Hershey's Cocoa Cost Relief: A Commodity Balance Perspective

The fundamental story for cocoa has flipped. After years of tight supplies and soaring prices, the market is now bracing for a significant surplus, driving prices down sharply. As of February 5, 2026, the benchmark price for cocoa was trading around $4,000 per tonne, a level not seen since late 2023. This marks a dramatic reversal, with prices down 63% over the past year from their peak.

The projected supply glut is the core driver. Consulting firm StoneX forecasts a global surplus of 287,000 tons for the 2025/26 crop year. This is a clear shift from the severe deficits of recent years, including a record 494,000-ton deficit in 2023/24. The surplus is being built on two key pillars: strong production forecasts and a slowdown in key export flows. West African farmers, the world's dominant producers, are reporting a bumper crop, with pod counts in Ivory Coast and Ghana up significantly. Yet, even as production looks robust, shipments from the top producer, Ivory Coast, have slowed, with exports down 5.7% in early shipments for the new season. This creates a complex dynamic where more beans are being grown but moving to market more slowly, contributing to inventory accumulation.

The bottom line for chocolate makers like Hershey is a clearer path to cost relief. The market's shift from scarcity to surplus directly pressures the raw material cost that has been a major headwind. While demand remains a concern, with grindings data showing weakness in key regions like Asia and Europe, the overwhelming supply signal is now bearish. This fundamental balance sets the stage for Hershey's cost position to improve, assuming the company can navigate the inventory build and any lingering demand softness.

The Tariff Relief: A Policy Offset in a Weak Market

The tariff exemption is a tangible policy win for Hershey, but its impact must be viewed through the lens of a collapsing commodity price. The company secured a tariff exemption on cocoa imports, effective from November 13, 2025, which could lower quarterly import expenses by around $50 million. This directly offsets a 10% reciprocal tariff that had been imposed.

The key point is that this relief does not change the fundamental price Hershey pays for the cocoa beans themselves. It is a cost offset on the import channel, not a reduction in the underlying market price. This distinction is critical. The exemption arrived as cocoa prices were already in a steep decline, having fallen 23 points, or 0.44% in the days following the announcement. The market's dominant story was the looming supply surplus, not trade policy.

Viewed another way, the tariff relief is a meaningful but secondary benefit. In a tight market where cocoa prices were rising, this $50 million quarterly saving would have been a major shield against cost inflation. Now, with the commodity price itself collapsing, the marginal impact of the tariff offset is smaller. It provides a cleaner cost structure, but it does not alter the primary driver of Hershey's cost trajectory, which is the fundamental shift from scarcity to surplus in the cocoa market.

Financial Impact and Operational Realities

The financial results paint a clear picture of a company navigating a tough environment. Hershey's fourth-quarter net income plunged 60% to $320 million. While the company reported a 7% increase in consolidated net sales, the sharp drop in profitability signals that cost pressures and demand headwinds overwhelmed top-line growth. This sets the stage for a critical assessment: can the recent cost relief offset this operational weakness?

The tariff exemption provides a tangible, quarterly savings of $50 million. On paper, that amount is significant, representing roughly 15% of the reported Q4 net income. In a different market context, this would be a major margin boost. Yet, in the current reality, it is a partial offset against a much larger problem. The savings are a direct benefit from policy, but they do not address the core issue of declining sales volume.

That issue is stark. The company's own data shows a severe contraction in its core market. Sales volume of chocolate candy was down more than 21% in the 13 weeks ending September 7. This isn't a minor fluctuation; it's a deep and sustained demand shock. When volume falls that sharply, even lower ingredient costs struggle to improve the bottom line. The cost relief is a useful tool, but it cannot manufacture demand.

The bottom line is a tension between two powerful forces. On one side, the collapsing cocoa price and the tariff exemption are providing a clear tailwind to the cost of goods sold. On the other, a dramatic volume decline is crushing revenue and likely pressuring promotional spending. For Hershey, the path to improved profitability now hinges on whether it can stabilize or grow volume, using the cost relief to fund that effort. The financials show a company with a cleaner cost structure but a weaker top line, making the coming quarters a test of its operational execution.

Catalysts and Risks: What to Watch

The path from current cost relief to sustained margin improvement is not guaranteed. Several forward-looking factors will determine if the favorable cocoa backdrop holds or if new pressures emerge. The key variables to monitor are the stability of trade policy, the resilience of the supply forecast, and Hershey's ability to translate lower input costs into better sales.

First, the tariff exemption's stability is a critical policy risk. While the 10% reciprocal tariff on cocoa has been dropped, imports from Brazil will still face a 40% national-security tariff. Brazil is a significant producer, and any shift in its export flows or a broader escalation in trade tensions could reintroduce cost volatility. The current exemption is a positive, but it is not a permanent shield. Investors should watch for any changes in the administration's stance or new duties that could undermine the $50 million quarterly savings.

Second, the market's bullish supply story is vulnerable to a shift in the surplus forecast. The projected 287,000-ton surplus for 2025/26 is built on expectations of a bumper West African crop. Any unexpected weather disruption, disease outbreak, or logistical issue in Ivory Coast or Ghana could tighten supplies and reverse the price decline. Conversely, if the surplus proves even larger than forecast, it could accelerate the price slide. The recent slowdown in Ivory Coast exports provides some near-term support, but the fundamental driver remains the harvest outlook.

Finally, the most important test is Hershey's operational execution. Lower cocoa costs are a tailwind, but they must be matched by improved demand. The company's own data shows a severe contraction, with chocolate candy sales volume down more than 21% in a key period. The path to margin recovery now hinges on whether Hershey can stabilize or grow volume. This requires effective pricing power and promotional strategies. If demand weakness persists, the cost savings may be absorbed by deeper discounts, limiting the profit benefit. The coming quarters will show if the company can leverage its cleaner cost structure to fund a volume turnaround.

The bottom line is that the cocoa market's shift to surplus provides a clear opportunity. However, the sustainability of this advantage depends on navigating trade policy risks, monitoring supply forecasts for surprises, and, most importantly, successfully offsetting deep demand headwinds with improved sales performance.