After a substantial rise of 45% in 2023, cocoa prices are experiencing an even steeper surge in 2024, gaining a staggering 85% so far. In fact, April 2024 saw cocoa prices reach an all-time high of $12,261 per tonne, pushing the annual gain to a remarkable 190%. But what’s driving this dramatic increase, and who’s feeling the pinch? Let’s delve into the reasons behind the cocoa price surge and explore how it’s impacting different players in the chocolate supply chain.
Weekly Chart of Cocoa (Futures on July 2024 Delivery) - Source: ActivTrader on the 2nd of May
What’s Pushed Cocoa Prices to Record Highs?
The recent surge in cocoa prices can be attributed to a simple imbalance: demand for cocoa is growing faster than supply can keep up. This strain on the supply side stems from several factors.
Climate change and unpredictable weather patterns are disrupting harvests in major cocoa-producing countries, particularly those in West Africa. These countries, like Côte d’Ivoire, Ghana, Nigeria, and Cameroon, contribute a staggering 70% of the world’s cocoa. Additionally, diseases pose a threat to cocoa trees, jeopardising future harvests.
It’s important to note that the recent price surge isn’t solely driven by supply and demand. Trading activity and speculation within the market can also contribute to price volatility. In fact, according to Bloomberg, cocoa price volatility reached record highs in April 2024.
From Farm to Factory: The Ripple Effect of Rising Cocoa Costs
The meteoric rise of cocoa prices on the global market has sent shockwaves through the entire value chain. From cocoa farmers, chocolate processors, and retailers to final consumers, let’s take a closer look at the way a strong and sustainable rise in cocoa prices can affect these actors, so you have a better idea of the underlying forces at play when investing in cocoa.
Cocoa Farmers: The Uneven Gains of High Cocoa Prices
In theory, higher cocoa prices should translate to higher incomes for farmers, allowing them to invest in better farming practices, improve their families’ well-being (reducing poverty, increasing access to education and healthcare), and lead an overall better life.
Unfortunately, this increased income may not always reach the farmers themselves, as middlemen operating within the supply chain can take a significant cut, leaving farmers with a smaller share of the profits.
Adding another layer of complexity, government policies in some cocoa-producing countries can further limit the benefits reaching farmers. Local pricing systems, cocoa trading structures, and even who farmers can sell their beans to, all vary significantly by country.
Let’s take for instance two of the largest cocoa-producing countries in the world:
● Ivory Coast: Farmers have some flexibility, selling their beans either through cooperatives or directly to private companies.
● Ghana: Farmers face stricter limitations. They are restricted from selling to external buyers, essentially losing control over pricing. Instead, they are obligated to sell exclusively to the state agency COCOBOD (Ghana Cocoa Board), which then manages the product on the global market.
Another risk associated with rising cocoa prices associated with farmers is the potential for overproduction.
Farmers, incentivized by the current lucrative market, might be tempted to plant more cocoa trees. However, cocoa takes years to mature, leading to a potential future glut in the market and a potential subsequent price crash. This boom-bust cycle can be devastating for farmers’ long-term financial stability.
Furthermore, the pressure to increase production can lead to unsustainable farming practices like deforestation and soil depletion, ultimately harming the environment and future cocoa yields.
Caught in the Middle: Chocolate Processors Grapple with High Cocoa Costs
Chocolate processors are like alchemists who transform cocoa beans into our favourite treats. But with rising cocoa prices, they find themselves in a tricky position for several reasons.
The first reason is quite evident: rising cocoa prices increase their input and production costs. Cocoa is indeed a major ingredient they use to create their final products, so with rising costs, profit margins usually decrease.
The second reason is linked to limited flexibility when it comes to proportionally increasing the price of finished chocolate products, as consumers are quite sensitive to price hikes, which can lead to decreased sales.
Of course, some companies are trying to modify their chocolate recipes to find alternatives that will allow them to keep their margins, such as using less cocoa, lowering their use of chocolate, decreasing the size of their product or entirely changing the recipe.
However, this could negatively impact the taste and quality of the final product, which could in turn affect consumption choices.
Retailers: Caught Between Price Hikes and Consumer Loyalty
Being the final stop in the cocoa journey before reaching consumers, retailers such as supermarkets and specialised shops face a delicate balancing act between maintaining competitive prices and preserving margins.
Retail consumers are often sensitive to price hikes, especially for everyday chocolate items. A significant price increase can lead to decreased sales volume and potentially a shift towards cheaper alternatives or private label brands.
Retailers must also consider the impact on their overall brand image when raising prices, as frequent price hikes can erode consumer trust and loyalty. They need to strategically raise prices on specific chocolate products with less elastic demand (where consumers are less price-sensitive) or higher profit margins (premium chocolates).
Having explored the reasons behind the cocoa price surge and its impact across the industry, we’ve gained valuable insights. However, the story doesn’t end here. In the next article, we’ll delve deeper into the factors that generally influence cocoa prices, and explore the world of cocoa trading.
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