Hershey drove a record spike in cocoa prices after reportedly sourcing beans from the futures market instead of physical sellers

• Hershey's move into cocoa futures trading pushed the market into chaos this month and boosted prices to record highs.
• The candy producer bought cocoa beans through the ICE Futures exchange in mid-November, Bloomberg reported Friday.
• The trade allows Hershey to obtain cocoa at lower prices, as chocolate producers typically buy from physical suppliers who charge various premiums.
• The trade was so big it lifted December-delivery contracts as much as 13.4% from November 13 to November 16. It also placed December contracts at a record-high premium over the next contract.
• Watch cocoa trade live here.

Hershey threw the cocoa market into chaos earlier this month after taking an unconventional approach to sourcing beans.

The candy producer bought cocoa beans through ICE Futures exchange in mid-November, Bloomberg reported on Friday. The move marks a shift from the deals with physical sellers commonly used to supply beans. While deals with middlemen make up the bulk of global cocoa purchases, procuring beans through futures trades allows Hershey to avoid typical premiums.

Hershey's trade was so big it required special permission from the exchange to execute, according to the report. The size of the trade lifted December-delivery contracts as much as 13.4% from November 13 to November 16 and placed the futures at a record-high premium over the next contract. Read more: Brad McGill's fund is beating 99% of its peers this year. The small-cap manager shares how he invests for big wins and where he is finding opportunities amid a 39% return year-to-date.

Prices have continued to rise after December-delivery futures expired. Contracts for March delivery jumped as much as 2.3%, to $2,774 per ton, on Monday, the commodity's highest level since late February.

Hershey's move to futures trading comes just before two major cocoa exporters implement a new premium on beans. Ghana and Ivory Coast placed a $400-per-ton premium — known as the Living Income Differential — on their beans starting in October. Other premiums for sustainability and quality can also be levied on cocoa depending on several factors.

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Several chocolate producers agreed to pay such charges to improve living conditions for cocoa farmers, but the coronavirus pandemic and its hit to chocolate demand has since left companies looking to cut costs. By turning to the futures market, Hershey can avoid the premiums and buy cocoa at lower prices.

Still, a Hershey spokesperson told Bloomberg the company continues its "substantial cocoa sustainability work" to combat poverty and deforestation. Hershey continues to pay the Living Income Differential and invest in training for farmers to diversify their crops, the spokesperson added. Now read more markets coverage from Markets Insider and Business Insider:

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