Historic surge in cocoa prices: chocolate, soon a luxury product?

After the sudden rise in the price of cocoa in the first half of this year, chocolate could soon become a luxury product. For years, prices remained around $2,500 to $3,000 per ton, but by the end of 2023, cocoa reached $4,000. However, this increase did not mark the end of the price surge: just before Easter 2024, the price doubled, then almost tripled by the end of April. Although the situation calmed down for a while with the start of the new harvest season, uncertainties regarding future production resurfaced. Are these new records simply a springboard for additional increases? Will chocolate Santas become a luxury product in the near future?

A season of historic deficit

The 2023/2024 season recorded the largest deficit in history, due to a sharp drop in production in West African countries. In Ghana, production fell by almost 50%, while in Ivory Coast it fell by 30%. Although cocoa demand for 2024 is lower than the previous year, the considerable gap between demand and production has led to a sharp rise in commodity prices. Since the start of the year, prices have almost tripled, creating uncertainty over the ability to maintain strong demand for chocolate.

The deficit for the 2023/2024 season is the largest in history. Source: Bloomberg Finance LP, XTB

Uncertainty about the future has manifested itself in a complete capitulation of investors in the futures market. Concerns over supply and high holding costs have led to a significant decline in liquidity in the market. The number of open positions fell to a more than 10-year low in November, while stocks on the stock exchange (used by traders and chocolate makers) hit a 20-year low. It appears that with current concerns, stocks could quickly fall to historic lows.

The number of open positions in cocoa futures fell to its lowest level in more than 10 years. This means that liquidity in this market is extremely low, favoring strong price movements. Source: Bloomberg Finance LP, XTB

Although stocks on the stock exchange and general stocks are very different, it is worth mentioning that all cocoa bean stocks relative to consumption have fallen to only 27%. In the past, stocks represented up to 40 to 50% of annual consumption. Further production problems could mean that, without improvement in the next 2-3 years, cocoa will become a scarce commodity.

Stocks on the stock market fell to their lowest level in 20 years. Source: Bloomberg Finance LP, XTB

A season of uncertainty

After the catastrophic 2023/2024 season, it was anticipated that production in Ivory Coast and Ghana would return to normal. These two West African countries represent almost 75% of global cocoa production, putting significant pressure on the global cocoa and chocolate market. The main season harvest, which runs from October 1 to March, went very well, with deliveries to Ivory Coast ports even 30% higher than the previous year. As a result, the start of the fourth quarter brought a significant drop in prices. Traders and manufacturers delayed their purchases, anticipating a further fall in prices. However, it turns out that the improvement was only temporary.

Parts of Ivory Coast were hit by heavy rains, leading to the evacuation of many farms, some of which were destroyed or had their trees attacked by diseases. A large proportion of the beans arriving at national ports in recent weeks were spoiled by mold, so that, even if initially approved for delivery, they would not reach European or American markets. Many remaining deliveries did not meet quality criteria. The number of beans per 100 grams has started to exceed 100, while only batches containing between 80 and 100 beans per 100 grams are classified for delivery.

In other parts of Côte d’Ivoire and Ghana, very high temperatures and droughts were observed, which is a bad omen for the shoulder season which begins in April. Processors have used up most of their inventories and now face the decision of waiting for further price declines or replenishing their stocks at record prices. The entry of these investors, who wanted to wait for prices to fall, could mean that we will not stop around 12,000 points. On the other hand, the future contracts market predicts that prices will be lower in the future. However, the same predictions were made last year, and the final prices on the market turned out to be significantly higher than the quotations a year earlier. The entry of many entities into the market could mean that prices will not only test recent all-time highs, but will at least exceed $12,000 per tonne and reach much higher levels.

Will chocolate Santas become more expensive?

Germany is one of the largest producers of chocolate Santas in the world. In 2022 alone, nearly 170 million units have been produced. The vast majority are sold domestically, as it is a very common gift during Saint Nicholas Day or Christmas. On the other hand, 30 to 40% of chocolate Santas are intended for export. However, chocolate consumption may well decline, given continued price increases. Last year, “only” 167 million Santas were produced, while it is estimated that 164 million Santas will hit the market this year. The market therefore seems to be slowly contracting.

Of course, the increase in chocolate prices is not only due to the increase in the price of cocoa itself, but also the increase in the prices of other products like milk and sugar. We must also not forget the costs of production, transport and sales. However, cocoa prices will increasingly weigh on the increase in chocolate prices. European manufacturers, already in the third quarter, have not shown as much willingness to buy as before, because they now have to contract at high prices. However, due to the shortage of cocoa beans in warehouses, they will have to start buying at high prices. According to the financial director of one of the world’s largest chocolate manufacturers, Mondelez, owner of brands such as Milka, Oreo and Toblerone, uncertainty regarding the future of cocoa prices is very high. According to Luca Zaramelli, the company expects prices to fall, although it must also prepare for a potential further increase.

Does this mean standard chocolate will become more expensive? Not necessarily. There is also a fairly common practice among manufacturers in the form of “shrinkflation”. The price of the product itself does not change, but its weight is reduced or fewer raw materials are used. Although cocoa seems difficult to replace, the prospect of significantly reduced corporate profits seems unacceptable, which is why the use of other beans is already being tested as a primary replacement for cocoa butter. Additionally, the proportion of sugar in the products themselves could increase compared to cocoa. Ultimately, the products might not become more expensive, although it is certainly no longer the high-quality chocolate we can still enjoy today. On the other hand, a skillfully communicated price increase could also be used by manufacturers to justify price increases. So it’s possible that next year’s chocolate Santas will be lower in cocoa, but not necessarily more expensive.

The price of cocoa has reached a record level, crossing the thresholds of last April. Source: Bloomberg Finance LP, XTB