Everyone panics because of the cocoa peak

The fact that cocoa prices are skyrocketing is not only due to disappointing production in West Africa, but also to speculation and chocolate producers trying to obtain scarce cocoa beans. There are still plenty of eggs on the market at Easter, although they will be more expensive or smaller.

The cocoa price rose to unprecedented heights this week. A ton of cocoa beans, to be delivered in two months, cost more than $10,000 in London on Tuesday. In the meantime, the price has fallen slightly. Profit-taking with the extended Easter weekend just around the corner, it sounds.

The fact is that cocoa as a raw material now costs more than copper, something that seems very strange. Since the beginning of this year, the main ingredient of chocolate has more than doubled in price, after becoming more than 90 percent more expensive last year. The question is whether it can be much higher.

At the same time, we must put the cocoa peak into perspective. Nominally we are experiencing a record price, but in real terms – adjusted for inflation – the price remains below the peaks of the 1970s. The record at that time corresponds to about 27,000 dollars today.

Over the past ten years, the cocoa price has fluctuated between $2,000 and $3,000 per tonne. Cocoa is known as a difficult crop. The Theobroma cacao, like the cacao tree in the 18^the century by the Swedish botanist Carl Linnaeus, only thrives in a tropical climate, in the zone between the two tropics. The tree requires fertile soil and sufficient rain, but does not like full sun. Cocoa trees are therefore often planted under taller trees. Too much precipitation can easily cause fungal diseases, such as black pod disease, or viruses to strike. If the weather is too dry, the harvest will yield smaller cocoa beans.

That is exactly what happened to the crucial West African production countries in the past year. Ivory Coast, the largest cocoa producer in the world, and neighboring country Ghana together account for about 60 percent of world production. Last summer, the region first suffered from rainfall, which caused fungal diseases to develop. The fight was extra difficult because roads had become impassable. Then El Niño struck, the weather phenomenon that brought warm and dry weather to West Africa. Cocoa trees refrain from this and produce less. Yields were also affected by the swollen shoot virus, a disease that regularly strikes in West Africa.

The Ivory Coast-based International Cocoa Organization (ICCO) expects global cocoa production to be almost 11 percent lower in the 2023/24 crop year (October 1 to September 30) to just 4.45 million tonnes. On the other hand, global demand for cocoa is expected to decline by 5 percent to 4.78 million tons, according to the latest quarterly bulletin. Supply will therefore not be able to keep up with demand, for the third year in a row.

The poor harvest in West Africa is the main cause of the cocoa price explosion, but not the only one. Cocoa stocks, which are at very low levels, also play a role. Chocolate manufacturers have failed to replenish their own stocks. Because the cocoa price has been on the rise since the beginning of 2023 – just like that of sugar, another important ingredient of chocolate – they watched the cat out of the tree for months, hoping for lower prices. But when it comes to cocoa, the opposite has happened.

EU regulations on deforestation also play a role. From now on, companies must be able to demonstrate that the products they import into the European Union have not contributed to the destruction of forests. “This entails additional costs and has an effect on the availability of cocoa for the EU,” says Neuhaus CEO Isabel Baert, “because preference may be given to regions where such drastic measures are not required.”

As usually happens when the price of a commodity skyrockets, speculators also jump on the bandwagon. They can buy futures contracts, with delivery of the beans taking place at a later date, and hope that they can sell the futures for a profit before the delivery date.

According to Ole Hansen, head of commodity strategy at investment bank Saxo, the cocoa price rally has not been driven by speculators for several weeks now. They have reduced their positions in both London and New York. Their place has been taken by the chocolate producers, who have started a real battle for supplies.

They bought futures on the stock exchanges to secure supplies, Hansen says. ‘In the eight weeks before March 19, producers bought 296,000 tonnes on the New York futures market and 530,000 tonnes on the London market. During the same period, hedge funds and large speculators reduced their positions by a total of 715,000 tonnes, divided between 439,000 tonnes in New York and 276,000 tonnes in London.’

