The crop failure, followed by a wave of financial speculation, has sent cocoa prices plummeting this year, destabilizing an industry that relies on the crop and cheap labor.
This is not how things usually work in the cocoa market. For most of the past decade, the price of cocoa in one of the major global benchmarks hovered around $2,500 per metric ton. Last year, after poor harvests in West Africa, the price began to rise, rising to $4,200 a ton by December, a threshold that had not been crossed since the 1970s.
Then the financial speculators started piling in, causing betting prices to rise even 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 swung wildly, falling nearly 30 percent in just two weeks before bouncing back. By Thursday, the price was $8,699 per ton.
Big food companies have raised prices and warned 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 fillers that go into many candy bars — will be hit the hardest, although some luxury chocolate makers point out that they always pay much higher prices in order to fairly compensate farmers. .
The situation does not seem to stabilize soon. Here's what you need to know.
What happened to the cocoa crop?
A combination of low rainfall, plant diseases and aging trees led to a disappointing crop in Ivory Coast and Ghana in 2023. The two countries produce about two-thirds of the world's cocoa, so shortages have hit the global market hard. He continues: The International Cocoa Organization recently Climate prediction He said global production would lag behind demand by 374,000 tons this season, which ends in September, after a deficit of 74,000 tons last year.
There is no quick fix to this. It takes years for trees to produce fruit, which gives farmers little incentive to plant more because they do not know the price of the crop when it bears fruit. Some may prefer to use more of their land to grow rubber or extract gold.
But while the lack of production fueled initial price gains, speculation by investors such as hedge funds took things to another level.
“Yes, there are fundamentals that lead to this move, but then you add these financial considerations to it and you exacerbate the situation.” “It's money-driven,” said Judy Janis, a commodities consultant.
How is the global price of cocoa determined?
Like any other commodity, cocoa has many different prices.
In Ghana and Ivory Coast, the government sets a seasonal rate paid to cocoa farmers, in an attempt to protect them from global price fluctuations. After market prices rose in April, Ivory Coast's Ministry of Agriculture agreed to raise that rate for the rest of the season – but it is still well below the increase in global commodity markets.
In other countries, farmers receive market prices.
But large buyers, such as Hershey and Mondelez, and commodity traders buy and sell cocoa on global exchanges, where they trade the physical beans as well as futures contracts that can require them to receive the cocoa beans at a later date.
On global stock exchanges, prices have become disconnected from reality on farms.
The global standard for cocoa is futures contracts traded in Exchange between continents The buyer of this contract agrees to deliver the price per metric ton of cocoa beans to one of several ports in the eastern United States.
One big factor behind the rise in prices this year is that those futures contracts are settled through physical delivery of cocoa — which means traders selling the contracts need to keep large reserves of cocoa beans on 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 the price changes.
In January, the number of active cocoa contracts jumped 30 percent from a year earlier, CFTC data show. But trading volume declined sharply starting in April — when prices peaked — and the smaller number of trades led to significant price swings in the past two weeks.
Paul Jules, an analyst at Rabobank, said that although prices have fallen from their highest point, they are likely to remain high for some time, due to systemic issues that will take time to resolve.
Carla Martin, a Harvard professor who studies the cocoa industry, said the broader market could appear more efficient if farmers had greater ability to set prices based on their supplies.
“There is actually a lot of money in cocoa, and it has been captured at very specific points in the supply chain,” Ms. Martin said. “The market itself doesn't actually solve this kind of problem; the problems are solved by people.”
What does this mean for chocolate bars?
Chocolate prices are often rising. When Hershey and Mondelez, which own brands like Cadbury and Toblerone, reported earnings recently, price fluctuations were a big topic of discussion.
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 further if the cost of cocoa remained high. The two companies said that their profits increased by double compared to the previous year as consumers continued to buy their products despite the rise in prices.
Luca Zaramella, Mondelez's chief financial officer, told analysts on April 30 that the market was “overreacting” and that it would likely correct itself in the latter half of the year.
However, he said: “It is very important for us to prepare for the possibility that cocoa will remain at these levels.” Zaramilla said Mondelez could protect its profits by trying to secure large cocoa orders during market volatility or reducing costs of other inputs, such as ingredients.
Some “bean-to-bar” chocolate makers, who have always paid a higher price for their cocoa from small farmers, say they have a different experience.
“The price of premium cocoa has never changed,” said Dan Maloney, who runs Soul Cocoa, a chocolate company in the Bronx, with his two brothers. “It's as if the wholesale price is catching up with the premium price, but we've always paid the premium.”
Mr 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, especially in Latin America and Africa. Sol Cacao charges $8 for a 1.86-ounce bar, while a four-ounce Hershey's bar costs about $2.
Mr Maloney said he imposed these prices to ensure the quality of the product and ethical treatment of farmers in the industry, which has a history of exploiting children and enslaving people for labour.
“They market chocolate as candy,” Maloney said of the major manufacturers. “We market it as a luxury, something to savor, like a bottle of wine.”
Some cocoa farmers see buyers like Mr. Maloney as allies, protecting them from the whims of financial markets.
Gustavo Mendeneros, a cocoa farmer who leads a producer cooperative in Tumaco, Colombia, said farmers tend to prefer small buyers when production is low because they buy smaller quantities of beans at a higher price.
“The big company guarantees volume, but it does not recognize quality,” Mendineros said. “Young buyers recognize quality, and they pay dearly for it.”
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