Raw cocoa

Cocoa Prices at Record Highs as Festive Season Approaches

Nov 9 2023

While 2023 has been relatively calm for many commodity markets in contrast to the previous few years, cocoa has maintained an upward trajectory and broken several records in the process. In recent weeks, New York Cocoa futures reached their highest level since 1978 when supply shortages from West Africa sent markets to a peak of $5,379 per ton in July 1977. Across the pond, London Cocoa Futures have hit the highest price recorded since the contract began trading in 1920. The final months of the year traditionally see strong seasonal demand for chocolate products, driven by Halloween and Christmas, so in this week’s market insight article we’ll look at some of the key reasons behind cocoa’s price rally.

West African Supplies Threatened

West Africa plays a pivotal role in global cocoa production. Ivory Coast is the largest cocoa producer globally, followed by Ghana, with the two countries contributing around two-thirds of the world’s cocoa production. These countries' favorable climates and extensive cocoa plantations contribute significantly to the global cocoa supply chain. However, the concentration of the world’s cocoa supply in one region also makes the market susceptible to extreme pressure if the crop from West Africa fails.

Heavy rainfall in West Africa has led to the spread of black pod disease, a major driver of cocoa prices. This disease causes cocoa pods to turn black and rot, leading to lower crop quality and reduced production. The disease outbreak could potentially push the global cocoa market into a third consecutive year of deficit for the 2023/24 season.

In addition to black pod disease, the cocoa crops in Ivory Coast and Ghana are threatened by the swollen shoot virus, transmitted by mealybugs that feed on cocoa plants' sap. The virus significantly reduces cocoa crop yields and can ultimately kill the cocoa plant. Reports suggest that around 20% of Ivory Coast's cocoa crop is infected with the swollen shoot virus. In Ghana, this combination of factors has led to a reduction of almost 24% in the expected yield of the 2022/23 crop, resulting in the lowest crop estimates in 13 years.

Cocoa pod infected with blackpod disease

An example of a cocoa pod infected with blackpod disease

These challenges also come at a time when Ghana is attempting to refine the financial structure of the domestic cocoa industry. The state-guaranteed cocoa price paid to farmers was recently increased by two thirds, meaning that for the upcoming 2023-2024 season, Ghana's cocoa farmers will receive 20,943 cedis ($1,837) per tonne, up from the previous rate of 12,800 cedis.

Concurrently, the Ghana Cocoa Board, also known as Cocobod, plans to borrow $1.2 billion for this season, of which $800 million will come from a syndicate of lenders and $400 million from other sources as per Reuters. Cocobod, which acts as the country’s industry regulator, secures a loan to finance local licensed buying companies to buy the cocoa beans from farmers on its behalf to export.

The cumulative effect of these challenges are showing in the region’s exports. Barchart reported government data from the Ivory Coast government showed that the nation’s farmers shipped 288,686 MT of cocoa to ports from October 1-November 5, down -17.3% from the same time last year. The declining exports, as well as crop health and weather conditions, have been picked up by ChAI’s models. The current 6 month forecast is bullish, with the satellite and weather data used to inform ChAI’s ‘Crop Growth’ and ‘Weather Conditions’ models being bullish and the ‘Seaborne Imports and Exports’ model being the most significant bullish driver on that horizon, as shown below.

Cocoa 6 month influences

ChAI's Family Influences for 6 Month Price Forecast for NY Cocoa

Prices Beginning to Impact Demand

Demand for cocoa beans in Europe has held relatively steady, despite the persistent increase in costs. European third-quarter cocoa processing data showed only a modest 0.9% decrease from the previous year.

Elsewhere however, the age-old adage that high prices are the cure for high prices seems to be coming true. Soaring cocoa prices are beginning to dampen global cocoa demand outside of Europe. According to the The National Confectioners Association, North American cocoa grindings in Q3 fell by a staggering -18% year-on-year, marking the fewest grindings for a Q3 in 15 years. A similar trend was observed in Asia, where Q3 cocoa grindings fell by -8.5% year-on-year.

The surge in cocoa prices has compelled major players in the cocoa industry to reassess their strategies. Mondelez International's CEO, Dirk Van de Put, has acknowledged in a recent interview with Bloomberg that the company will have to increase the prices of its end-products in response to rising cocoa and sugar costs. He even pointed out that shrinkflation, a tactic where product size is reduced while maintaining the same price, may not be sufficient to sustain current pricing levels.

Continued price increases may create enough of a bitter taste in the mouths of consumers to dent chocolate demand enough to abate the price rally in time. While this process appears to be underway in America and Asia, the Q4 grind statistics will be a key indicator for cocoa demand in 2024.

Speculative Money Supporting Rally

A final piece of the puzzle to consider is the role of speculative money in driving up cocoa prices. With so many fundamental reasons underpinning the supply tightness and high pricing in cocoa, it is unsurprising that speculators have joined in on the rally. When speculators anticipate rising prices, they buy contracts, creating upward pressure on prices which can then be exacerbated by other traders following suit in herd behavior.

As shown in the graph below from ChAI Insight, Non-Commercial Long Positions have considerably outstripped Short Positions since Q1 of this year, with the correlation between Long Positions and Cocoa prices becoming increasingly strong since August. The delta between Long and Short positions could close quickly if there are concrete signs of improved supply or significantly reduced supply, but in the meantime it seems that the cocoa market will sustain or increase its current level.

Cocoa positions

Non-Commerical Positions on NY Cocoa Futures, shown in ChAI

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