Sweet Affliction: The Unraveling Economics of Chocolate Amid Surging Cocoa Prices

Chocoholics brace yourselves; chocolate is about to become significantly more expensive. With the gustatory key ingredient, cocoa, trading at its highest level in almost forty years, the sweet indulgence that has long been considered an affordable luxury is taking a hit. This escalation is fuelled by strong demand, a global shortfall in cocoa production, and adverse weather predictions in West Africa – the largest cocoa-producing region in the world.

Benchmark cocoa futures prices in London have surged by over 32% this year, making cocoa one of the world’s best investments in H1 2023, and even outpacing the Nasdaq Composite. They are at their highest since 1985, according to data provider FactSet. This leap in cocoa futures is likely to exacerbate the already soaring prices of chocolate, with U.S. chocolate candy prices up by over 20% since 2021, according to Chicago-based market research firm Circana.

Historically, large multinational companies have responded to high prices by reducing candy bar sizes, substituting cocoa butter with other ingredients such as palm oil, and raising prices. Pascal Baltussen, Head of Impact and Operations at Tony’s Chocolonely, confirmed that this soaring price trend is putting pressure on profitability. In an attempt to encourage customers to buy premium products, Tony’s reduced its prices in the UK last October. This move squeezed their profit margins but was deemed essential to keep chocolate affordable for consumers.

In contrast to the recent decrease in prices for commodities such as energy and metals, select agricultural commodities have continued to rise. Sugar and coffee, other critical ingredients in chocolate, are also trading near multiyear highs. This inflation in the grocery aisle has resulted in disruptive trading in cocoa beans. Buyers are reneging on orders and holding back on long-term purchases, according to Javier Lastanao, Senior Trader at London-based Quanton Commodities.

The overall global demand for cocoa is expected to exceed production by 142,000 metric tons by the end of the season on September 30. This deficit equates to around 355 million pounds of chocolate bars and will leave end-of-season stocks down 8% from last year, at 1.6 million tons, according to the International Cocoa Organization. Weather conditions, such as El Niño, which typically reduces cocoa output in West Africa, and geopolitical factors like the war in Ukraine, which has made fertilizers more expensive and affected cocoa output, are adding to these pressures.

The quality of cocoa is another concern, especially in Ivory Coast, where subpar beans are affecting output. As of June 4, shipments of cocoa beans were down 4.8% from a year earlier, at 2.1 million tons. However, demand continues to rise, as seen in the record volumes of cocoa grindings in Asia and Europe last year.

More challenges are on the horizon, as the European Union has implemented the world’s strictest rules against deforestation. Companies have 18 months to prove the origin of cocoa and six other commodities imported into the trading bloc. The EU, which imports more than half of the world’s cocoa beans, is essentially banning cocoa, cattle, soy, and palm oil produced on deforested land since December 31, 2020. This legislation disrupts the market response function to expand production quickly in response to high prices.

Ivory Coast and Ghana, which collectively produce about 60% of the world’s cocoa beans, have historically responded to high prices by clearing forests and planting more trees. Now, however, proving compliance with these new rules is proving difficult. According to Alex Assanvo, Executive Secretary of the Côte d’Ivoire-Ghana Cocoa Initiative, no company can currently guarantee that their cocoa is not sourced from deforested areas.

With supply chains under duress and prices soaring, the chocolate industry is grappling with the harsh reality of inflation and sustainability challenges. As cocoa prices continue to rise, the ultimate burden is likely to fall on the consumer, making the once affordable luxury of chocolate a premium product. What the long-term impacts will be on the chocolate industry and how companies will innovate to survive remains to be seen. But, as it stands, the simple act of enjoying a chocolate bar is set to become a more expensive pleasure.

Conclusion

The chocolate industry’s landscape is in upheaval. The significant rise in cocoa prices underscores the vulnerability of the sector to multiple external factors, including geopolitical strife, weather anomalies, production shortfalls, and stringent environmental regulations. As the situation unfolds, chocolate manufacturers will face hard choices on how to maintain their profitability while meeting ethical and environmental standards.

Ultimately, it is the consumers who will bear the brunt of these changes. As chocolate transitions from an affordable luxury to a premium product, consumption patterns could change significantly, with potential long-term impacts on the chocolate industry. Now, more than ever, there is an urgent need for all stakeholders to collaborate to build a resilient, sustainable, and inclusive global cocoa economy. Let’s hope the love for chocolate proves strong enough to spur on the necessary innovation and adaptation to weather this storm.