Cocoa prices are currently at an all-time high
Cocoa prices are hitting record highs, signalling a challenging time ahead for businesses reliant on this commodity. The surge is driven by a confluence of factors, from supply constraints to adverse weather conditions, presenting a complex landscape for industry players to navigate.
Cocoa market prices have seen a consistent upward trend since August 2022, with notable supply challenges for buyers. In 2024, cocoa prices rose 3.7% and 33% M-o-M in January and February, respectively, and are likely to surge 11.8% M-o-M in March, driven by supply concerns in key cocoa-producing regions.
End-use industries, primarily the chocolate industry, confectionery industry, baking and cosmetic industries, are facing losses as high prices impact profitability.
Outlook for the rest of 2024
Prices are expected to remain elevated due to a continuation in supply constraints and escalating freight costs; however, a ~17% Q-o-Q decline is anticipated in Q2 2024 as the mid-crop harvest season in Ivory Coast and Ghana will ease pricing pressures.
Factors currently supporting prices include:
- Reduced bean arrival and limited sales: Supply disruptions have led to a decline in cocoa exports from major producing regions. For example, Nigeria – the fifth-largest cocoa producer – experienced a notable 32% Y-o-Y decline in cocoa exports in December 2023.
- Labour shortage: Continued labour shortages in the trade and logistics segment are anticipated to exert upward pressure on the global freight costs during H1 2024
- Lower production: West African cocoa production, accounting for ~70% of global supply, is expected to fall short of expectations due to adverse weather conditions, with Ghana’s production forecast for the 2023/24 season being ~40% below its target of 820,000 MT
Despite an anticipated price easing in Q2, we are expecting a possible demand surge in H2 2024 from the hotel and restaurant industry during the peak tourist season in the EU, combined with a further supply constriction.
Supply challenges and impact
In MY2023–MY2024, global cocoa supply is anticipated to decline by ~11% Y-o-Y to 4.45 MMT. This is attributed to challenges such as climate change, increased input costs, and the threat of pest and diseases across key cocoa producing nations.
Africa continues to lead global cocoa production, accounting for ~74% of the world’s cocoa output, with Côte d’Ivoire, Ghana, Cameroon, and Nigeria being the largest producers. This dominance in cocoa production exacerbates supply chain issues, as switching to alternative production locations is more challenging than for some other commodities.
Key challenges for cocoa supply
Environmental and agricultural changes
- Climate change: The combination of El Niño and long-term climate change effects, is resulting in a lasting impact on cocoa yields. El Niño is expected to last till March 2024, causing reduced dew points and higher temperatures in West Africa; this is leading to drought stress, impacting pod development, and is projected to result in a global cocoa deficit of 400,000 MT in 2023–2024.
- Transition to alternative crops: Historically, some cocoa farms have shifted to growing alternative crops, driven by profitability concerns. While the recent surge in cocoa prices has led to cocoa expansion outside West Africa, with farmers in Brazil, Ecuador, and Colombia entering the market for profit; cacao trees only reach maturity after ~6 years, so production cannot quickly be replenished.
- Illegal mining is impacting cocoa production as farmers are leasing their lands to miners for significant payments; ~2% of Ghana’s cocoa cultivation area has been lost to illegal mining activities.
Market demand influence
- Rising demand for premium cocoa products: There is an increasing demand for specialty chocolates. The global premium chocolate market is expected to grow at a CAGR of 8.8% during 2023–2032 to reach ~$68 billion.
- Innovation and product development: Brands are launching new and innovative products, including cooking chocolate and products with increased shelf life further increasing demand on raw commodities.
Cost-related factors
- High input costs and fertiliser shortages: The Russia-Ukraine war disrupted supply chains, driving up fertiliser prices, which impacted the cocoa industry, raising bean prices and affecting quality.
- Labour intensity and cost considerations: Cocoa production is labour-intensive, and labour costs are rising. For instance, in Ghana, a key production country, minimum wages have increased from GHS14.88 to GHS18.15 per day in 2024.
- Deforestation pressure: Ghana and Côte d’Ivoire grapple with deforestation issues driven by the demand for alternative production sites, which can provide higher yields than cocoa plantations.
- Logistical hurdles and efficiency issues: In Côte d’Ivoire, inadequate road infrastructure leads to increased transport costs and delays at checkpoints.
Production challenges
- Risk of pests and diseases: Cocoa faces significant challenges from various pests and diseases, leading to estimated losses of 30–40% of global production. E.g. farmers in Ivory Coast, Ghana, and Nigeria have reported signs of black pod disease across plantations. This disease has devastated ~500,000 hectares of farmland in Ghana, resulting in a decline in cocoa output to 600,000 MT in MY2022–MY2023.
- Disrupted operations: Ghana’s cocoa processors have stopped operations intermittently in late H2 2023 and early H1 2024 due to a severe cocoa bean shortage and minimal inventory levels.
Best practices and mitigation measures
So, what can FMCG firms and businesses reliant on cocoa as a key commodity do to mitigate against supply disruptions and price raises? Beyond planned price adjustments, as announced by leading chocolate manufacturers like Nestle and Mondelez, as well as operational efficiency measures, like streamlining operations and cutting head count, companies have a range of supply chain solutions they may choose to explore:
Mitigation measures
Supply chain diversification
- Explore sourcing options from more than one destination such as Brazil, Ecuador, and Indonesia to reduce dependency on West Africa
- Consider sourcing cocoa from multiple suppliers to reduce dependency on a single source
- Use of alternative ingredients where possible: The confectionery industry, for example, is shifting to cocoa butter equivalents derived from palm oil and exotic fats.
Partnering with a freight forwarder
- Freight forwarders can negotiate the best prices, ensure streamlined logistics, manage and track the shipment efficiently, and handle unforeseen obstacles in real time
Investing in sustainable farming practices
- Collaborate with suppliers to implement sustainable farming techniques that combat the adverse effects of climate change
- Proposing a co-investment with suppliers into sustainable practices will benefit both parties by enhancing cocoa yields and mitigating the risk of crop failure in the long term
Hedging and forecasting
- Implement hedging to stabilise prices and mitigate risks associated with price fluctuations.
Furthermore, the following Procurement insights will be crucial in controlling costs:
Negotiation levers
- Leverage long-term contracts to enhance bargaining power and secure favourable terms
- Diversify your supplier base to reduce supply risks and offer better negotiation power
- Negotiate forward purchases to secure future supplies at a fixed price, mitigating price hikes
Contract terms
- Enter into medium–long-term contracts with suppliers
- Implement regular quarterly or half-yearly price reviews to effectively manage risks associated with price volatility
Pricing models
- While cost-plus and spot pricing models are typically followed in the cocoa bean industry, index-based pricing (cocoa futures market) can be an option as the index serves as a reference point for pricing adjustments, offering more stability and predictability
Navigating uncertain terrain
As the cocoa market continues to fluctuate, agility and foresight will be critical for businesses to thrive amidst uncertainty. By staying attuned to market dynamics and implementing robust mitigation strategies, companies can weather the storm and emerge stronger on the other side.
Are you seeking specialist guidance to navigate the complexities of the cocoa market and optimise your category strategies? Reach out to us for tailored category and commodity intelligence solutions.