Analysts anticipate that the cost of the primary chocolate ingredient could continue its unprecedented surge, as there are no indications of significant demand reduction looming ahead.
The apprehension regarding cocoa supply in West Africa, where approximately three-quarters of the world’s cocoa is produced, has been propelling the market upwards in recent months. In New York, the benchmark ICE cocoa futures reached $6,549 per metric ton on Wednesday. Surpassing $6,000 for the first time last month, the contract has surged more than 57% year-to-date.
Interestingly, despite the historical price spike, global demand has not yet been adversely affected.
“Typically, when you witness such astronomical price hikes in any agricultural commodity, you would expect to see some demand decline — but in the case of cocoa, we’re not observing it,” stated Paul Joules, commodities analyst at Rabobank, during CNBC’s “Squawk Box Europe” on Wednesday.
“One could argue that cocoa is essentially a compulsive purchase for consumers, which is why we don’t witness the same demand dynamics as with many other commodities,” he elaborated. “Moreover, many of these processes have pre-existing contracts. Hence, they continue processing as usual, operating their factories, so we don’t necessarily witness an immediate impact on the figures.”
Joules from Rabobank anticipates some demand reduction in the latter half of the year, emphasizing that the current supply and demand scenario is “extremely tight.”
U.S. chocolate giant Hershey, among the largest chocolate manufacturers globally, issued a profit warning last month due to soaring cocoa prices. The company, renowned for its Reese’s Peanut Butter Cups, stated in a February 8th announcement that cocoa prices were expected to constrain earnings growth this year.
How much farther can cocoa prices climb?
“The key question, and also the toughest, is how much higher cocoa prices can go,” remarked Warren Patterson, head of commodities strategy at ING, in a research note published on Feb. 15.
“They need to go to levels where we start to see significant demand destruction. We are already seeing some of that already, but clearly not enough to bring the market back into balance and ease tightness concerns.” Patterson emphasized that West African cocoa supply remains the “big concern” among market participants.
This is because the Ivory Coast is estimated to account for about 44% of global supply, while Ghana holds a share of roughly 14% of output. “Last year, heavier-than-usual rainfall raised concerns over the impact it would have on the crop, with rising cases of black pod disease. Heavy rains also led to issues over cocoa being delivered to ports,” Patterson noted.
“This year, drier weather conditions and strong Harmattan winds are raising only further concerns over how the current crop evolves.”
The El Niño-related dryness in much of Southeast Asia, India, Australia, and parts of Africa has contributed to a price rally for soft commodities such as cocoa, sugar, and coffee in recent months.
The El Niño phenomenon, a naturally occurring climate pattern, occurs when sea temperatures in the eastern Pacific rise 0.5 degrees Celsius above the long-term average. It can lead to more storms and droughts.
