Cocoa has been one of the hottest commodities, seeing gains of more than 15 percent this year and more than 30 percent in the last 12 months. And that could mean a lot not just for food companies, but also for consumer spending.
Several factors are contributing to the rise in cocoa futures, including aging cocoa trees in West Africa, which is the source of about 70 percent of the world's cocoa. Additionally, chocolate consumption in Asia, especially in China, was up 7 percent in 2013 and is projected to rise more this year.
Cocoa futures have gotten investors' attention, especially as earnings season has kicked into high gear. Investors are watching consumer companies that use cocoa as a raw ingredient, trying to gauge how they are managing costs in order to protect the bottom line. Hershey's last week announced an 8 percent price hike due to higher raw material costs, passing part of its burden onto consumers. And this week, Mars Chocolate North America, the maker of M&M's and Snickers, announced an average 7 percent price hike, its first increase in three years.
Cocoa prices could affect stocks including Mondelez, General Mills, Kraft, Nestle and Tootsie Roll, especially in light of the recent price announcements.
Rising food costs across the board have concerned Wall Street of late. Investors are looking to evaluate how inflationary pressures affect consumer psychology and spending.
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Up to this point, it appears that consumers are absorbing higher costs for meat, dairy, fruit, coffee and now cocoa. But what will be their breaking point?
"Despite the fact that consumers will be upset with a price hike, they will not hesitate to pay more for their chocolate addiction, myself included," said Jeff Kilburg, founder and CEO of KKM Financial. "There will be a trickle-down effect as people will be more selective on their expenditures, and that could hurt soda and snack companies ... and gas stations and mini-marts."
Jim Iuorio, managing director of TJM Institutional Services, agreed with Kilburg, but based on a different analysis.
"Consider recent earnings. Chipotle did well, but McDonald's did poorly. I think this represents a 'stepping up' of the consumer to the higher end. It suggests that people will spend money for things that give them pleasure," Iuorio said.
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Where will cocoa futures prices go? Most traders are bracing for moves even higher.
"If we move above July 3 highs, I think we push up to about $3,345," said Iuorio. That's almost a 5 percent hike from cocoa's Friday trading price of about $3,194 per metric ton.
— By CNBC's Jackie DeAngelis