Cocoa price sees unprecedented spike on supply chain issues

Cocoa prices were surging this week on the back of a persistent supply deficit. We have seen repeated spikes in the cocoa price over the course of the year, which is also having an impact on wholesale chocolate prices.

This week cocoa futures spiked 15% in what was being called “an unprecedented rally” by market analysts. Cocoa prices had come off a major short term bull phase over May/June and were probing a resistance level at around $7000 per tonne. But what has got cocoa so excited all of a sudden?

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Cocoa facing supply issues

The cocoa market lacks efficiency in its supply chains and in addition harvest data can be opaque. Following the end of the last bull rally in cocoa, analysts were complaining that spring pod counting surveys were yet to become available. But the cocoa industry was already making bullish forecasts about the harvest by the end of June.

Cocoa had been sold off in late June including a six day bear phase which was the longest run of losses for cocoa positions since 2022. The cocoa price had previously soared to $12,000 a tonne, a record high, due to worries about poor weather affecting harvests in key cocoa growing areas like Ghana and the Ivory Coast.

Bear in mind that there are still some unresolved strategic issues within the cocoa market: cocoa is typically grown on small farms, but buying and distribution is dominated by government agencies and conglomerates. There has been a lack of investment in small farms and in the surrounding communities which support them.

There is an impressive and evolving deficit in cocoa supplies that seems to have little to do with the harvest projections.

As Jacob Radke, a Director at Fjell Capital in the US, says: “the problem is that cocoa can only be grown in a narrow strip of the globe. Nearly 75% of all cocoa comes from four West African countries, and any everyday person can go and buy a chocolate bar (whereas before chocolate was a luxury good), which means there is a growing demand from consumers and a shrinking supply because of poor growing conditions.”

Prices for chocolate products at US retail stores grew 11.6% in 2023

Speculative activity remains important for cocoa price action

Speculative activity in cocoa had recently come down with many hedge funds exiting the market in July. It is possible some hedge funds will be coming in with long bets this week. Cocoa industry specialists are still claiming that both Ghana and Ivory Coast “still have significant volumes of cocoa to sell before the new crop year, which will play a crucial role in determining prices.”

In addition cocoa also suffers from a migration of rural youth who are turning their backs on cocoa farming for better paid urban jobs.

Higher prices mean other countries are becoming more interested in cocoa. We know, for example, that bigger cocoa plantations are being created in Ecuador to meet global demand. But this could take time to make an impact.

As if that was not enough of a headache for the cocoa sector, the EU is introducing its European Deforestation-free Regulation (EUDR) which will come into full force in December 2024. This means cocoa beans imported into the EU will need to be EUDR compliant. This is putting massive pressure on European buyers to secure compliant supplies and the market is already starting to feel the pinch.

Big buyers of cocoa are saying they are seeing a market in a state of flux with more volatility and higher prices anticipated before the end of the year. Keep an eye on cocoa.

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