A failed harvest, followed by a wave of financial speculation, has sent cocoa prices on a rollercoaster ride this year, shaking up an industry dependent on cheap crops and labor.
This is not the normal course of events on the cocoa market. For much of the past decade, the price of cocoa in a key global index has remained around US$2,500 per metric ton. Last year, after poor harvests in West Africa, the price began to climb – reaching US$4,200 per tonne in December, a threshold that had not been crossed since the 1970s.
Then financial speculators began to flock in – betting that prices would continue to rise. They pushed the price above US$6,000 per tonne in February, US$9,000 per tonne in March and US$11,000 per tonne by mid-April. Since then, the price has seen wild swings, dropping nearly 30% in just two weeks before rebounding again. On Thursday, the price was US$8,699 per tonne.
Big food companies have raised their prices and warned that they will have to continue to do so if cocoa does not stabilize. Companies that use more pure cocoa — rather than the palm oil and other fillers found in many candy bars — will be hit hardest, although some high-end chocolate makers note that they have always paid much higher prices to compensate farmers fairly.
The situation does not seem to be calming down any time soon. Here’s what you need to know.
What happened to the cocoa harvest?
A combination of low rainfall, plant diseases and aging trees has led to a disappointing harvest in Ivory Coast and Ghana in 2023. The two countries produce about two-thirds of the world’s cocoa, so the shortage has hit hard hit the global market. It continues: The International Cocoa Organization recently forecast that global production will fall short of demand by 374,000 tonnes this season, which ends in September, after a deficit of 74,000 tonnes last year.
There is no quick fix to this problem. 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 to grow rubber or mine for gold.
But if the production deficit fueled the first price increases, speculation from investors like hedge funds took things to another level.
“Yes, there are fundamentals that trigger the move, but then these financial considerations add up and make it worse,” said Judy Ganes, a commodities consultant. “It’s driven by money. »
How is the world price of cocoa set?
Like any raw material, cocoa has many different prices.
In Ghana and Ivory Coast, the government sets a seasonal rate at which cocoa farmers are paid, in an effort to protect them from the volatility of world prices. After market prices soared in April, Ivory Coast’s agriculture ministry agreed to increase the rate for the rest of the season – but it is still well below the increase on global commodity markets.
In other countries, farmers are paid market rates.
But large buyers, like Hershey and Mondelez, and commodity traders buy and sell cocoa on global exchanges, where they trade physical beans as well as futures contracts that may require them to take delivery of beans on a specific date. future.
It is on the world stock exchanges that prices have become disconnected from reality on farms.
The global benchmark price for cocoa is a futures contract traded on the Intercontinental Exchange – and a buyer of this contract accepts a price for a metric ton of cocoa beans to be delivered to one of multiple east coast ports the United States.
A major factor behind the price surge this year is that these futures contracts are settled by physical delivery of cocoa – meaning traders selling the contracts must maintain large reserves of cocoa beans. This can lead to an upward spiral, with traders forced to buy more cocoa to replenish their stocks.
Trading volume can also affect price action.
In January, the number of active cocoa futures contracts increased by 30% from a year earlier, according to data from the Commodity Futures Trading Commission.
But that trading volume fell sharply starting in April — when prices hit record highs — and the smaller number of trades led to wild price swings over the past two weeks.
Although prices have come down from their highest point, they are likely to remain high for some time, said Paul Joules, an analyst at Rabobank, “due to systemic issues that will take some time to resolve.”
PHOTO MIKE BLAKE, REUTERS ARCHIVES
Mondelez and Hershey said they would be willing to push prices higher if the cost of cocoa remained high.
What does this mean for chocolate bars?
Chocolate prices are increasing overall. When Hershey and Mondelez, owner of brands like Cadbury and Toblerone, released their results recently, price fluctuations were a major talking point.
Mondelez said it raised prices about 6% in the first three months of the year, and Hershey about 5%, and both said they would be willing to push prices higher if the cost cocoa remained high. Both companies reported that their profits rose by double-digit percentages from the previous year as consumers continued to buy their products despite rising prices.
Luca Zaramella, Mondelez’s chief financial officer, told analysts on April 30 that the market was “overreacting” and would most likely correct in the second half of the year.
“ [Néanmoins], he added, it is absolutely essential for us to be ready in case cocoa remains at these levels. » Mondelez could protect its profits, Mr. Zaramella said, by trying to secure large cocoa orders during market declines or by reducing costs of other inputs, like ingredients.
Some bean-to-bar chocolate makers, who have historically paid a premium for the cocoa they get from small farmers, say they have a different experience.
“The price of premium cocoa has never changed,” said Dan Maloney, who runs Sol Cacao, a chocolate company in New York, with his two brothers. “It’s almost like the bulk price has caught up with the premium price, but we’ve still paid the premium price. »
Mr Maloney said he already pays between US$9,000 and US$12,000 a tonne for premium cocoa, which he gets from farmers around the world, particularly in Latin America and Africa. Sol Cacao charges US$8 for a 53g tablet, while a 113g Hershey tablet costs around US$2.
This text was originally published in the New York Times.
Read the original article (in English; subscription required)