High cocoa prices: why is the commodity so expensive?

Cocoa prices on the rise: understand what factors explain this situation and how they impact market participants in this commodity.

January 10, 2024

hEDGEpoint Global Markets

In 2023, cocoa prices reached their highest levels in more than a decade, which had repercussions all over the world. The trend is for prices to remain high this year. But what explains this situation?

One of the reasons is the unfavorable aspects of production in West Africa. This region is responsible for two thirds of the world’s cocoa harvest. These include the presence of diseases that affect plantations and adverse climatic conditions.

The global scenario is one of supply difficulties, with low stocks. In the case of cocoa demand, the increase is growing. As a result, the commodity is showing significant variations in price, which is having a number of impacts.

Want to understand more about the rise in cocoa prices? Read on and find out all the details!

Understand what factors explain the rise in cocoa prices

Cocoa supply expectations for the 2023/24 cycle were already negative. However, in November 2023, the commodity’s rise was one of the main highlights of the New York Stock Exchange. The significant increase in value is strongly associated with lower cocoa deliveries to ports in Ivory Coast, the world’s main producer.

Since the start of the 2023/24 cocoa harvest, which began in October, deliveries have fallen. To help you understand why prices are on the rise, we’ve selected the main factors generating volatility in the cocoa market. Check them out below!

1.    Adverse weather conditions

With La Niña in effect until the middle of 2023, the weather was very wet and rainy in several cocoa-producing areas in West Africa. The bad weather damaged cocoa plantations.

In Côte d’Ivoire, excessive rainfall has led to uncertainty about the volume of cocoa available. The country produced 2.14 million tons of cocoa in the 2022/23 season, down 2.7% on the 2.2 million tons of the previous cycle.

The warning for the coming months is dry weather in the region, given the challenges brought on by El Niño. There are new concerns among farmers about crop prospects for 2023/24.

2.    Harmattan

Among the adverse climatic phenomena, the Harmattan stands out. This dry, dusty wind blows from the Sahara towards the West African coast.

Its effects include the drying out of young cocoa fruits in older plantations in Côte d’Ivoire, leading to an increased risk of lower production in the western part of the country.

The harvest, therefore, may not be as abundant compared to last year, as the Harmattan intensifies.

3.    Pests and diseases

The lower supply of cocoa came after heavy rains in West Africa caused diseases in a large volume of seeds. In this regard, producers are fighting the “swollen porpoise virus“, which can kill trees in a few years. There is also the presence of the brown rot disease, responsible for rotting the fruit.

Although the outlook is dry for the coming season, the rain hasn’t stopped completely in southern Africa. In this scenario, the presence of fog and dew promotes favorable conditions for insect attacks.

Farmers across West Africa face similar threats. In Ghana, many have taken preventative measures by cutting down bushes around their crops.

 4.    Rising world demand and falling supply

While the pandemic triggered a slowdown in global demand for cocoa, the recovery in consumption over the last two years has changed that reality. Demand for cocoa has increased considerably: countries that were not traditional buyers, such as China, have become significant consumers.

In addition, there has been a reduction in the supply of cocoa in Ivory Coast and Ghana, due to all the factors mentioned above. If the current scenario persists, the cocoa market could face another year of stock deficits in 2024.

Just to give you an idea, Côte d’Ivoire has cut off sales of futures contracts for the 23/24 cocoa cycle. The measure came about in July 2023 as a response to the insecurity of not having enough production to meet demand.

The International Cocoa Organization (ICO) indicates that the deficit will be around 142,000 tons. In a report released in August, they stated that the reduced stocks could cause a new price hike.

What are the main impacts of changes in cocoa prices?

The impacts of the rise in cocoa prices are felt by different sectors of the economy, involving producers, industries and consumers, for example.

Data from Nielsen IQ shows that the price of chocolate in Europe rose by 13.3% in the first half of 2023. In the United States, the increase reached 20.7%. This rise is being felt on the global markets that trade cocoa futures contracts.

In other words, production costs become more expensive for chocolate manufacturers. One of the industry’s most common moves is to pass the increase on to consumers. This makes the product more expensive on the shelves.

Two possibilities then arise. The first is a negative scenario, with a drop in sales due to rising prices, since chocolate is not an essential product. But if consumers absorb the increase and continue to consume, companies can increase profits.

Many of the largest cocoa producers are developing countries, mainly in West Africa. Fluctuations in commodity prices risk impacting the economies of these nations, which influences export revenue, employment and income.

Read also:

How can you protect yourself from rising cocoa prices?

As you can see, the cocoa market is extremely volatile. After all, it experiences variations in supply and demand due to conditions such as the weather and the presence of diseases and pests that affect the crops.

Relying on risk management makes all the difference to the global commodity chain. In this sense, hEDGEpoint offers sophisticated hedging products such as the use of derivatives to protect against price volatility.

We combine the knowledge of our professionals with data analysis and insights to help make decisions. In addition, we have a market intelligence team at our disposal. In this way, our clients are able to follow all the movements that can cause cocoa price volatility.

Contact hEDGEpoint to find out more.

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