Editor’s Note: If there’s one thing Santi Falcone learned from manufacturing pianos, it’s that competition keeps prices in line. Falcone is no longer in the piano business; he’s transitioned into making a sweeter, and as he says, “recession-proof” product: chocolate truffles. But unexpectedly this year, the price of the cocoa that he needs to make those truffles shot up 26 percent.
How is his company, Dante Confections, located in North Billerica, Massachusetts, surviving? Falcone is passing on a 10 percent price increase to his customers, the candy shops. And they’ll pass it on to, guess whom? You.
And this isn’t just about truffles. For those trying to fill their plastic pumpkins last-minute for Friday’s trick-or-treaters, Paul Solman found out in New York last week that the price of individual Kit-Kats has risen 10 cents.
So what’s causing the price to spike? As Paul reported on the NewsHour Tuesday, there are fears that the Ebola outbreak in West Africa is limiting the supply of cocoa. But just how rational those fears are is another question. There’s still plenty of cocoa, commodities trader David Martin told Paul on Making Sen$e, but cocoa traders are taking advantage of the hysteria to make money.
At his truffle factory, Falcone is feeling the pinch from his suppliers — big agribusinesses who have raised the price of cocoa on him — just when his one-year contract was up for renewal. “I almost fell out of the chair when I saw it,” he told Paul. “I thought it was a big mistake.” It wasn’t.
— Simone Pathe, Making Sen$e Editor
Paul Solman: When did you learn of the price increase?
Santi Falcone: A little over a month ago I got a call from my sales rep explaining the price increase, and he feels next year will be even higher. That’s what he told me. And I told him, “Ah, hey, be easy on me, we’ve been doing business for a long time.” And when I saw my contract, I thought he made a mistake. And so I ended up calling him, and asked, “John, could you make a mistake? 26 percent?” And, his response was, “I wish I did. But it’s a fact.”
Paul Solman: And what is a 26 percent rise in price do to you?
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Santi Falcone: Well, basically, I buy two, three, four thousand pounds of chocolate every other week. That’s quite a bit of chocolate. It’s the difference between paying $5,000 or $6,000 versus $7,000 or $8,000. It’s quite a big jump.
Paul Solman: And how much of that price increase did you pass along to your customers?
Santi Falcone: Well, as soon as I got the increase on my contract, I had to immediately come up with a new price list. I did personally call my good customers before they got the price increase to let them know what was going on with the cocoa market and my price increase. I was very open with them. And I basically compromised by increasing the price between 9 to 10 percent. And they accepted it, and not very nicely, but they did accept it.
Paul Solman: What was the worst response you got?
Santi Falcone: Well, I hope that people keep on buying the chocolate [because] that’s a big price increase on the wholesale. When the candy shop gets a 10 percent price increase, he’ll have to raise it 20 percent. So, chocolate is going to get quite expensive.
Paul Solman: Do you expect it to get more expensive in the future?
Santi Falcone: That’s what I’ve been told, again, by the rep for Cargill, my supplier.
Solman: So, for Christmas, Easter — ?
Santi Falcone: They did not say. I’m locked [into my contract] for one year now. So, if the prices drop, I’m basically still paying premium. If it goes up, I still pay the same as I’m paying right now. I anticipate a drop. That’s my feeling.
Paul Solman: Why?
Santi Falcone: Why? Ah, well, all these speculators, they’re all buying this cocoa future, and before you know, they gonna get choked on that, and the prices are gonna drop. I could be wrong. I’m not into the speculative market.
Paul Solman: But your suspicion is that this was a scare, an Ebola scare, and then speculators jumping in and driving up the price?
Santi Falcone: I would assume that. I think people are scared. Also the Asian market is just gobbling up every cocoa plant it can get a hold of, which is driving the market up.
Paul Solman: That’s been gradual, over a long period of time.
Santi Falcone: Exactly. All gradual, but this price increase is just — I almost fell out of the chair when I saw it. I thought it was a big mistake there.
Paul Solman: Now, in the last few days, cocoa has dropped in price, right?
Santi Falcone: Yeah, for last month, it was above $3,400 per ton; it’s [now] dropped to $3,100. But my contract still remains. I cannot renew, I cannot renegotiate.
Paul Solman: So the problem is that you’re on a year-to-year contract, and the date that you had to renew just happened to be the moment at which the cocoa market was at its highest, and now you’re stuck?
Santi Falcone: I am stuck, yeah. Who else can I buy from? Cargill owns quite a few chocolate companies, and in the next 60 days or few months, they will own also Merckens, which is owned by ADM [Archer Daniels Midland].
Paul Solman: But you’re surviving…
Santi Falcone: I am. I’m passing the price to my my customers, which are candy shops who aren’t doing good.
Paul Solman: And then they’ll pass it onto people like me?
Santi Falcone: They will pass it on to the end consumer.
Paul Solman: But your guess is that prices are going to go down in the next few holiday seasons — Christmas, Easter — as opposed to right now?
Santi Falcone: I do think the prices will drop, but even if they do, I’m still stuck with the old price. Though the salesperson for Cargill, he doesn’t see that. He feels that the market is still going to go further up…. I’m not an economist, and I know it doesn’t make sense. In 25 years, I’ve seen increases of 3 percent or 1 percent, or it stays the same. But God, not 26 percent! You know, that’s a little crazy.
I’m hoping small companies are not being taken advantage of by these big companies. That’s the reason I was opposed to Cargill buying Merckens chocolate from ADM. Competition is good; it keeps prices level. I learned that a long time ago in the piano industry. A lot of piano manufacturers keep prices in line. But when you have one manufacturer who’s got it all, they pretty well do whatever they want.