A poor harvest, followed by a wave of financial speculation, sent cocoa prices on a roller coaster ride this year, undermining an industry dependent on cheap crops and labor.
This is not how things usually happen in the cocoa market. For much of the past decade, the price of cocoa, according to a key global benchmark, has hovered around $2,500 per metric ton. Last year, after poor harvests in West Africa, the price began to rise, reaching $4,200 per tonne in December, a threshold that had not been crossed since the 1970s.
Then financial speculators began to flock – betting prices would rise further. They pushed the price above $6,000 per ton in February, $9,000 per ton in March, and $11,000 per ton in mid-April. Since then, the price has fluctuated wildly, falling almost 30% in just two weeks before rebounding again. On Thursday, the price was $8,699 per ton.
Big food companies have raised prices and warned that they will have to continue doing so if cocoa does not stabilize. Companies that use more pure cocoa — rather than the palm oil and other substances that go into many chocolate bars — will be hit hardest, although some high-end chocolatiers note they’ve still paid much higher prices in order to fairly remunerate farmers.
The situation does not appear to be stabilizing 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 around two-thirds of the world’s cocoa production, the shortage has therefore hit the global market hard. It continues: The International Cocoa Organization recently forecast that global production will be 374,000 tonnes short of demand this season, which ends in September, after a deficit of 74,000 tonnes last year.
There is no miracle solution to this problem. Cocoa trees take years to produce fruit, which provides little incentive for farmers to plant more since they do not 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 supported initial price gains, speculation from investors like hedge funds took things to another level.
“Yes, there are fundamentals that trigger this decision, but then these financial considerations add to it and make the situation worse.” said commodity consultant Judy Ganes. “It’s about 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 rate of remuneration for cocoa producers, with the aim of protecting them from the volatility of world prices. After market prices soared in April, Ivory Coast’s Ministry of Agriculture agreed to increase this rate for the rest of the season – but this remains well below the rise in global commodity markets.
In other countries, farmers receive market rates.
But big 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. later.
It is in global trade that prices have become disconnected from the reality of agricultural operations.
The global benchmark for cocoa is a market-traded futures contract Intercontinental exchange – and the buyer of this contract agrees to a price for a ton of cocoa beans to be delivered to one of several ports in the eastern United States.
One of the main factors behind the price surge this year is that these futures contracts are settled by physical delivery of cocoa, meaning that traders selling the contracts must maintain large reserves of beans. of cocoa at hand. This can lead to an upward spiral, as traders are forced to buy more cocoa in order to replenish their stocks.
Trading volume can also affect how prices move.
In January, the number of active cocoa contracts jumped 30 percent from a year earlier, according to data from the Commodities Futures Trading Commission. But this trading volume fell sharply from April – when prices peaked – and the reduced number of transactions led to sharp price swings over the past two weeks.
Even though prices have fallen from their peak, they are likely to remain high for some time, said Paul Joules, an analyst at Rabobank, “because of systemic issues that will take some time to resolve.”
Carla Martin, a Harvard professor who studies the cocoa industry, said the broader market could look more efficient if farmers had more power to set prices based on their supply.
“There’s actually a ton of money in cocoa, which is just captured in very specific nodes of the supply chain,” Ms Martin said. “The market itself doesn’t solve these kinds of problems, people solve them.”
What does this mean for candy bars?
Chocolate prices are largely on the rise. When Hershey and Mondelez, which own brands like Cadbury and Toblerone, recently released their results, price fluctuations were a big topic of conversation.
Mondelez said it raised 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 more if the The cost of cocoa remained high. Both companies said 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.
Still, he said, “it is absolutely essential for us to prepare for cocoa potentially remaining at these levels.” Mondelez could protect its profits, Mr. Zaramella said, by trying to secure large cocoa orders during periods of market declines or by reducing costs of other inputs, such as ingredients.
Some bean-to-bar chocolatiers, who have historically paid a higher price 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 the Bronx, with his two brothers. “It’s almost like the wholesale price has caught up to the premium price, but we’re still paying more.”
Mr Maloney said he already pays between $9,000 and $12,000 for a tonne of premium cocoa, which he gets from farmers around the world, including Latin America and Africa. Sol Cacao charges $8 for a 1.86-ounce bar, while a four-ounce Hershey bar costs about $2.
Mr Maloney said he charged these prices to ensure the quality of the product and the ethical treatment of farmers in the industry, which a history of exploitation of children and slaves for labor.
“They market chocolate like candy,” Mr. Maloney said of the big manufacturers. “We market it more as a luxury, something to savor, like a bottle of wine.”
Some cocoa farmers view buyers like Mr. Maloney as allies who protect them from the vagaries of financial markets.
Gustavo Mindineros, a cocoa farmer who runs a producers’ cooperative in Tumaco, Colombia, said farmers tend to favor small buyers when production is low because they buy fewer beans at a higher price.
“Big business guarantees volume, but does not recognize quality,” Mr. Mindineros said. “Small buyers recognize quality and pay extra for it. »
