Amidst soaring cocoa prices and whispers of supply chain disruptions, Barry Callebaut, the world's leading chocolate manufacturer [1], held its Q2 2024 earnings call. While analysts focused on the company's resilient performance and its ambitious "Next Level" investment program [2], a subtle shift in Barry Callebaut's language hints at a potentially more profound cocoa crisis brewing beneath the surface.

Barry Callebaut's CEO, Peter Feld, described the cocoa environment as "amazing," highlighting the unprecedented vertical price spike. He assured investors that the company is "well covered with beans," emphasizing their competitive advantage in sourcing and their "thousands of employees in the sourcing countries on the ground." This reassurance, however, is laced with a thread of caution, as Feld acknowledges the "uncertainty" surrounding the upcoming mid-crop and the crucial main crop in fall 2024.

CFO Peter Vanneste echoed this cautious optimism, noting that the company is actively working to improve operational free cash flow. He highlighted the positive impact of Next Level initiatives on working capital, but admitted these improvements are currently "outshadowed by the extreme increase of the bean price."

While these statements seem to reflect the general industry sentiment of navigating a volatile cocoa market, a closer examination of the Q2 transcript compared to the Capital Markets Day presentation from November 2023 reveals a subtle but significant change in tone.

During the November presentation, the focus was on market reacceleration and Barry Callebaut's confidence in capturing a disproportionate share of this growth. Vamsi Mohan Thati, President of APAC, Middle East & Africa, spoke enthusiastically about the "good tailwind" of rising per capita income levels and chocolate consumption in emerging markets. Feld himself highlighted the "clear underlying growth opportunity" and the "increasing customer reliance on established, large outsourcing partners."

Fast forward to the Q2 2024 call, and the narrative shifts. The confidence in market reacceleration is tempered by concerns over bean supply, price volatility and the potential impact on customer demand. The earlier emphasis on "durable recurring growth" is replaced by a more cautious approach of "navigating the short term" and helping customers "weather the situation."

This shift in language suggests Barry Callebaut, with its unparalleled insight into the cocoa market, may be sensing a deeper, more structural issue with cocoa supply than is currently reflected in the market's focus on short-term price fluctuations.

Here's a hypothesis: Barry Callebaut's cautious tone could be hinting at a potential lag in the expected supply response to high cocoa prices. While the company expects high prices to eventually encourage farmers to invest in fertilizers and increase production, factors like the aging cocoa tree population, climate change impacts and the persistent challenges of farmer poverty may be delaying this response.

Let's look at the numbers: Barry Callebaut invested in planting 7.5 million trees last year. However, with an estimated global cocoa tree population of over 10 billion, this represents less than 0.1% replenishment. Furthermore, the time lag between planting and a mature, yielding tree can be several years.

If Barry Callebaut's internal data is revealing a sluggish supply response, the current cocoa price spike may not be a transient phenomenon but rather a harbinger of a prolonged period of tight supply and elevated prices.

The implications are significant. For Barry Callebaut, it means the pressure on working capital and free cash flow could persist, potentially requiring additional financing measures. For the broader chocolate industry, it could translate into further price increases and a more sustained shift in consumer behavior towards private label and value brands.

Cocoa Bean Price Fluctuations

The chart below visualizes the dramatic increase in cocoa bean prices over the past year, based on data from the Q2 2024 earnings call transcript.

Barry Callebaut, the chocolate canary in the cocoa mine, may be signaling a deeper crisis than the market realizes. The industry, and investors, would be wise to pay close attention.

"Fun Fact: It takes about 400 cocoa beans to make one pound of chocolate! [5]"