Chocolate Catastrophe
Bad news for sweet-tooths – prices of their favourite products have sharply risen and will stay at a high level for some time. The reason – a cocoa crop failure in major producing countries and the impossibility of substituting the missing volumes with any other alternative. However, similar chocolate hurricanes have occurred before. To get prices back to normal, it took at least 2-3 years each time. That means we are entering a two-year period of expensive chocolate bars, candies, and bars. Perhaps, production could be restored faster, but on this path, one has to adhere to the principles of sustainable cocoa production. And that's right, no matter what.
On December 19, COCOBOD, the cocoa production bureau in Ghana, signed a credit agreement for $800 million to purchase cocoa beans. Out of this amount, the company will receive $600 million in the last week of the year, and another $200 million are expected in January 2024, as reported on the same day by Ray Ankrah, the deputy CEO of the cocoa marketing board. Cocoa beans are grown in forty countries worldwide. However, only three states, with a significant margin, generate the crop affecting the global market. These are, by a large margin – Ivory Coast, accounting for 40% of the market, Ghana, and Indonesia.
So, the news from December 19 indicates that Ghanaian farmers will receive funds for the previous harvest and will be able to prepare for the next season. Therefore, even though it's expensive, chocolate will be on the shelves of supermarkets.
Photo: Historically record cocoa prices were recorded in 1977. Due to a poor harvest, the cost of chocolate raw materials peaked at $5,400 per ton. Adjusted for inflation, today, this is equivalent to $27,000 per ton. Cocoa farmers open harvested cocoa pods to remove the beans on a farm in Asikasu, Ghana. The beans will be left to ferment for 5 days before put them under the sun to dry them. The main crop cocoa season in Ghana starts in October and ends in March. Source: Getty Images
El Niño vs Chocolate
This year, two out of the top three cocoa bean producers suffered from adverse weather conditions, mainly the El Niño cyclone. This climatic phenomenon is usually associated with abnormal heat in Europe, but in West Africa, where two-thirds of cocoa bean production is concentrated, it brought rains. Besides direct damage, they caused rot and diseases in the tropical cocoa tree Theobroma, from the beans of which cocoa is produced. And these plant diseases further reduced the harvest. As a result, in Ivory Coast, cocoa bean production will decrease by 20% compared to last year, and in Ghana, it will not reach historical averages.
According to estimates by global traders, the world cocoa deficit will be 279 thousand tons.
This is the third consecutive season when farmers fail to reach the harvest and set new multi-year production lows. Thus, cocoa bean transitional stocks have long been depleted, and the industry faces a compounded deficit problem.
Production cutbacks have affected cocoa bean prices. Over the past year, they have risen by 60%. In summer, on the exchange, some contracts for beans were traded at a remarkable level of $3,500 per ton, and in November, it exceeded $4,000. This is the highest figure in 44 years, when there was also a serious deficit in the market. Experts believe that reaching the $5,000 per ton mark is only a matter of time.
The last time such prices nominally occurred in 1977. And even nominally reached $5,400. But it is worth noting that the dollar in 1977 is now five times more expensive. So, in modern dollars, cocoa in 1977 would cost $27,000 per ton. This is simply impossible even to think. And even in the relatively recent record-breaking year in terms of prices – 2011, cocoa cost more than $3,760, which, considering inflation, is equivalent to $5,130 in current dollars.
So, price hurricanes have happened before. How quickly did the markets calm down? It took at least two years to return to average levels.
Photo: Workers gather dried cocoa beans outside the cocoa cooperative warehouse in the village of Germankono, Ivory Coast. Unusually heavy rains in Ivory Coast have significantly reduced cocoa production, anticipated on the farms. Ivory Coast supplies about 40% of the world's cocoa production, and the country has temporarily suspended the execution of export contracts. As a result, cocoa prices are hitting records on financial markets. However, the majority of these premiums do not reach the farmers; these profits remain with intermediaries and traders. Source: Getty Images
We're Eating More Deliciously
The pressure on prices intensifies due to a decrease in supply amid the growing global demand for chocolate. The driving force behind this surge is the increasing prosperity in developing countries. However, the expansion of cocoa plantations is not keeping pace with the rising needs of processors for raw materials.
As noted, a deficit in the cocoa bean market arises quite regularly. The industry's logical response to this is considered the expansion of cocoa tree plantations. However, this is not happening.
According to one version, this is a deliberate strategy by cocoa-exporting countries aimed at increasing production profitability with the same expenses. Currently, in West Africa, cocoa cultivation involves 2 million farmers who own farms covering only three to four hectares each. Their income, when broken down annually, is about one dollar per day.
Why is the raw material so expensive for end consumers - international corporations like Lindt or Hershey's? The cocoa supply chain consists of a huge number of intermediaries, artificially inflated, and at each stage, the raw material becomes more expensive. In this scheme, farmers themselves earn the least - the purchase price for them is equivalent to only 6% of the retail price of a chocolate bar, while the share of cocoa beans in the cost of this product exceeds 60%. Overall, global chocolate trade is estimated a retail value of more than $100 billion annually.
Another reason for the inability to increase production is the impact of the environmental agenda. This hinders deforestation for plantations and significantly limits the possibilities of clearing new areas for cultivation.
According to recently published research based on the analysis of satellite images, it was found that cocoa production is associated with the forrest clearance of 360,000 out of 962,000 hectares (37.4%) of protected areas in Ivory Coast since 2000 and 26,000 out of 193,000 hectares (13.5%) of forest clearance in similar areas in Ghana. In total, cocoa was grown on more than 1.5 million hectares of protected areas in both countries, including almost 14% of Ivory Coast's protected areas and 5% of Ghana's protected areas.
For the sake of fairness, cocoa production is not the sole reason for deforestation in West Africa, but it bears direct responsibility for logging, along with mining and logging industries.
The reduction in cocoa bean supply significantly impacts the global economy due to its uniqueness and lack of substitutes. Cocoa beans cannot be replaced by anything else.
The main consumers of cocoa are the USA, Germany, and the Netherlands, which together account for about 40% of global demand. Confectionery manufacturers in these countries have already warned that prices for their products may increase, especially since other cost components, including energy sources, have become more expensive, and sugar prices have broken records and may only start to decline next year.
The most pronounced price increase will affect confectionery products with the highest cocoa content – namely, chocolate bars. In second place are chocolate candies.
To a lesser extent, beverages containing chocolate and cocoa are also affected.
Unable to replace cocoa beans, producers can save by reducing their concentration in the recipe. Typically, this is what confectionery giants do, not wanting to deter consumers with prices. The content of the most expensive ingredients – cocoa butter and cocoa powder – is reduced in the product.
Another trick is to reduce the weight of the product, where instead of the usual 100-gram bar, an 85-gram or even 70-gram bar is placed on the shelf.
Finally, to maintain competitive prices for chocolate products, manufacturers can cut their own profits. However, this method is resorted to only as a last resort.
It is worth noting that chocolate is considered a luxury item, so the laws of supply and demand are applied to it with reservations, and the increase in prices is not directly correlated with a decrease in sales volumes. Chocolate consumers are traditionally more loyal and willing to tolerate price increases longer than buyers of basic food products. However, this is true only until the price of a chocolate bar rises to the point where it begins to exceed the pleasure of its consumption.