Cocoa Prices up 40% in March

This year, people with a sweet tooth will feel extra inflation pressure as climate change pushes up prices of chocolate's key ingredient.

Cocoa Prices Soar

Cocoa prices tripled last year due to stressed and damaged crops in West Africa, which produces over 70% of the global cocoa supply. Heavy rains and flooding in December just a few months ago damaged crops, doubling prices since last year's end and up 40% in March alone. The acute weather conditions caused black pod disease in Ghana and Ivory Coast cocoa plants, with higher prices forcing the suspension of the largest cocoa processing plants. Ghana's cocoa output for the upcoming season is expected to be almost 40% below the target of 820,000 metric tonnes due to unfavourable conditions, including smuggling and damage from illegal gold mining, amongst the reasons above.

Chocolate companies like Hershey's and Mondelez have passed on higher costs to consumers, and further increases can be expected in 2024 as global demand for chocolate continues to rise. However, not all chocolate makers have fully managed to pass on higher cocoa costs to consumers. Persistently high prices are also expected to lead to even higher prices as companies run out of cheaper inventory. Although Easter spending will likely drop slightly this year as consumers reduce purchases due to higher prices, some argue that prices have remained in line with food inflation.

Canary in the Copper Mine?

The cacao crops appear most vulnerable to the effects of extreme weather negatively impacting Western Africa this year, with conditions expected to worsen into the summer months. However, other key crops from the region have not seen large price fluctuations, such as palm oil prices, which have risen marginally but are nowhere near the magnitude experienced by cacao. It is important to note that it is not just agriculture reliant on a steady water supply, with the region, particularly Ghana, Togo and Benin, being large producers of other vital commodities, including oil and copper, requiring significant water usage. To date, mining in the region has not been interrupted but could be affected should the seasonal rains not improve.

Regarding the evolution of chocolate prices, global demand is forecast to continue increasing this year. Major companies typically contract cacao prices one year in advance, helping to mitigate costs initially. However, prices may rise for consumers as contracts still have to be renewed, leading to delayed passing on of pricing pressures. Ivory Coast's largest export destination is Switzerland, home to major brands including Nestle, Lindt & Sprungli and Barry Callebaut. To date, those companies have declined to comment on cost pressures, but it could feature prominently in their upcoming trading updates.

Mondelez in H&S Pattern?

Mondelez appears to be undergoing a technical correction, which could form a head-and-shoulders pattern if the share price falls below the key support level of $69. Should $65 prove unsustainable as support, further downward pressure may decrease the stock to around $60. However, a sustained move above $75 could see prices retest the $77 resistance point.

Source: SpreadEx / Modelez Intl

Key Takeaways

Cocoa prices have risen sharply this year due to damaged crops in West Africa, which produces over 70% of the global supply. Heavy rains and flooding in late 2023 caused black pod disease, and output for Ghana is expected to be almost 40% below target. While chocolate makers have passed on some higher costs, persistently high prices are expected to increase further as companies use cheaper inventory. The crops may indicate vulnerability to extreme weather impacts, though other key exports have seen less fluctuation. Global demand for chocolate is forecast to continue rising, but companies contract prices in advance, though consumers may see delayed cost increases as contracts renew.