Factors Contributing to Rising Cocoa Prices: Should You Panic?
Disruptions in the supply and demand for cocoa have seen its prices and futures hit an all-time high of nearly $10,000 in March 2024. Demand for cocoa remains strong, while weather conditions threaten to continue affecting its supply, meaning prices may jump even higher.
Supply and demand affect prices, and several conditions have led to diminishing supplies. Besides the fallout from the Russia-Ukraine conflict, the weather, wildfires, and an outbreak of a virus continue to make it an expensive commodity. There is also the speculative nature of commodity trading, which makes it very difficult to know when prices will start to ease.
No one is happy about the soaring prices of one of the world’s favorite commodities used to make chocolate treats. However, as long as these adverse conditions remain in place, it’s unlikely that cocoa’s price will ease soon.
Understanding Cocoa Demand
The demand for cocoa remains strong in the U.S. and across Europe. However, producers of chocolates have noticed a slump in consumer demand in the last few months as they continue to feel the pinch of higher pricing in their favorite snacks. In the meantime, consumption has tripled in China within the last four years.
The countries that traditionally eat the most chocolate per capita are Switzerland, Germany, Ireland, and the United Kingdom. These are followed by Norway, Sweden, and Denmark, with the Netherlands following very close behind. Chocolate manufacturers rely on several commodities like cocoa, sugar, and milk. Prices for all have increased, but none as much as cacao.
However, when pressured to price their chocolate products in the future, chocolate manufacturers say they cannot guess because the high cocoa and sugar prices have already limited their earnings.
Chocolate producers like Hershey’s and Mondlaez in the U.S. have started the race to regain market share by being innovative. The move comes as they see consumers swapping their chocolate bars for
other snacks. They create recipes that reduce the cocoa content by replacing cocoa butter with palm or cottonseed oil. They also use more nuts, fruits, wafers, and other ingredients to bulk up their bars
while using less chocolate.
Inevitably, you have already heard about shrinkflation during the past year and its price increases. Shrinkflation is when you get less of a product for the same price. The chocolates grow smaller, but the consumer will have to pay a higher price sooner or later, especially if cocoa prices continue in this upward trajectory.
Effects of Inflation
Inflation has become a major concern around the world. Even though drastic measures by governments have managed to contain it somewhat, uncertainty has caused the prices of many commodities to increase, including cocoa.
Uncertainty is the main cause of inflation, and the Russian invasion of Ukraine in 2022 and the consequent measures taken against Russia certainly haven’t helped. The prices of energy spiraled as European countries faced a fuel supply shortage. Additionally, European manufacturers, including those of chocolate, ordered fewer supplies, fearing work stoppages and an inability to run their factories.
Thanks to Europe’s warmer winter and countries securing alternative energy resources, commodity demand increased as circumstances eased. Suddenly, by the end of 2022, everyone was desperately trying to source cocoa beans.
However, another important factor in the Ukrainian invasion was the increase in fertilizer prices, and cocoa growers needed it for better crops. To counter the price increase, cocoa growers used less, affecting their crops and reducing supply.
El Niño’s Effects
The conflict between Russia and Ukraine started the steep climb in cocoa prices. Still, another phenomenon has resulted in further price increases – El Niño. This warm phase warming cycle develops in the east-central tropical regions of the Pacific Ocean and warms the oceans’ surfaces. It emerged in mid-2023 and generally lasts anything between two and seven years.
Even though the weather system starts in the Pacific, it affects the global climate, with some areas becoming wetter and others drier. Meanwhile, 80% of cocoa comes from four countries in West Africa – Ivory Coast, Cameroon, Ghana, and Nigeria. Ghana and the Ivory Coast suffered a drought last year, as they usually do during El Niño phases, but climate change has also severely impacted harvests on the continent.
The Ivory Coast exports over 50% of West Africa’s cocoa quota, but a bad harvest made the cocoa deficit sorely felt.
What Does the Future Hold for Cocoa Prices?
J.P. Morgan’s research foresees the price coming down by a small percentage to about $6,000 over the medium term, with a chance of them peaking further until they stabilize at this elevated level once cocoa yields increase.
They base their research on the foreseeable weakening of El Niño and the possibility of La Niña replacing it in the summer, where sea surface cooling would improve rainfall in the major cocoa- growing countries.
Besides more rains, J.P. Morgan believes that the only way to offset shortages and boost long-term supply is for producers to plant more cacao.
As long as traders worry about smaller production, cocoa prices will keep increasing, which is not the best news for manufacturers of cocoa products or consumers wanting a piece of the world’s beloved treat.