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Tariffs increase import costs for U.S. chocolate makers

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Canada, Mexico can export chocolate to the U.S. tariff

free

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U.S.-based Taza Chocolate considered moving production to

Canada

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Data shows Canada chocolate exports to U.S. rose 10% this

year

By May Angel, Helen Reid and Jessica DiNapoli

LONDON/NEW YORK, July 30 (Reuters) - U.S. President

Donald Trump's trade tariffs are meant to boost domestic

manufacturing.

But in the chocolate industry, they're doing the opposite:

ramping up the cost of importing already-pricey cocoa and

hurting the competitiveness of local factories versus Canadian

and Mexican outfits that supply the U.S., according to

conversations with 11 industry executives, representatives,

experts and traders.

Under the United States-Mexico-Canada free trade pact (USMCA),

which the Trump administration has confirmed remains in place,

Canada and Mexico can export chocolate to the U.S. tariff-free

no matter where they sourced their inputs of cocoa - a tropical

crop that does not grow in the United States.

Canada also has zero tariffs on imports of raw and

semi-processed cocoa like butter and powder, while Mexico grows

its own beans, meaning factories both north and south of the

U.S. border can produce more cheaply than those domestically who

now have to pay tariffs of between 10-25% on cocoa inputs. The

rates could rise to 35% on August 1.

A government official said that the White House continues to

monitor trends in trade and commerce and listen to industry

feedback to deliver on Trump's economic agenda.

Top U.S. chocolate maker Hershey, which mainly makes

chocolate in the U.S. but has plants in Canada and Mexico, has

estimated it would face $100 million in tariff costs in its

third and fourth quarters if the levies remain in place.

Smaller firms like Somerville, Massachusetts-based Taza

Chocolate, which produces chocolate from scratch using imported

cocoa, have no alternatives to U.S. manufacturing.

Taza in May had to pay $24,124 in duties on a container of

cocoa from Haiti, subject to the blanket 10% tariff imposed by

Trump, a Customs and Border Protection invoice showed. Taza

faces a customs cheque of more than $30,000 to release its next

container of cocoa from the Dominican Republic, founder and CEO

Alex Whitmore said.

"For a company our size, that's our profit margin gone so

the immediate thought is OK, the rules have changed, we just

need to create the most cost-effective solution for the

consumer," said Whitmore.

He initially explored offshoring part of Taza's

manufacturing to Canada to benefit from USMCA terms, but decided

against it given the significant investment of both money and

time that would require, in a volatile business environment.

"Right now, the environment is so uncertain that we're just

hunkering down and hoping this will pass," Whitmore said. "A lot

of us business owners are kind of frozen."

Customs data compiled for Reuters by Trade Data Monitor (TDM)

shows Canada's chocolate exports to the U.S. grew by 10% in

volume terms in the five months to end-May, indicating some

Canadian manufacturers are taking advantage of the opportunity

created by tariffs.

Companies benefiting are mostly Canadian and Mexican

contract chocolate makers, or multinational contractors like

Barry Callebaut that have a significant footprint in

Canada and Mexico, industry sources said.

Barry Callebaut, which has just under half its North America

chocolate factories in Canada and Mexico, declined to comment.

Its CEO Peter Feld said at its July post-results conference

call: "On tariffs ... we have operations in the U.S., we have

operations in Canada, we have operations in Mexico. So we can

actually navigate this environment in the right way."

Contract chocolate firms produce raw chocolate that U.S.

factories add ingredients to and sell as American chocolate.

Tariffs - a pillar of Trump's "America First" economic

agenda - come at a delicate time for U.S. chocolate makers as

consumers are already buying less after absorbing double-digit

inflation over the past several years.

In chocolate specifically, prices have risen sharply as

cocoa tripled in value to hit record highs in the

first four months of last year, and remains well above

historical averages because of adverse weather and disease in

top growers Ivory Coast and Ghana.

Under pressure from rising input costs, Hershey earlier

this month rolled out double-digit price hikes across its

confectionary products like Reese's cups to retailers like

Walmart ( WMT ) and Kroger ( KR ).

Cocoa accounts for about 30-50% of the cost of a bar of

chocolate.

Hershey said its recent price hikes were not related to

tariffs. Taza has raised its wholesale prices by 10% since a

year ago, and the price of its chocolate bars on its website

rose in June to $6.99 from $5.99 previously, but Whitmore also

said tariffs would cause further price hikes.

Because cocoa can't be sourced domestically, Hershey said in

May it is "engaging with the U.S. government to seek an

exemption" for cocoa.

It declined to comment on whether it was counting on imports

from its Canada and Mexico plants to help mitigate tariff costs.

M&Ms maker Mars, which said Tuesday it is investing $2

billion in its U.S. manufacturing, including chocolate, has not

changed its sourcing structure and continues to make 94% of its

U.S. products locally. A Lindt spokesperson said the

Lindor truffle maker will decide on possible changes to its

sourcing after August 1.

Paolo Quadrini, director general of Mexican chocolate and

candy association Aschoco Confimex, said U.S. tariffs are

"creating new opportunities for Mexican companies."

"The sentiment among companies and entrepreneurs, as well as

requests from U.S. chocolate companies to manufacture in Mexico,

is real and has been increasing," he said.

The chocolate market in the U.S., the world's top chocolate

consumer, is worth $25-30 billion, according to investment bank

TD Cowen, and imports from top supplier Canada account for about

10% of that total, while those from No. 2 supplier Mexico

account for some 2.5%.

Tareq Hadhad, CEO of mid-sized Nova Scotia-based chocolate maker

Peace by Chocolate said tariffs had largely prompted Canadian

and American firms to opt for locally produced goods but that

contract chocolate makers in Canada had benefited from the new

trade dynamic.

"It's an advantage for them," he said.

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