Cocoa prices are rising in global markets, but this rise benefits grain growers and manufacturers of its derivatives, as well as speculators and chocolate makers, to a varying extent. Last March, prices increased to more than $10,000 per ton in New York as a result of the decline in crops in West Africa due to bad conditions. Weather and diseases destroy old farms.
But prices have since fallen from their peak, but are still three times higher than last year.
The price of a metric ton in futures contracts reached $8,144 in the latest trading, a daily decline of 8.55%.
Huge discrepancy
In Ivory Coast and Ghana, the world’s largest cocoa producers, authorities set prices in October based on previous months.
But by the indicated period, “the majority of the crops have already been sold,” according to Tancred Vaturier of the French Agricultural Research and Cooperation Organization (CIRAD).
This limits the impact of fluctuations in cocoa prices, whether up or down, but this boom does not directly benefit small producers, whose profits are usually limited to what barely suffices them.
The authorities raised the price of medium crops in April by 50% to between $2,300 and $2,500 per ton, a modest increase compared to what farmers can receive on global stock exchanges.
In countries with less regulation, such as Cameroon, Nigeria, Ecuador and Brazil, farmers have benefited more from this trend.
These farmers were allowed to sell their grains to parties willing to buy at prices close to those paid in the financial markets.
But this unregulated approach comes with risks, as Agence France-Presse quoted the coordinator of the Peruvian Coffee and Cocoa Chamber, David Gonzalez, as saying that “high prices have made production more attractive.”
But the fear remains that cocoa production will be in surplus within 3 to 5 years, which is the time needed by farmers who hope to benefit from planting new trees, which will bring prices down again.
According to the World Cocoa Organization, the list of the largest producers in the world is as follows in the 2022/2023 season:
- Ivory Coast 2.24 million tons.
- Ghana 645 thousand tons.
- Ecuador 454 thousand tons.
- Cameroon 290 thousand tons.
- Nigeria 280 thousand tons.
- Brazil 220 thousand tons.
- Indonesia 180 thousand tons.
Opportunities arise
The major manufacturers of cocoa derivatives, who grind the beans into butter, drinks or powder, annually negotiate a large portion of their supplies in advance.
But some contracts have not been fulfilled, forcing them to search for much-needed cocoa at high cost, and in some cases to reduce production.
Smaller brokers may find it difficult to provide the funds necessary to adjust to higher prices. However, there are a group of brokers who are happy with higher prices.
Smugglers could benefit greatly, said Steve Wateredge of the Tropical Research Services Center for Tropical Commodities Data Analysis.
He pointed to the possibility of black market traders taking advantage of the regulations in Ivory Coast and Ghana by purchasing cocoa at a slightly higher price than the set prices and selling the beans on open markets in Togo, Guinea, Liberia or Sierra Leone.
Varying opportunities
Cocoa prices are rising because supply is less than demand for the third year in a row, according to the International Cocoa Organization, and investment funds that sense the changing conditions are counting on the rise in prices, and making profits in the process.
But as of January, prices have become too volatile for even the most profitable speculative funds.
Many investors withdrew from the market completely, and the volume of contracts traded fell from 334,000 in mid-January to 146,000 in April, according to Ole Hansen of Saxo Bank.
According to Waterridge, “speculators cannot be held responsible for artificially inflating prices.”
On the other hand, interstate trade brokerages and chocolate makers tend to hedge price reversals.
But after prices rose, many of them were forced to allocate more money to cover their potential losses.
Chocolate makers
Given the time lag between cocoa harvest and the final product, the cost of chocolate on store shelves should not theoretically rise for the giants of the sector.
Nestlé CEO Ulf Schneider confirmed in April that his company was “largely covered” thanks to futures contracts for the remainder of the year.
But over time, rising raw cocoa prices will eventually have an impact.
To avoid passing on the cost to consumers already affected by high inflation, manufacturers can change their recipes, such as increasing the proportion of hazelnuts in Nutella, for example, or reducing the serving size.
Even for artisan chocolate makers, the cost of raw cacao makes up only a small fraction of the final product.
Sébastien Langlois, one of the founders of the French cocoa company, said that “there is a huge margin” for chocolate bars, which mitigated the impact of high grain costs.
He added that his company, which sells organic and fair trade products, has not yet raised its prices.
