A crop failure followed by a wave of financial speculation has sent cocoa prices on a rollercoaster this year, throwing an industry dependent on cheap crops and labor into turmoil and making chocolate sweets more expensive will become.
This is not how things normally go on the cocoa market. For much of the past decade, the price of cocoa in one major global benchmark has hovered around $2,500 per tonne. Last year, after poor harvests in West Africa, the price started to rise, reaching $4,200 per tonne in December, a threshold not exceeded since the 1970s.
Then the financial speculators started piling in – betting prices would rise further. They pushed the price above $6,000 per tonne in February, $9,000 per tonne in March and $11,000 per tonne in mid-April. Since then, the price has gone through a huge swing, falling almost 30 percent in just two weeks before bouncing back. On Thursday the price was $8,699 per tonne.
Major food companies have raised prices and warn they will have to continue doing so if cocoa does not stabilize. Companies that use pure cocoa – instead of the palm oil and other fillers used in many bars – will be hardest hit, although some premium chocolate makers note that they have always paid much higher prices to fairly compensate farmers.
It doesn't look like the situation will improve any time soon. Here's what you need to know.
What happened to the cocoa crop?
A combination of low rainfall, plant diseases and aging trees led to a disappointing harvest in Ivory Coast and Ghana in 2023. The two countries produce about two-thirds of the world's cocoa, so the shortage hit the global market hard. It continues: recently the International Cocoa Organization prediction that global production will trail demand by 374,000 tonnes this season, which ends in September, after a deficit of 74,000 tonnes last year.
There is no quick fix for this. Cocoa trees take years to produce fruit, which gives farmers little incentive to plant more because they don't know what the price of the crop will be when it bears fruit. Some may prefer to use more of their land for growing rubber or mining for gold.
But while the production shortage supported the initial price increases, speculation from investors like hedge funds took things to another level.
“Yes, there are fundamental factors driving this move, but these financial considerations add to it and worsen the situation.” said Judy Ganes, a commodities consultant. “It's money-driven.”
How is the world price of cocoa determined?
Like any commodity, cocoa has many different prices.
In Ghana and Ivory Coastthe government sets a seasonal rate that cocoa farmers are paid in an effort to protect them from the volatility of global prices. After market prices spiked in April, Ivory Coast's Ministry of Agriculture agreed to increase that rate for the rest of the season – but it is still far less than the increase in global commodity markets.
In other countries, farmers receive market rates.
But big buyers, like Hershey and Mondelez, and commodity traders buy and sell cocoa on global exchanges, where they trade both physical beans and futures contracts that can obligate them to take delivery of a delivery of beans at a future date.
It is in the global stock markets that prices have become disconnected from the reality on the farms.
The global benchmark for cocoa is a futures contract traded on the cocoa market Intercontinental exchange – and a buyer of that contract agrees to a price for a ton of cocoa beans to be delivered to one of several ports in the eastern United States.
A key factor behind the price spike this year is that those futures contracts are settled with the physical delivery of the cocoa – meaning traders selling the contracts must keep large reserves of cocoa beans on hand. That could result in an upward spiral as traders are forced to buy more cocoa to replenish their stocks.
Trading volume can also affect how the price changes.
In January, the number of active cocoa contracts rose 30 percent from the previous year, according to data from the Commodities Futures Trading Commission. But that trading volume fell sharply from April – when prices peaked – and the smaller number of trades resulted in big price swings over the past two weeks.
Although prices have fallen from their highs, they are likely to remain high for some time, says Paul Joules, an analyst at Rabobank, “due to the systemic issues that will take a while to resolve.”
What does this mean for chocolate bars?
Chocolate prices are mainly rising. When Hershey and Mondelez, which owns brands like Cadbury and Toblerone, recently reported earnings, price swings were a big talking point.
Mondelez said it raised its prices by about 6 percent in the first three months of the year, and Hershey by about 5 percent. Both said they would be willing to raise prices further if cocoa costs remained high. Both companies said their profits rose by double digits last year as consumers continued to buy their products despite rising prices.
Luca Zaramella, Mondelez's chief financial officer, told analysts on April 30 that the market was “overreacting” and would most likely correct itself in the second half of the year.
Still, he said, “It is absolutely critical that we prepare for the fact that cocoa may remain at these levels.” Mondelez could protect its profits, Mr. Zaramella said, by trying to secure large orders of cocoa during market downturns or by cutting costs for other raw materials such as ingredients.
Some “bean to bar” chocolate makers, who have always paid a premium for the cocoa they get from smaller farmers, say their experience is different.
“The premium cocoa price has never changed,” says Dan Maloney, who with his two brothers runs Sol Cacao, a chocolate company in the Bronx. “It almost seems like the bulk price has overtaken the premium price, but we always paid premium.”
Mr. Maloney said he has already paid $9,000 to $12,000 for a ton of premium cocoa, which he sources from farmers around the world, mainly in Latin America and Africa. Sol Cacao charges $8 for a 1.86-ounce bar, while a four-ounce Hershey bar costs about $2.
Mr Maloney said he charged these prices to ensure product quality and the ethical treatment of farmers in the industry. a history of exploiting children and enslaved people for labor.
“They market chocolate as candy,” Mr. Maloney said of major manufacturers. “We market it more as a luxury, something to enjoy, like a bottle of wine.”
Some cocoa farmers see buyers like Maloney as allies who protect them from the vagaries of financial markets.
Gustavo Mindineros, a cocoa farmer who heads a producer cooperative in Tumaco, Colombia, says farmers tended to favor smaller buyers when production was low because they bought fewer beans at a higher price.
“The big company guarantees volume, but does not know quality,” said Mr. Mindineros. “Smaller customers recognize quality and pay a premium for it.”