In recent years, the cocoa industry has faced significant challenges that have put a strain on global supply. One of the countries at the forefront of this crisis is Ivory Coast, which is now taking measures to increase its cocoa prices. But why is Ivory Coast making this move, and what are the factors driving the need for higher prices?
A crucial aspect of understanding the cocoa industry is recognizing its unique production structure. Unlike most crops grown for global commodity markets, cocoa is predominantly produced by small farmers, primarily located in West Africa.
Ivory Coast, along with Ghana, has been a significant player in the cocoa trade for decades, supplying over 50% of the world’s cocoa.
However, a series of factors has led to a decline in cocoa production in the region. Both excessive rainfall and drought have plagued West Africa, causing damage to cocoa fields.
These extreme weather conditions have worsened the spread of diseases like black pod disease and swollen-shoot virus. These diseases rot pods and kill trees, further exacerbating the shortfall in cocoa production.
Additionally, the age of the tree stock and the limited resources available to farmers have hampered their ability to invest in improvements and prevent disease, leading to lower cocoa yields.
The combination of these challenges has resulted in a supply crunch, driving up prices in the cocoa market. The International Cocoa Organization predicts a deficit of 374,000 tonnes in cocoa supply in 2024, while Barry Callebaut, a leading manufacturer, expects a gap of about 500,000 tonnes.
Recognizing the need for higher prices to address these issues, Ivory Coast and Ghana have taken steps to increase cocoa prices. Historically, small farmers in these countries have been underpaid for their crops. To combat this, the governments of Ivory Coast and Ghana set prices ahead of time. However, previous price levels have failed to adequately compensate farmers, leaving them unable to profit from the current rally in cocoa prices.
Recently, there has been a record cocoa shortage caused by various factors, and this shortage has contributed to a general increase in cocoa prices. Citigroup Research analysts had previously indicated that cocoa prices would fluctuate between US$7,000 and US$10,000 per tonne.
However, the recent surge in prices, which saw New York cocoa futures rise by over US$1,000 during two sessions, has led experts to believe that financial drivers are playing a role as well.
Typically, traders use the futures market to hedge risks in the physical market. Sellers who possess cocoa hope for price increases but protect themselves by making side bets on falling prices.
When cocoa prices rise, the gains derived from their stockpiles offset the cost of these short positions. However, if cocoa prices decline and their stockpiles lose value, their short bets help reduce the losses they incur.
In scenarios where cocoa prices only rise and do so significantly, the cost of adding collateral to maintain their positions may become unaffordable for some traders. As a result, these traders may decide to close out their positions, which can only be accomplished by purchasing more cocoa contracts.
This additional buying further drives up prices in the market. To maintain market orderliness, the Intercontinental Exchange has implemented measures such as reducing the amount of cocoa traders can purchase through the London exchange.
Specifically, the delivery limit for cocoa is being reduced from 75,000 tonnes in May to 50,000 tonnes in July. This limit will decrease further until it reaches 25,000 tonnes for the December contract and subsequent periods.
Chocolatiers are facing challenges as they try to navigate higher costs in the industry. In order to minimize the impact, they have been taking various measures like raising retail prices, reducing the size of their product packaging, increasing efficiency, and promoting items with lower cocoa content. However, these strategies only provide short-term relief.
Companies in the chocolate industry typically hedge prices and secure supplies well in advance, which means they are shielded from the immediate effects of record-high cocoa futures. As a result, the full impact of these increased prices has not yet reached retail shelves.
Unfortunately, the consequences of rising costs are not limited to chocolatiers. Chocolate processors and their employees are also feeling the pinch. There have been intermittent closures of cocoa processing plants in Ghana due to supply shortages, and major processors like Barry Callebaut and Blommer Chocolate have announced facility shutdowns and layoffs.
One of the reasons behind these challenges is the cocoa pricing system implemented by the governments of Ivory Coast and Ghana. Prices are based on sales from the previous year, and this has resulted in Ivory Coast farmers receiving 1,000 CFA francs (S$2.22) per kg, while their Ghanaian counterparts receive 20,928 cedis (S$2,142) per tonne.
Farmers in Ivory Coast are now advocating for higher pay for the upcoming mid-crop harvest starting in April. However, the country’s industry regulator has proposed maintaining the current prices, creating a potential conflict.
On the other hand, farmers in countries with liberalized markets, such as Brazil, Ecuador, Cameroon, and Nigeria, are taking advantage of the higher prices by ramping up their cocoa production. Brazil and Cameroon have set ambitious goals to double their output by the end of the decade, while Ecuador aims to achieve 800,000 tonnes of output by 2030. If successful, Ecuador could even surpass Ghana and become the second-largest cocoa producer globally, after Ivory Coast.
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