What is happening to cocoa prices?

Since the beginning of this year, cocoa prices have been soaring. Starting in January at 4509.13 USD per ton (3568.06 GBP) they have increased to a record high of 12538.81 USD (9921.91 GBP) which entails a 178 % increase in 4 months. The price surge has been caused by rapidly declining yields of farmers in West Africa, leaving an opportunity for other producers to jump in.

Despite being native to South America, cocoa production has been largely dominated by countries in West Africa with Côte d’Ivoire and Ghana accounting for around 60% of global production in 2023. In comparison, South American producers in Ecuador, Brazil, and Peru account for only 17% of global production. West African dominance has come with a certain level of dependency on the crop, which has proven critical in the current crisis.

Climate Change is blamed for declining yields, as well as difficult weather patterns caused by El Nino, which has made harvest less predictable. Other reasons include ageing cocoa trees and the spread of the Cocoa Swollen Shoot Virus. With diminishing output, the price of cocoa has shot up dramatically, yet producers have been unable to benefit. In Côte d’Ivoire and Ghana, the prices received by farmers are only around 40-50% of global prices, due to price controls et by the Coffee and Cocoa Council (CCC) and Cocoa Marketing Board, respectively. This has prevented farmers from adapting their crops to adverse conditions and investing in new trees, fertilisers, and disease-resilient seeds. While prices received have since been raised by the regulators, it may be too late, with numerous farmers shutting down operations. 

The response to surging prices in South America has been dramatically different. Benefitting from more liberalised markets, entrepreneurial farmers have set out to jump on cocoa production to profit from the high prices. Producers in Ecuador have bought up cocoa seeds which have higher resiliency to cocoa diseases. A notable difference is that South American farmers have historically had higher access to capital and a higher willingness to scale production quickly, while West African farmers consist of mainly small-plot farming. This has played a significant role in their ability to respond to the volatility in the market.

What is in it for you?

The cost of chocolate in consumer markets will likely remain high until the price stabilises or returns to normal. Chocolatiers in both Europe and the US have not hesitated to pass the cost increases to consumers, with firms like Lindt warning consumers of price rises before last month’s Easter celebrations. In an attempt to lessen the impact on consumers, some firms have tried to reduce the amount of cocoa in their chocolate.

Perhaps more pertinent to our readers in the policy space is how national regulators deal with volatile commodity markets. The rationale behind Côte d’Ivoire and Ghana’s pricing regimes was originally devised to protect small-scale farmers from the low cocoa prices that global firms were willing to pay. However, with prices jumping regulators were unable to keep up, leaving farmers to fend for themselves. Alternatively, South American regulators have been hesitant to intervene with price controls in any agricultural markets, leaving farmers exposed to global prices. Yet with the current price surge, these farmers have benefitted from receiving 90% of the global price compared to around 40-50% in West Africa.

There seems to be a considerable trade-off when it comes to commodity markets. If governments intervene to protect local farmers from volatility through price controls they run the risk of farmers being unable to benefit from high prices in a time of crisis. If governments liberalise the market, farmers may be  out-priced and exposed to global volatility, yet during a price surge, farmers are more readily available to reinvest in their plots.

The elephant in the room in this discussion on the cocoa industry is the environment. Cocoa farming greatly contributes to deforestation in West Africa and South America. As discussed in last week's Intelligence briefing on Cocoa production in West Africa, forests in Liberia and Cote d’Ivoire have suffered under cocoa expansion. With the high prices, the rapid expansion of cocoa production in South America will likely lead to increased levels of deforestation. 

What happens next?

It is unclear how long the surge in prices will last. Market prices have already begun to decline as producers respond. South American producers, especially in Ecuador, are likely to fill the remaining gap that the crisis in West Africa left. Weather conditions might improve as El Nino retreats, yet the continued effects of climate change are likely to remain an unpredictable variable.

Another aspect to look out for is the recently passed EU deforestation law that requires agricultural firms to demonstrate that their products do not contribute to deforestation, which will be enforced in late 2024. This will require farmers and regulators to install costly tracing systems to ensure environmental due diligence. For more on this aspect please check our last week's intelligence brief on Cocoa farming in Liberia and EU deforestation law. Existing tracing capabilities vary, with Ecuador lagging, which may cause prices to resurge next year as producers are cut out of European markets. Therefore, the volatility of the cocoa market is likely to remain for the foreseeable future. 

The Polis Team in London