1/ The media is blaming climate change for the cocoa deficit. But aren’t there other reasons, such as El Nino, disease, lack of land tenure, periods of low prices and a lack of investment in the fields?
The predicted global deficit of 400,000 mt, or 10 per cent of global production, is as large as we have ever seen, but the climate change story is nonsense in cocoa. I’m seriously concerned about climate change in coffee, but it has nothing to do with the problems in cocoa.
El Nino has had a minor impact on the Ecuador crop due to excess rainfall, but we’re talking about a loss of 50,000 mt. El Nino doesn’t explain the problems in West Africa; they result from long-term issues.
Following a price increase, the production area in Ivory Coast and Ghana significantly expanded in 2008-10. However, these trees are now relatively old, and their yields have declined.
The Swollen Shoot Virus is a more significant factor. The disease decimated the crop in Ghana in the 1960s and 1970s, reducing production by 50 per cent at a time when Ghana was the world’s largest producer of cocoa. The Ghanaians are trying to control the current outbreak. Ivory Coast is doing nothing.
We first identified the Swollen Shoot Virus in the Ivory Coast in 2008. It spreads slowly, and once it infects a tree, it will kill it within 5 to 10 years. There is no way to prevent it other than by cutting out infected trees, burning them, and replanting. Ivory Coast has reached a tipping point. We estimate that 25 to 30 per cent of the country’s farms are infected, but it may be more.
When a farmer sees his yields declining, he cuts down the trees and moves on to a different crop or replants with cocoa. The problem is that the disease will infect the new seedlings if you replant without burning the affected trees.
Prices have been stable for the last 10 or 12 years, and with the benefit of hindsight, they’ve been too low. Farm prices need to rise above $3,000 per mt to encourage farmers to invest in fertiliser, tree pruning, or planting new areas.
Farmers in Ivory Coast and Ghana still receive less than $2,000 per mt because the farm price was set at the start of the crop year last October. Ghana and the Ivory Coast should send a signal to their farmers by significantly increasing the price of the mid-crop, which starts in April. Otherwise, farmers will only begin receiving higher prices from October onwards and will only respond once they receive the higher price. The time lags are long in cocoa.
2/ Can anything be done short term?
A new tree takes about three years to produce fruit and 5 to 7 years to reach full maturity. The short-term answer is to invest in better farm care (pruning) and fertiliser use.
Fertiliser use has fallen in the Ivory Coast and Ghana over the last two years because of the high fertiliser price after Russia invaded Ukraine.
We’re seeing the first signs of the Ghanaian government trying to improve yields for the 24/25 crop. They plan to prune trees, spray against disease, and distribute fertiliser. It could be beneficial if they get their act together over the next 3 to 6 months. But the best incentive to better farm care would be to pay the farmers more.
If everything is done correctly at the right time, yields could increase by 30 to 40 per cent. The problem is that the window for applying fertiliser is when the rains return from March to June. Anything later than that will not impact the main crop. You might impact the next mid-crop, but it is much smaller.
Both countries have a central marketing board that fixes the price. The boards sell forward, and this sets the farmer’s price. That’s one of the problems. The 30 per cent drop in production this year has surprised both countries; they found themselves oversold. The governments of Ivory Coast and Ghana never default, but they roll forward the contracts. They’ve had to roll forward low-price sales from last year into next year. It means that they are well sold for 24/25 without being able to take advantage of the higher world prices.
Ghana and Ivory Coast account for 65 per cent of world production and are not yet passing on the higher prices to farmers.
3/ Swiss chocolate manufacturers were in the news last night saying they won’t increase prices this year. How will the market match demand and supply? Will there be shortages?
Many chocolate manufacturers have forward price cover and wouldn’t usually pass on today’s cocoa prices until the back end of this year. Still, they have other ways of mitigating against price rises.
They could reduce the amount of cocoa in their chocolate or promote filled bars with fillings such as wafers or fruit and nuts. They could still sell the same volume but use less cocoa. We will probably also see some shrinkflation.
Cocoa demand is price inelastic. It’s a recession-proof snack – a luxury but a low-price one. One way or another, we’ve got to reduce the amount of cocoa we consume. The easiest way of doing that is to price chocolate higher than alternatives such as snack food, cereal bars, etc.
The only comparable situation was 1977, when the world ran out of cocoa. The price spiked to a record high of $5,000 per mt in New York. If you apply the US Bureau of Labour Inflation Statistics back to 1977, $5,000 then equals $25,000 now.
4/What’s behind the explosive move in cocoa this year? Is it speculation?
The chickens are coming home to roost. I remember attending an industry event last November and was surprised at how complacent people were. Some felt that cocoa may move to $4,000 per mt, but no more. They thought it was a weather issue and not a structural one. They have probably revised their views this year.
Some physical cocoa users may be forced to buy back their short-term hedges due to margin stress.
The funds have been long cocoa for quite some time but have significantly reduced their positions since the market took off this year. Managed funds are pretty much out of cocoa. You can’t blame hedge funds for squeezing the market. They’ve been doing the opposite.
5/ Three companies, Barry Callebaut, Cargill, and Olam grind two-thirds of the world’s cocoa beans. I have seen suggestions that they control the market and are behind the price rise.
I don’t think they do. Even with this reasonably high concentration, they are price takers rather than price makers. If you look at Barry Callebaut’s share price, for example, you will see that it has fallen significantly in the past twelve months. It should have rocketed if they were controlling the market.
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Steve Wateridge is the senior coffee and cocoa analyst for Tropical Research Services.