Why cocoa prices are rising crazily fast

APRIL UPDATE: Since I wrote this blog back in mid-March, the price of cocoa has rocketed further to peak at $10,000 (!) per tonne in Easter week. It is now hovering around $9,000/tonne which is mind blowing as we thought $7,800 was high enough just 2 weeks previously.

Initial blog written on 16th March 2024:
The sudden and extraordinary recent increases in the price of cocoa beans on global stock markets is a huge challenge for the chocolate industry and longer term for consumers, as everyone is going to have to re-think their attitude to chocolate - something I have been saying for a long time. Western consumers expect chocolate to be a cheap commodity food as the market is dominated by a few huge global players known as 'big chocolate' and the way the market has been controlled is coming back to bite everyone. 

This graph says it all - in April 2023, the price of cocoa on the New York Stock Exchange was c$2,600 a tonne (& to be honest, it had been that around that price for too long). As of yesterday 15th March 2024, it was the highest it has ever been - c$7,800 a tonne - beware the Ides of March indeed.

However, the speed of the rises has taken everyone in the industry by surprise and has been driven by several different factors.

Declining supply:
The latest quarterly bulletin by the ICCO (International Cocoa Organisation, an inter-governmental organization established in 1973 under the auspices of the United Nations and operating within the framework of successive International Cocoa Agreements, comprising 51 member countries representing 86% of world cocoa exports and 72% of world cocoa imports), is reporting a large global deficit of 374,000 tonnes based on an estimated 10.9% year on year decline in supply. Other experts predict an even bigger cocoa deficit of up to 500,000 tonnes this year, making this era likely to be the largest shortfall of cocoa supply ever. 

This decline is the third consecutive crop season in a row and is being driven by another year of poor harvests in West Africa especially.  What the industry is facing is a perfect storm combination of unfavourable weather but also aging cocoa farmers, reducing yields from aging cocoa trees and increasing reports of disease. This is a huge problem for the chocolate industry as Ivory Coast, the world's largest cocoa producer (accounting for c40% of total volume) shipped 1.16 million tonnes of cocoa from October 23 to Feb 24, down 32% on the same period the previous year - that is a big drop! Ghana (the 2nd biggest cocoa producing country producing c20% total volume), is forecasting another poor crop this year with climate change, swollen shoot virus disease affecting trees and smuggling all being factors in the steep decline.

Smuggling of cocoa across borders from Ivory Coast & Ghana to neighbouring countries such as Togo, Liberia & Guinea is happening because the cocoa farmers in Ivory Coast & Ghana are ironically not benefiting from the higher prices. Their 'farmgate' cocoa price per tonne was set by their Governmental cocoa boards BEFORE the prices started rising so they are stuck on a much lower price vs other countries where farmers are earning much, much more.
So this is another problem, if the millions of cocoa farmers (most of whom have small farms of less than 5 hectares and are not earning a living wage) in the biggest producing countries are not actually seeing the benefits of these higher prices, there is even less incentive for them to invest in new trees, for young farmers to want to grow cocoa and the downward spiral of ever-reducing supply from West Africa continues. 

So all this is pushing up the price of what is known as 'bulk cocoa' - usually the cheapest type of cocoa on the market bought by 'Big Chocolate' for bulk mass confectionery brands - which is pushing up prices of 'speciality cocoa' too. This is the type of fine origin cocoas we work with - Arriba Nacional from Ecuador, Fino de Aroma (also known as Trinitario) from Colombia & Grand Cru de Sambirano from Madagascar.
So whilst we may be in shock at the sudden increases, the cocoa farmers our chocolate partners in Ecuador, Colombia & Madagascar work with to make our chocolate are seeing the benefit of these higher prices which is fantastic for them, and, if we take a step back from the immediate worries about how we will cope with these higher prices, longer term for us all, as they have more incentive to invest in continuing to grow cocoa.

Speculators:
This however, is where it gets more complicated. Hedge funds have spotted an opportunity to profit from all of this volatility and, according to the Financial Times, traders have bet $8.7 billion that prices will continue to rise - and yes, you read that amount right! According to the Commodity Futures Trading Commission, this is the largest cocoa speculation ever in dollar terms. So whilst they are not the cause of the rise in price, they are exacerbating the situation big time...aagggh. This is causing the price to rise by sometimes hundreds of $ per tonne in a day which is not reflective of the underlying market issues and is making it pretty impossible for small companies like us to plan our next contracts with our chocolate partners.

So what is the likely result of these higher cocoa prices on finished products and the longer term?
All the talk in the industry is that this will settle out at a new higher price per tonne for cocoa as a reset for the industry. In simple economic terms, supply and demand need to come back into balance - prices will be higher for finished chocolate products and this should result in lower consumption and that wouldn't be such a bad thing when it comes to bulk mass market confectionery especially. Anything containing chocolate needs to be a more expensive treat and consumers need to treat chocolate with much more respect than they do now.  We have to stop treating chocolate as a cheap commodity. Why do consumers accept higher prices of craft coffee but not for chocolate when they have such similarities in where grown and cocoa is actually much trickier to grow, harvest & process into chocolate? Will just leave that one there with you...
Longer term, if the market price is higher, West African cocoa farmers would be able to earn a living income if their future farmgate prices better reflect reality and cocoa would be a more appealing crop for young farmers to grow.

However, there is a risk that 'Big Chocolate' will cut costs in other ways to hold prices down and keep distorting the market which doesn't help anyone - 'shrinkflation' (reducing pack sizes whilst holding the price) is already happening, or they will reduce the amount of cocoa in their products (not that there is much there as it is) & bulk it out with yet more (addictive & bad for you) sugar, or increase the use of what are known as CBEs (cocoa butter equivalents).
You need to watch out for this practice where they swap out a % of the (now very expensive) cocoa butter (the fat part of cocoa beans which gives chocolate its melt in the mouth properties and shine) with cheaper vegetable fats, which always includes palm oil (there is NO place for palm oil in chocolate - rant over). Then we are into a different world of pain with regard to further pressures on deforestation, ultra processed foods, impact on health and obesity etc - all subjects for another blog I think.  

So what does this mean for Chococo?
Definitely challenging times ahead (as if we havent already navigated our way through years of challenging times thanks to Brexit, Covid, the war in Ukraine affecting energy & shipping costs, the cost of living crisis & the war in Gaza further affecting consumer confidence). This could one of our toughest yet as we are also already facing more big increases in staff costs with the increases in the living wage coming in April.
We are working very closely with our chocolate partners in Ecuador & Colombia especially and trying to work out when would be the best time to place our next orders - however, none of us has a crystal ball and every prediction made by wise South American folk who have been in the industry much longer than we have, has proved wrong so far with regard to when the price might settle, as this is truly uncharted waters for everyone.

We will do our very best to keep our prices competitive by keeping tight control of all our other costs, but given we already a small lean business and are now buying chocolate at sometimes more than double historic prices, we cannot absorb all of these cost increases and still be a sustainable business.