A failed harvest, followed by a wave of financial speculation, put cocoa prices on a rollercoaster ride this year, shaking an industry that relies on cheap crops and labor.
Things are not normally like this in the cocoa market. For much of the last decade, the price of cocoa at a key global benchmark hovered around $2,500 per metric ton. Last year, after poor harvests in West Africa, the price began to slowly rise, reaching $4,200 a ton in December, a threshold that had not been crossed since the 1970s.
Then financial speculators began to accumulate: betting prices would rise even further. They pushed the price above $6,000 a ton in February, $9,000 a ton in March and $11,000 a ton in mid-April. Since then, the price has swung wildly, dropping nearly 30 percent in just two weeks before recovering again. On Thursday, the price was $8,699 a ton.
Big food companies have been raising prices and warning that they will have to continue doing so if cocoa does not stabilize. Companies that use more pure cocoa (rather than palm oil and other fillers used in many chocolate bars) will be hardest hit, although some premium chocolate makers point out that they have always paid much higher prices to compensate consumers. farmers fairly.
The situation does not seem like it will calm down anytime soon. Here’s what you need to know.
What happened to the cultivation of cocoa?
A combination of low rainfall, plant diseases and aging trees led to a disappointing harvest in Côte d’Ivoire and Ghana in 2023. The two countries produce around two-thirds of the world’s cocoa, so the shortage hit the global market hard. 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 shortfall of 74,000 tonnes last year.
There is 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 to grow rubber or mine for gold.
But while the production shortfall underpinned initial price gains, speculation by investors such as hedge funds took things to another level.
“Yes, there are fundamentals that trigger the measure, but then these financial considerations add up and aggravate the situation.” said Judy Ganes, a commodities consultant. “It’s driven by money.”
How is the world price of cocoa set?
Like any commodity, cocoa has many different prices.
In Ghana and Ivory Coast, the government sets a seasonal fee paid to cocoa farmers in an effort to protect them from global price volatility. After market prices soared in April, Ivory Coast’s Agriculture Ministry agreed to increase that rate for the rest of the season, but it is still much smaller than the increase in global commodity markets.
In other countries, farmers are paid market rates.
But large 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 may require them to accept delivery of beans at a future date.
It is in global exchanges where prices have become disconnected from reality on farms.
The global benchmark for cocoa is a futures contract traded on the Intercontinental Exchange, and a buyer of that contract is agreeing on a price for a metric ton of cocoa beans to be delivered to one of several ports in the eastern United States. Joined.
A major factor behind this year’s price rise is that those futures contracts are settled with the physical delivery of cocoa, meaning traders selling the contracts must have large reserves of cocoa beans on hand. This can result in an upward spiral as traders are forced to buy more cocoa to replenish their inventories.
Trading volume can also affect how the price changes.
In January, the number of active cocoa contracts rose 30 percent from a year earlier, Commodity Futures Trading Commission data shows. But that trading volume fell sharply starting in April (when prices peaked) and the lower number of trades caused big price swings in the last two weeks.
Although prices have come down from their peak, they are likely to remain elevated for some time, said Rabobank analyst Paul Joules, “due to systemic issues that will take some time to resolve.”
Carla Martin, a Harvard professor who studies the cocoa industry, said the overall market could appear more efficient if farmers had more power to set prices based on their supply.
“There is actually a lot of money in cocoa, which is simply being captured at very specific nodes in the supply chain,” Ms Martin said. “The market alone does not solve these types of problems, but people solve them.”
What does this mean for chocolate bars?
Chocolate prices are mostly going up. When Hershey and Mondelez, which owns brands such as Cadbury and Toblerone, recently reported earnings, price swings were a big topic of conversation.
Mondelez said it raised its prices about 6 percent in the first three months of the year, and Hershey about 5 percent, and both said they would be willing to raise prices further if the cost of cocoa remained high. Both companies said their profits had increased by double-digit percentages from a year earlier, 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.
Still, he said, “it is absolutely critical that we prepare for cocoa to potentially remain at these levels.” Mondelez could protect its profits, Zaramella said, by trying to secure large cocoa orders during market downturns or by reducing the costs of other inputs, such as ingredients.
Some bean-to-bar chocolate makers, who have always paid more for the cocoa they source from small farmers, say they are having a different experience.
“The price of premium cocoa never changed,” said Dan Maloney, who runs Sol Cacao, a chocolate company in the Bronx, with his two brothers. “It’s almost like the wholesale price reached the premium price, but we were always paying more.”
Maloney said he was already paying between $9,000 and $12,000 for a ton of premium cocoa, which he sources from farmers around the world, particularly in Latin America and Africa. Sol Cacao charges $8 for a 1.86-ounce bar, while a four-ounce Hershey bar costs about $2.
Maloney said he charged those prices to ensure product quality and the ethical treatment of farmers in the industry, which has a history of exploiting children and enslaved people for labor.
“They market chocolate like candy,” Maloney said of the big manufacturers. “We market it more as a luxury, something to savor, like a bottle of wine.”
Some cocoa farmers see buyers like Maloney as allies who protect them from the vagaries of financial markets.
Gustavo Mindineros, a cocoa farmer who runs a producer cooperative in Tumaco, Colombia, said farmers tended to favor smaller buyers when production was low because they bought fewer beans at a higher price.
“Large companies guarantee volume, but do not recognize quality,” said Mindineros. “Smaller buyers recognize quality and pay more for it.”