Who benefits from the surge in cocoa prices?

(Paris) The surge in cocoa prices on the financial markets is sending shivers through the entire sector, but benefits cocoa growers, bean processors, speculators and chocolate makers unequally.

Prices exploded in March to more than $10,000 per tonne in New York after a poor harvest in West Africa, due to a combination of unfavorable weather conditions and devastating diseases in aging plantations. They have since fallen again, but remain three times higher than last year.

Large differences among producers

In Ivory Coast and Ghana, the world’s largest cocoa producers, prices are set by the authorities in October “on the basis of prices from previous months”, but the harvests “are then already largely pre-sold”, explains Tancrède Voituriez, from the Center for International Cooperation in Agricultural Research for Development (CIRAD).

This reduces the impact of price fluctuations, both upward and downward. Small producers, who generally earn barely enough to live on, therefore did not immediately benefit from the surge.

In April, the authorities nevertheless increased the price of the intermediate harvest by 50%, between 2,300 and 2,500 dollars per tonne paid to the producer.

In other countries where the system is liberalized, such as Cameroon, Nigeria, Ecuador or Brazil, producers have benefited more, selling their beans to buyers ready to approach financial market prices.

But watch out for the backlash. “The surge in prices has made this production more attractive,” David Gonzales, coordinator of the Peruvian Chamber of Coffee and Cocoa, explains to AFP. At the risk of an excess supply within 3 to 5 years, time for new trees to grow, and a sudden drop in prices.

Intermediaries on the lookout

The large processors who grind the beans into butter, liqueur or powder (the Swiss Barry Callebaut, the American Cargill, the Singaporean Olam) have generally negotiated a large part of their supply in advance. But some contracts were not honored, forcing them to urgently find beans at high prices, and sometimes to slow down their factories.

Barry Callebaut indicated at the beginning of April that it had drawn more than usual from its cash flow to finance its purchases, but that it had enough cocoa on hand to meet demand.

Other smaller intermediaries may find it difficult to advance the funds needed to adapt to the new environment.

“Smugglers can probably rub their hands” by buying slightly above fixed prices in Ivory Coast and Ghana and reselling at market prices from Togo, Guinea, Liberia or Sierra Leone, notes Steve Wateridge, from Tropical Research Services.

Diverse fortunes on the markets

If cocoa prices have jumped, it is because supply is lower than demand for the third year in a row, according to the International Cocoa Organization. Investment funds sensed the wind coming and bet on a rise in prices, reaping profits in the process.

But from January onwards, prices became very erratic, even for speculator funds, and many withdrew from the markets: the number of contracts traded fell from 334,000 in mid-January to 146,000 in April, explains Ole Hansen of Sax Bank. “We cannot accuse speculators of having artificially inflated prices,” says Steve Wateridge.

Trading houses and chocolatiers, for their part, usually protect themselves from price reversals by betting on the opposite trend on the financial markets, in this case by betting on a decline. With the outbreak, some had to deposit additional funds with their bankers to cover their potential losses. Others have had to abandon their bets, which technically forces them to buy back contracts on the market, and mechanically raises prices.

Chocolatiers adapt

Given the time lag between the purchase of raw materials and production, the cost of chocolate bars and biscuits currently on the shelves should theoretically not have skyrocketed for the giants of the sector Mars, Mondelez, Nestlé, Hershey’s and Ferrero .

“We are amply covered by our upcoming contracts for the rest of the year,” confirmed Nestlé boss Ulf Schneider in April.

This should evolve over the months. To avoid putting off consumers already exhausted by inflation, manufacturers could increase the proportion of hazelnuts or reduce portions.

Even among chocolatiers, artisans and franchisees, the raw material only represents a small part of the finished product, on which “there is a lot of margin”, estimates Sébastien Langlois, co-founder of the French Cocoa Company. His company, which sells organic and fair trade products, has not yet increased its prices, he assures.