The bitter truth: Chocolate lovers brace for price hikes as cocoa prices soar
Cocoa prices have doubled over the past year, driven by poor crops in the Ivory Coast and Ghana, the main producers, and a scramble by manufacturing companies to secure cocoa beans.
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The cocoa market has seen a sharp rise in prices, though such an event is rare in the world of food commodities. Over the past year, cocoa prices in New York have soared by more than 200 percent, continuing to rise this year by 97 percent. Futures prices in London have surged even more, with May 2024 contracts up by 105 percent since the start of the year.
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Cocoa prices have doubled over the past year, driven by poor crops in the Ivory Coast and Ghana, the main producers, and a scramble by manufacturing companies to secure cocoa beans.
According to a study by Saxo Bank this significant price increase can be attributed to a set of factors, especially in West Africa. Ivory Coast and Ghana are known as the leading global producers of cocoa beans. These countries have been experiencing difficult weather conditions since last year, especially extreme heat, negatively impacting cocoa production.
Workers collect dry cocoa beans in front of the store of a cocoa cooperative in the village of Hermankono on November 14, 2023. (AFP)
Moreover, the increasing costs of pesticides and fertilizers have placed financial pressure on farmers, making it difficult for them to purchase these vital components for crop maintenance. Pests targeting cocoa plants have led to further crop reduction.
Impact of rising cocoa prices on traders and investors
Ole Hansen, Head of Commodity Strategy at Saxo Bank, says the prevailing conditions present an exciting scenario for traders and investors alike.
“With cocoa production declining - as evidenced by a 40 percent drop in arrivals at Ivory Coast ports compared to the previous season - the supply chain is feeling the crunch. This drop in supply occurs as a large portion of cocoa is pre-sold to companies and manufacturers of cocoa and chocolate products.”
Hansen added, in research seen by Al Arabiya English, that in the face of the challenge of meeting these commitments, these entities are forced to look for alternative sources. This scramble for cocoa has put pressure on the futures market for cocoa prices.
Implications of rising cocoa prices for the consumer
From the consumer’s perspective, the direct effects of the significant increase in cocoa prices may not be immediately noticeable. Typically, these price hikes may take 6 to 12 months to be reflected in the retail prices of products. However, Saxo Bank considers that consumers should prepare for rising chocolate bar prices in the upcoming period.
Stock image of a bar of chocolate, which is made from roasted cacao seeds. (Pixabay)
Hansen also predicts an increase in shrinkflation - reducing the size of chocolate bars or the amount of chocolate while keeping prices stable. Therefore, while the prices of chocolate products may not significantly rise, the quantity offered at the same price will decrease.
Hedge funds’ exposure to the cocoa market
Arun Leslie John, Chief Market Analyst Century Financial, says that major African cocoa factories in Ivory Coast and Ghana have stopped or significantly reduced processing because they cannot buy the beans, according to 4 trading sources. This means that chocolate prices worldwide are likely to rise as Easter approaches.
In exclusive statements to Al Arabiya English, he added that hedge funds in the cocoa market have been stacking up since the end of 2023, exacerbating the record rise in prices due to poor crops in West Africa. This led to prices in the London market reaching levels of 7,454 GBP, while future cocoa contracts in New York reached an all-time high of $8,959.
While poor weather and disease afflicting the cocoa trees in the world’s main cocoa growing regions in West Africa sparked the rally, the hedge fund stampede has added to its fierceness, according to analysts, as per Arun.
Two cocoa farmers harvesting cocoa pods from a cocoa tree in a farm in Asikasu, a town in Eastern Region of Ghana, on December 19, 2020. (AFP)
Arun also referred to previous statements by Martijn Bron, who was the global head of cocoa and chocolate trading for agricultural commodities firm Cargill - he said that hedge funds’ risk exposure in cocoa is the highest historically.
However, “hedge funds are not the source of this rise, but in a low liquidity market environment, they can amplify fundamentally justified market movements to extreme levels.”
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