The cost of cocoa, a core ingredient in chocolate production, has been on a record-breaking run in recent months, with prices climbing more than 57% year-to-date. This surge in prices has been primarily driven by concerns over the supply of cocoa in West Africa, which is home to around three quarters of the world’s production. Despite the historic price surge, analysts have noted that global demand for cocoa has not shown any significant signs of destruction yet, which is somewhat surprising given the astronomical prices.
According to commodities analyst Paul Joules from Rabobank, the demand for cocoa has remained strong due to the compulsive nature of the purchase for consumers. Additionally, many chocolate manufacturers have pre-existing contracts and factories that they need to operate, which has helped sustain the demand for cocoa even as prices continue to rise. However, Joules anticipates that there may be some demand destruction in the second half of the year, as the supply and demand dynamics in the cocoa market remain very tight.
U.S. chocolatier Hershey, one of the largest chocolate companies globally, issued a profit warning last month due to the soaring cocoa prices. The company expressed concerns that the high cocoa prices would limit their earnings growth for the year. Warren Patterson, head of commodities strategy at ING, highlighted that the key question is how much higher cocoa prices can go before significant demand destruction occurs. While there have been some indications of demand destruction, it has not been enough to ease concerns about the tightness in the market.
Patterson emphasized that the supply of cocoa from West Africa remains a significant concern for market participants, particularly as the Ivory Coast and Ghana are major producers of cocoa. Weather conditions, such as heavier-than-usual rainfall and El Niño-related dryness, have also impacted cocoa production in these regions. Last year, concerns over black pod disease and delivery issues to ports were raised due to heavy rains, while this year, drier weather conditions and strong Harmattan winds are further complicating the current crop outlook.
The El Niño phenomenon has contributed to dryness in Southeast Asia, India, Australia, and parts of Africa, leading to a price rally for soft commodities like cocoa, sugar, and coffee. El Niño occurs when sea temperatures in the eastern Pacific rise above the long-term average, which can result in more storms and droughts. This climate pattern has added to the challenges faced by cocoa producers and has contributed to the overall price increase in the cocoa market.
While the cocoa market continues to experience record-breaking prices, global demand for cocoa has surprisingly remained resilient. However, challenges persist in the form of supply concerns from West Africa and weather-related issues that impact cocoa production. It remains to be seen how the cocoa market will evolve in the coming months as stakeholders navigate these complexities.
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