Cocoa crisis: How poor harvests and disease threaten global chocolate prices
27 March 2024 02:05
Cocoa prices soared by over 50 percent in March on the New York commodity exchange due to poor harvests in West Africa caused by unfavourable weather and crop diseases. Analysts say cocoa prices might still increase.
On Monday, futures contracts in New York rose by 7.6 percent to $9,210 per metric tonne (about £6,955 per tonne). Prices are continually increasing, even though technical indicators have been pointing to an overbought condition for the better part of the past few months.
"Cocoa is more expensive than copper"
Just this month, cocoa futures contracts have increased by about 50 percent, and this year, they have already more than doubled. Analysts indicate that poor harvests caused by bad weather and crop diseases among West African growers, from whom the majority of the world's cocoa crops come, along with scant signs of reduced production in other areas, have put the industry in a difficult position.
Cocoa prices are nearing $10,000 per metric tonne (about £7,550 per tonne), making cocoa more expensive than copper.
The rise in cocoa prices could lead to higher chocolate prices within the year. Currently, Easter eggs are becoming more expensive due to last year's jump in cocoa prices, and some manufacturers are reducing the size of bars or promoting products with other ingredients to mitigate shortages.
Chocolate might get even more expensive by Easter 2025 if diseases of cocoa trees and unfavourable weather prolong the deficit amidst high sugar prices – wrote Bloomberg Intelligence analyst Diana Gomes in her report.
Bloomberg reported that despite the price increases, speculators are actually retreating from the market. The number of open contracts dropped from a peak at the end of January, and last week, fund managers lowered their positions to the lowest level in a year. This suggests that physical buyers might have played a key role in the price increase.
However, Reuters reported that record cocoa prices helped systematic strategy hedge funds perform better in the first quarter than other funds.
The systematic management of a hedge fund means using coding and algorithms to identify or find transactions strong enough to become market trends, as opposed to traditional managers who decide on transactions themselves. The biggest risks were taken by the most effective systematic strategies or trend funds.
According to Barclays, which tracked the performance of 40 hedge funds, systematically approached funds reported an average gain of nearly 9 percent in the first two months of 2024, compared to a growth of 2.6 percent in the broader hedge fund industry.
What makes this macro environment so constructive is the fact that there are many sources of instability causing trend formations. These include the effects of El Niño, the normalization of interest rates, and increased geopolitical risk – said Razvan Remsing, Director of Investment Solutions at Aspect Capital.
There's a risk that the supply situation may worsen. Regulations being developed by the European Union to stop the sale of forest-destroying products in stores could further complicate securing supplies for leading chocolate producers in the EU.
Attention is now focused on the upcoming mid-year harvests in West Africa, the smaller of the two annual crops. Bloomberg reported earlier this month that the regulatory body of Ivory Coast, the leading cocoa producer, expects the harvest to be weaker than last year.
