Chocolate has been getting more expensive in supermarkets over the past year, and indeed was cited as a key driver of consumer inflation in May, and this looks set to continue as the cost of its ingredient commodities continue to rise. In particular, cocoa prices have reached almost 50–year highs in the past week. Cocoa futures prices for July are above $3,300 and £2,800 in New York and London respectively, with both having climbed over 30% since the start of the year. London cocoa prices have been on a relentless rise for 12 months now, while the New York counterpart contract began its climb in September 2022. The market is currently under pressure from both supply and demand factors, while also being subject to significant speculative influence. In this week’s blog, we’ll look through these issues and how much higher they might yet propel cocoa prices.
Supply Struggles Mounting
Supply in the cocoa market has been tightening for months and the pressure from this side stems from the combination of several factors, as opposed to a single incident or issue. One longer-term cause of supply concerns is reduced exports of fertiliser from Russia and Ukraine over the past year due to the conflict in the region. Russia was previously the leading global exporter of fertilisers and following the nation’s invasion of Ukraine last year, and the subsequent threat of Russian produce becoming inaccessible, the price of fertilisers climbed. While prices have since subsided from last year’s peaks, they remain higher than historical averages and may have encouraged growers to be miserly in their use of fertilisers.
Cocoa crops require more fertiliser than most, so the higher prices have affected production in West Africa and the results are increasingly apparent. According to the International Cocoa Organization’s (ICCO) May report, published on June 20th, cocoa bean counts in Côte d’Ivoire have been “averaging 120 for every 100 grams”. Quality cocoa beans are reflected by lower counts, with 80 to 100 for every 100 grams being the preferred levels for exporters. With beans suffering in quality, more cocoa will be required to meet the demand for chocolate which has contributed to the price rally.
Weather has been another contributor to the supply-side drivers of cocoa’s price rise. Heavy rainfall in recent weeks has created logistical challenges by disrupting roads and preventing goods reaching ports in West Africa, the area in which four countries account for around 75% of global cocoa production. The heavy rain also infects drying cocoa pods with blackpod disease, which causes the beans to rot, and has been reported in Nigeria by Bloomberg and in Côte d’Ivoire by Reuters. The latter article also notes that arrivals of cocoa at ports in Côte d’Ivoire are “down nearly 5% this season”, further evidencing the present supply squeeze caused by the weather.
However, weather is not just causing price pressure for its immediate effects. Longer term concerns include the flooding of growing regions which may reduce the main crop in October. The wet weather won’t continue into that October season as the El Niño phenomenon has returned after several years of La Niña. El Niño tends to bring hotter and drier conditions to West Africa which has a significant impact on cocoa crop health; when the last major El Niño effect occurred in 2015/16, it caused a 179,000 tonnes supply deficit according to ICCO. While the extent to which the severity of the impending El Niño remains to be seen, its forecast provides yet more support to cocoa prices.
Rainforest deforestation for Palm Oil plantation in Malaysia
A final point to consider alongside these supply-side challenges is that in previous years, with so many obstacles threatening to reduce the quantity and quality of cocoa beans harvested, many growers would look to expand their farms in order to make up the shortfall. This is, however, no longer as simple. The EU recently introduced anti-deforestation regulation which is related to the production of specific commodities before they are imported to the bloc. While the legislation has been closely associated with palm oil production in Malaysia and Indonesia, cocoa is another of the affected commodities. As noted by the Wall Street Journal, being able to prove “comprehensive compliance with the new rules” is yet another challenge for cocoa growers to overcome should they wish to expand their production for the upcoming season.
Demand Remains Strong, for Now
After the unprecedented chaos in commodity markets last year, the global economy in 2023 has damped the demand and therefore prices for many commodities. Industrial metal prices, for example, are experiencing much less volatile trading this year and have generally cooled from the heights of 2022. The key ingredients for chocolate, however, have not been subject to the same reduction in demand. Grind statistics, which are typically used by the industry as an indicator of demand, increased in Q1 by 0.5% year-on-year. The release of data for Q2 is due next week, and the market will be closely watching to see if there are signs of demand finally slipping.
It is important to consider that sugar prices have also been at record highs, while palm oil prices are trading well above the 2013-2020 average, therefore further increasing the cost of chocolate for consumers. The price elasticity of demand for chocolate is typically low, with people willing to pay for sweat treats regardless of cost increases. However, with multiple constituent commodities reaching such highs, it remains to be seen whether chocolate manufacturers can keep raising their prices without encouraging a period of demand destruction. After all, it is worth remembering the adage that ‘the best cure for high prices is high prices.’
Speculative Spiral
A final reason for the upward momentum in cocoa markets is the impact of speculators. For all of the reasons discussed so far, cocoa futures appear to be a strong option in an investment portfolio right now. As noted by the Wall Street Journal, cocoa has been one of the best investments in the world in the first half of this year and has outperformed the Nasdaq Composite. As shown in the graph above from ChAI’s Driver Detail charts, the net-long positioning of Non-Commercials on New York cocoa futures has steadily increased since a brief contraction around the time of the SVB collapse which rocked markets in March. Until there are positive developments for the next crop, or signs appear that consumers’ taste for chocolate may be waning, the cocoa price climb looks set to continue.