Chocolate makers are now trying to source in other regions. They turn to smaller production countries such as Ecuador, Peru and Indonesia and appear willing to pay extra to obtain beans. “Everyone is panicking,” Brandon Tay Hoe Lian, CEO of major Malaysian cocoa processor Guan Chong, told Bloomberg news agency last week. ‘Not only do we have to fight for beans, we also pay a lot more.’

Chocolate manufacturers do not like to admit whether this is the case. “In general, we are trying to further diversify our cocoa supply so that we are not dependent on one region,” says Swiss premium chocolate producer Lindt & Sprüngli.

“The rally will continue until chocolate producers have the cocoa they need, or until prices reach a level that cools demand,” said commodity specialist Hansen. In other words: the less chocolate we eat, the faster the cocoa price will fall. But with Easter just around the corner, that isn’t going to happen right away.

Solace can also come from another source, from a recovery in production. Although that largely depends on the weather gods. The dry season is now coming to an end in West Africa. The rainy season starts in April, and that rainfall is important for the harvest. Next month the mid-harvest starts, the smaller of the two harvest periods, with the most intense picking period between mid-May and the end of June. For the time being it looks decent, although farmers in Ivory Coast warn that the first cocoa beans delivered will be on the small side.

The harvest will therefore be rather modest in the next three months. As more rain falls, this should improve. The cocoa trees also have plenty of flowers – on the trunks and main branches, a special feature of the species. This should lead to good yields in five to six months.

It is unclear what we can expect in the longer term. Some commodity analysts believe that cocoa crops have become permanently uncertain due to changing weather patterns. Volatile and higher prices than in the past therefore seem inevitable. Production is being increased in countries such as Brazil and Ecuador, but it will take several years before the effect becomes visible on the market.

No matter how much cocoa prices have risen, small farmers in West Africa – who are responsible for the majority of production with their small plantations – can only benefit marginally. The prices they receive in countries such as Ivory Coast, Ghana and Cameroon are set by the national governments. They have recently raised prices, but much less than the price increases on international markets. A very large part of the cocoa price goes to all kinds of intermediaries and traders.

The low prices that small farmers receive often result in cocoa beans of lower quality. They do not have the resources to invest sufficiently in fertilizers and pesticides, let alone to renew their acreage and plant new cocoa trees that are more resistant and offer a better yield. It takes three to four years before a cocoa tree starts to bear fruit. Some farmers no longer feel like it and have left cocoa cultivation.

There are more and more calls for a thorough reform of the entire cocoa cultivation in West Africa, so that farmers receive a fair income and can sustainably produce cocoa beans of better quality. Trias shows that this is possible. The Flemish NGO works with cocoa cooperatives in Congo, among other places. ‘That cocoa is usually of better quality and is not produced in monoculture. Cultivation is also less regulated by the government than in Ghana and Ivory Coast,” says Trias advisor Eva Verbist.

The record chase for cocoa prices is making itself felt in the wallets of chocolate lovers. Major Swiss chocolate producer Lindt & Sprüngli increased its prices across the group by an average of 10.1 percent in 2023, ‘in line with local cost structures’. In Belgium, chocolate in stores was 12.4 percent more expensive in February than a year earlier, according to the statistics agency Statbel.

And there is more to come. “We will have to further increase our chocolate prices in 2024 and 2025 if we assume that cocoa prices remain at current levels,” Lindt & Sprüngli told De Tijd. The higher prices will hit worldwide. ‘Enjoy you Easter eggs this year. They will cost more in 2025’headlined The Sydney Morning Herald recently.

With the decline in purchasing power in many countries in mind, some chocolate manufacturers are resorting to… shrinkflation. Their large Easter eggs in the supermarket have not increased in price, but have become about 20 percent lighter, British media noted. Many manufacturers of cheap chocolate adjust the recipe: less cocoa and more sugar. Quality companies such as Lindt & Sprüngli certainly do not do that.

We should not fear a shortage of Easter eggs at the moment. “We are well prepared for this year,” assures Neuhaus CEO Isabel Baert. ‘We purchased on time.’