Hershey Co highlighted the globe's two-tier milk market as it cited high prices of dairy commodities, besides the rally in cocoa values, in a downgrade to its hopes for full-year profits and revenues.

The confectionery giant cut to 8%, from 9-11%, its forecast for growth in earnings per share in 2014.

The downgrade reflected in part a cut to 4.75%, from 5-7%, in the estimate for the rise in full-year revenues, which Wall Street had forecast rising 5.5% to $7.54bn, but also weaker expectations for the gross margin, seen falling 0.75 percentage points.

Investors have factored in a margin drop of about 0.5 points, to 45.5%.

Besides a stronger dollar, and slower-than-expected growth in some foreign markets, the US-based group said its revisions reflected "volatility in the commodity complex, primarily dairy".

'Higher input costs'

Indeed, in the July-to-September quarter, a drop of 2.40 percentage points in the gross margin was "drive by higher input costs, primarily cocoa and dairy".

Cocoa futures late in September hit a three-year high of $3,399 a tonne in New York, lifted by concerns of Ebola spreading from minor West African producing countries such as Sierra Leone and Liberia to Ivory Coast and Ghana, which are responsible for some 60% of world supplies.

Cocoa futures have in fact fallen back since, hitting a five-month low of $2,900 a tonne on Wednesday before recovering some ground to close at $2,937 a tonne, a gain of 0.5% on the day.

"It would appear that Ebola is no longer seen as posing such a threat to the West African producer countries of Ivory Coast and Ghana," Commerzbank said.

"Discounting the risk premium for Ebola, there is nothing to see but an amply supplied market, which hardly justifies prices… significantly in excess of $3,000 per tonne."

'Persistent dairy costs'

However, Hershey flagged in particular the firm domestic dairy market, telling investors that "the biggest issue really wound up being around our commodities and the dairy costs.

"We had some issues in 2014, and really the persistent dairy costs and not adjusting for those quickly enough."

The comments highlight the divergence between dairy prices in the US - which have remained at elevated levels thanks to relatively slow production growth and a surge in exports early in the year - and those abroad.

Values at the New Zealand-based GlobalDairyTrade auctions, which sell product from Europe, India and the US besides domestic supplies, fell this month to a five-year low.

Butter 'rout'

In fact, the elevated US dairy prices, which have also caught out milk processing and distribution giant Dean Foods, have shown signs of weakening late.

November futures in Class III milk are down some 8% in Chicago from a late-September high, while butter for November butter futures have slumped 30%.

 "This year US butter prices were high enough for long enough to discourage demand and attract imports, allowing the market to plunge before retailers finished stocking up for the holidays," the California-based Milk Producers Council said.

Still, while the "rout was widely expected given that overseas markets are much lower, the timing and depth of the drop likely came as a surprise.


 

Agrimoney