Cocoa bean supply lags consumer market
The chocolate world is facing such a huge cocoa shortage that the frenzied trade has attracted an unexpected player: oil suppliers. By April 2024, cocoa bean prices had already more than doubled in just 12 months.
The world has enjoyed cheap chocolate for decades, but bad weather has been a tipping point for production in Ivory Coast and Ghana, with many traders now fearing production in those countries has suffered a long-term decline. Cocoa bean sales prices rose rapidly by about 70 percent from the beginning of March and reached record levels by the end of April 2024.
A crisis has arrived for the world's chocolate producers. Plants in Malaysia, Germany and Chicago were forced to close. The lack of liquidity also means that the next stage of the market will be associated with volatile price fluctuations, which could lead to bankruptcy of companies.
“The consequences of this crisis may affect cocoa volatility for a long time,” stressed ChAI Chief Executive Officer, platform that uses artificial intelligence to analyze commodity markets, Tristan Fletcher. He added: “Speculative players are moving into and out of positions much faster, which adds to the volatility. This means markets are much more likely to fluctuate wildly.”
The rapid and severe rise in cocoa prices has taken even seasoned market players by surprise and wreaked havoc throughout the crop's global supply chain, from struggling West African farmers to European commodity brokers and American candy makers.
On Tuesday, April 23, 2024, futures reached a record $11,126 per metric ton, a level that was previously unthinkable for most traders and which is roughly double the previous peak set in the 1970s. Prior to this rally, the New York market had largely remained below $3,500 since the 1980s.
At the same time, cocoa futures trading volume reached historical lows and the number of outstanding contracts fell to its lowest level in the last 12 years. The market is currently in a state of severe crop shortage and dangerously low liquidity.
“It is the lack of physical activity—limited only to the urgent closing of nearby physical contracts—that has led to the cessation of their normal futures activity, resulting in reduced liquidity,” said trading analyst Pam Thornton.
The International Cocoa Organization (ICCO) forecasts production will lag demand by 374 thousand metric tons in the 2023-24 season, the third consecutive deficit. Chocolate maker Barry Callebaut AG expects a shortage of 500,000 tonnes, about a tenth of the global market, and the company will face another shortage in 2025.
“We have almost nothing else to offer until the end of this season,” said Nicolas Quartey, 67, who farms 12 acres of land in the town of Sukhum, about 100 kilometers north of Ghana's capital Accra.
Production is largely concentrated in Ivory Coast and Ghana, making the market very vulnerable to what happens to crops in those countries. Production in Nigeria and Cameroon has remained low for a long time, and competitors in Asia have seen declines. What's happening to cocoa is now a wake-up call for the coffee industry, whose production is concentrated in just two countries: Brazil and Vietnam.
Historic cocoa shortages also highlight other problems plaguing the region. For decades, farmers in Ivory Coast and Ghana have been chronically underpaid.
“What you need to do is get the farmer to understand that the next major crop is worth investing in his farm, and investing much more than he has been investing in recently,” said Steve Wateridge, head of research at Tropical Research Services.
New rules on deforestation in the European Union, the largest consumer, are adding to the difficulty of expanding farming. It is also unclear how much cocoa will be able to reach European shores, which will put further pressure on already dwindling stocks of exchange-certified cocoa. It is these beans that support benchmark futures traded in London.
Cocoa trees can take three to five years before they begin to produce a harvest. By then, it may be too late for some candy makers to recover.
“Many small players—bar coffee sellers, chocolatiers—are under a lot of stress,” said Judy Gaines, president of J Ganes Consulting. “For these players, they might just disappear.”