Surging cocoa prices mean making a KitKat bar is getting a lot more expensive.
That’s prompting traders to load up on bearish options on Nestle before the company reports sales this month. With cocoa harvesting season in full swing, concern that the spread of Ebola will disrupt bean shipments helped send prices to the highest since 2011. Bearish contracts on the maker of Baby Ruth bars cost the most relative to bullish ones in more than a year.
Hedge funds have raised bets that cocoa will soar even more after it completed the longest series of monthly gains in 12 years. With prices for ingredients from hazelnuts to milk also rising this year, the rally has already squeezed profitability at Nestle’s chocolate division, said Bank Vontobel’s Jean-Philippe Bertschy.
“Nestlé’s last set of results raised some concerns about the confectionery division as profitability fell,” Bertschy said in an e-mail. “The recent price hikes for cocoa bean and cocoa butter have raised some questions as to whether chocolate producers would be able to cope.”
Farmers are struggling to keep up with rising demand for chocolate candy. Ivory Coast, the world’s top cocoa-bean producer, shares borders with Liberia and Guinea, the center of the Ebola outbreak. Ebola has killed more than 3,000 people, the World Health Organization said last week.
Less Profitable
With sales at the Vevey, Switzerland-based company’s chocolate business slowing, and rising commodity costs making the unit less profitable, the company has been passing rising costs to consumers. First-half sales for the confectionery division fell 9.2 per cent to 4.2 billion Swiss francs ($4.3 billion), while margins shrank from last year. Nestle reports nine-month revenue on 16 October.
Options betting on a 10 per cent decline in Nestlé shares cost 9.89 points more than calls betting on a 10 per cent gain on 2 October, according to one-month data compiled by Bloomberg. That’s the largest spread, known as skew, since July 2013. The measure is more than double its six-month average.
Spencer Swartz, a spokesman for Nestle, declined to comment on the options (NESN) trading.
Nestlé will be able to offset commodity-price increases and any impact on financial results will be contained, said Urs Beck, who manages Swiss equities at EFG Asset Management in Zurich. Analysts predict Nestlé’s third-quarter sales gained 6.3 per cent to 24.6 billion francs, the average of four estimates compiled by Bloomberg. Beck also noted that chocolate represents less than 10 per cent of Nestlé’s sales and profit.
Bloomberg News edited by ESM
