficult harvests in top cocoa producer Cote d'Ivoire, which produces more than a third (about 37%) of the world's cocoa. Last year too much rainfall led to bad harvests, and this year more drought-like conditions could produce the same outcome again.
So far the October to January cocoa harvest in the African country has been strong, according to Laurent Pipitone, senior statistician at the International Cocoa Organization (ICCO), "but the second part of the main harvest (January to March) is expected to be relatively poor," thanks to the lack of rainfall between August and October of 2009. That will probably also impact the midcrop harvest, which produces about a quarter of the total harvest for the season and takes place between April and September next year.