Why the global cocoa market is melting down

BARRY CALLEBAUT, the world’s largest maker of bulk chocolate, is full of beans. Its share price has jumped by 20% since April, when it reported higher sales volumes despite a steep rise in the cost of cocoa. Peter Feld, its boss, told investors not to worry about expensive ingredients: “What goes up fast comes down fast.”

The chocolatier may have to eat his words. This season, for the third year in a row, cocoa supply is expected to fall short of demand—by 8.5% of global production. Next year another deficit looms. The result is a chaotic market. In the month to April 19th the price of the most popular cocoa contract rose by 50%, to nearly $12,000 a tonne, a record. Ten days later rain in drought-hit western Africa, home to four-fifths of the global crop, sparked the biggest-ever intraday price fall. Prices are still triple their level of a year ago (see chart).

The chaos is partly rooted in short-term supply issues. After being battered by storms at the end of last year, cocoa trees in Ghana and Ivory Coast have faced heatwaves, which have encouraged black pod (a fungus) and swollen shoot (a virus) to proliferate, further hurting yields. Ivory Coast’s mid-crop harvest, which runs from April to September, could be more than a third smaller than last year’s. Ghana’s could be the most miserable in 20 years.

This bad luck adds to chronic problems. Cocoa farmers in Ghana and Ivory Coast, most of whom own little land, get paid a price set by the government that is too low for them to invest in fertilisers, pesticides and new plants. Many of their trees are old and unproductive. Fixed “farmgate” prices also make growers insensitive to higher prices, meaning that shortages endure. In some places, beans are being smuggled into neighbouring countries with free markets. Increasingly farmers decide to quit altogether, preferring to bet on more lucrative crops such as rubber.

As a consequence, Ghana and Ivory Coast, from which traders buy contracts for deliveries at a later date, have not fulfilled orders worth hundreds of thousands of tonnes. Frustrated buyers are desperate to secure beans today, explaining another oddity of the market: today’s price is nearly $3,000 above that of a contract to deliver beans in May 2025, despite there being no end in sight to the current crunch.

This summer, as El Niño transitions to La Niña, more rainfall could arrive, bringing some relief to African plantations. Supply is rising elsewhere, too. Farmers in Ecuador, more exposed to global market prices, are quickly increasing production.

But that will make just a small dent in expected shortfalls. Crop diseases are tough to treat; new trees may take half a decade to bear fruit. And persuading farmers to plant them will be hard. Having raised the farmgate price in September, Ivory Coast’s government put up its price again in April for the mid-crop season. Ghana followed suit days later. Nevertheless, farmers still complain that prices are too low. Traders with outstanding contracts fear they will be asked to pay more when deliveries are made at last, because the two countries’ governments lack the money to cover the difference themselves.

This lack of faith in the world’s largest producers has sapped liquidity in futures markets—another factor behind the recent madness. Unconvinced that new contracts will be honoured in full, traders are shunning them. Others are liquidating existing contracts because the New York bourse is asking traders to put down more money to back their positions. “Open interest” in cocoa futures (the number of outstanding contracts) has dropped from 330,000 in January to 150,000, the lowest in a decade. Market thinness means single trades can have an outsize impact on prices.

The icing on the chocolate cake is the uncertainty created by new regulation in Europe, the biggest consuming region. Under rules that will come into force at the end of the year, companies will be required to show that their beans have not come from deforested land, which will be difficult to prove in an industry that relies on smallholder farmers. This has pushed the premium the London contract commands over its New York peer to more than $400 a tonne—a ten-fold increase in two months.

Until recently, many confectionery firms were well protected against rising prices. But hedges, which were mostly bought six to eight months ago, are beginning to expire, notes Paul Joules of Rabobank, a Dutch lender. As a result, companies are left with unpalatable choices. Some are reducing how much chocolate covers a candy bar, or launching fruit-based versions of their bestselling bonbons. Others are closing higher-cost factories in a bid to keep margins intact. Eventually, however, many will have to accept lower profits or pass on higher costs to the consumer, at the risk of destroying demand. For good or ill, the era of cheap chocolate may soon be over. ■