By J Edward Moreno
A failed crop, followed by a wave of financial speculation, put cocoa prices on a roller coaster this year, rattling an industry reliant on inexpensive crops and labour.
This is not how things normally go in the cocoa market. For much of the past decade, the price of cocoa in one key global benchmark hovered around $2,500 per metric tonne. Last year, after poor harvests in West Africa, the price began to creep up — rising to $4,200 a tonne by December, a threshold that hadn’t been crossed since the 1970s.
Then the financial speculators began to pile in — betting prices would rise further. They pushed the price above $6,000 a tonne in February, $9,000 a tonne in March and $11,000 a tonne in mid-April. Since then, the price has swung wildly, falling nearly 30 per cent in just two weeks before bouncing up again. By Thursday, the price was $8,699 a tonne.
Large food companies have been raising prices and warning that they’ll have to continue to do so if cocoa doesn’t stabilise. Companies that use more pure cocoa — rather than the palm oil and other fillers that go into many candy bars — will be hit hardest, though some premium chocolate-makers note that they’ve always paid much higher prices to compensate farmers fairly.
The situation doesn’t look as if it’s going to settle down soon. Here’s what you need to know.
What happened to the cocoa crop?
A combination of low rainfall, plant disease and aging trees led to a disappointing crop in Ivory Coast and Ghana in 2023. The two countries produce about two-thirds of the world’s cocoa, so the shortage hit the global market hard. It continues: The International Cocoa Organization recently forecast that global production will trail demand by 374,000 tonnes this season, which ends in September, after a 74,000-tonne shortfall last year.
There’s no quick fix for this. Cocoa trees take years to produce fruit, giving farmers little incentive to plant more since they don’t know what the price of the crop will be when they bear fruit. Some may prefer to use more of their land for growing rubber or mining gold.
But while the production shortfall underpinned the initial price gains, speculation from investors such as hedge funds took things to another level.
How is the global price of cocoa set?
Like any commodity, cocoa has many different prices. In Ghana and Ivory Coast, the government sets a seasonal rate that cocoa farmers are paid, in an effort to protect them from volatility in global prices. After market prices spiked in April, the Ivory Coast’s Agriculture Ministry agreed to raise that rate for the rest of the season — but it is still far less than the increase in global commodity markets.
In other countries, farmers are paid market rates.
But big buyers, such as Hershey and Mondelez, and commodity traders buy and sell cocoa on global exchanges, where they trade physical beans as well as futures contracts that can require them to take a delivery of beans at a future date.
It’s in the global exchanges that prices have become disconnected from the reality on the farms.
The global benchmark for cocoa is a futures contract traded on the Intercontinental Exchange — and a buyer of that contract is agreeing to a price for a metric tonne of cocoa beans to be delivered to one of several ports in the eastern United States.
One big factor behind the price spike this year is that those futures contracts are settled with physical delivery of the cocoa — which means traders who are selling the contracts need to keep large reserves of cocoa beans on hand. That can result in an upward spiral, as traders are forced to buy more cocoa to replenish their inventories.
What does this mean for chocolate bars?
Chocolate prices are mostly rising. When Hershey and Mondelez, which owns brands such as Cadbury and Toblerone, reported earnings recently, the price swings were a big topic of conversation.
Mondelez said it raised its prices about 6 per cent in the first three months of the year, and Hershey about 5 per cent, and both said they would be willing to push prices up more if the cost of cocoa stayed high. Both companies said their profits had increased by double-digit percentages over the previous year as consumers continued buying their products despite rising prices.
Luca Zaramella, the chief financial officer of Mondelez, told analysts on April 30 that the market was “overreacting” and that it would very likely correct itself in the latter half of the year.
Some “bean to bar” chocolate-makers, which have always paid a premium for the cocoa they get from smaller farmers, say they’re having a different experience.
“The premium cocoa price never changed,” said Dan Maloney, who runs Sol Cacao, a chocolate business in New York City, with his two brothers. “It’s almost like the bulk price caught up with the premium price, but we were always paying premium.”
Maloney said he was already paying $9,000 to $12,000 for a tonne of premium cocoa, which he obtains from farmers around the world, particularly in Latin America and Africa. Sol Cacao charges $8 for a 1.86-ounce bar, while a 4-ounce Hershey bar is about $2. — The New York Times
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