For chocolate lovers everywhere, rejoice. October 28 was National Chocolate Day. Halloween follows a few days later, offering another chance to indulge in candies that melt in your mouth. I have been a fan of pretty much everything chocolate since I was a little girl. I remember being deliriously happy about getting “right off the processing belt” samples when I took a tour of Hershey Foods Corporation’s main factory before they closed the plant to visitors. (The company’s website suggests a visit to Hershey’s Chocolate World when you are next in Pennsylvania.)
While estimates vary, the global chocolate market is relatively large at about $100 billion, grew at just over five percent last year and includes lots of other competitors such as Mars, Inc., Nestlé SA, Mondelēz International and the Ferrero Group. For many of these firms, understanding consumer demand and commodity price behavior is integral to managing risk.
Take cocoa for example. According to “Future of the chocolate industry looks sticky,” CNBC reporters Katy Barnato and Luke Graham cite supplier risk since “more than 70 percent of cocoa” comes from only four West African countries. Even though cocoa prices are predicted to “fall back a little from currently high levels” (which should be good for unhedged candy makers), world production has dropped. If supply continues to contract, prices could go up again. The International Cocoa Organization forecasts a one year decrease of 248 thousand tons.
Hedging is certainly possible although there is never a free lunch. Besides the opportunity risk of locking in a price at trade inception, a candy manufacturer needs to determine what hedging instrument makes sense, the size of a hedge, how often to adjust and cash requirements. In early 2015, the Chicago Mercantile Exchange published guidance about its two newly launched cocoa futures contracts to be cleared in London. Since one is denominated in Euros and the other is denominated in U.S. dollars, there could be currency risk that likewise has to be taken into account.
Other risks that come to mind include making sure that facilities are clean, properly training workers about safety and insuring that inputs are fresh and come from a reliable vendor. Remember the funny I Love Lucy video where Lucy and Ethel could not keep up with the speed of the chocolate candy conveyor belt? Hoping to avoid being fired because they can’t wrap chocolates fast enough, they gobble the candies, stuff them in their hats and drop them inside their clothes so their boss thinks all is good. It’s too bad for the company owner who is losing precious inventory – and money – as a result of their jolly foibles.
Managing risks should be prioritized by any company, government or non-profit organization. Maybe we should have a National Risk Management Day to celebrate this important discipline? Effective risk management benefits shareholders, taxpayers and other constituencies of an enterprise.