El Niño batters cocoa crops and drives chocolate prices to historic high

12 Feb 2024 --- Ahead of Valentine’s Day, El Niño dry spells in West Africa have sent chocolate prices soaring to a record high. Currently, the average global price of cocoa sits at around US$4.4 per kg, a 67.55% increase year-on-year and a 4.48% jump compared to December 2023, as revealed by data from the World Bank’s International Cocoa Organization.

Pressured supplies for the confectionery sector are sparking dialogue among food businesses surrounding an imminent surge for the price of a consumer favorite. Mirroring a common theme among other consumer-packaged F&B segments, confectionery companies in the last year have relied upon price increases to keep dollar sales growing and have seen notable declines in volume sales.

Mondelēz International chocolate sales volume growth weakened substantially this fiscal year. Meanwhile, Nestlé noted that higher ingredient prices, particularly for cocoa, may mean more price increases. 

Hershey’s is banking on the “resilience” of seasonal traditions and the overall consumer response to its innovations. The chocolate giant saw sales decline in 2023, with company earnings calls pointing to further volume declines in the second half of this fiscal year.

“While historic cocoa prices are expected to limit earnings growth this year, we believe our strong marketing plans, innovation and brand investments will drive top-line growth and meet consumers’ evolving needs,” Michele Buck, president and CEO of The Hershey Company, said in a recent earnings report.

High prices to set
Cocoa production in West Africa — which accounts for almost 70% of supplies — remains below even reduced estimates. 

Prices have trended higher for much of the past year. Cocoa prices this month are 14.8% ahead of levels even as recently as November 1, 2023. Early 2024 has seen another spike in prices, surpassing US$4,500 per metric ton as of January 26 — a 31.1% jump in the past six months alone.

As such, it may be a while before ballooned chocolate prices see some fluidity again. Cocoa prices listed on the Intercontinental Exchange in New York hit a new all-time high of US$5,874 per metric ton yesterday, closing up 7.3% at US$5,805.

According to a research brief from CoBank, cocoa prices are likely to remain elevated until a new African crop comes to market in late 2024. It concedes that additional price hikes for chocolate confections throughout the year are “likely.” 

“The cocoa issues come at a particularly challenging time for manufacturers, considering the increase in sugar prices they’ve been coping with over the past three years,” says Billy Roberts, senior food and beverage economist for CoBank. 

“While sugar prices have recently retreated, cocoa futures prices remain near record levels and show little sign of any significant movement. That could lead to a further erosion of chocolate volume sales and begin to impact dollar sales as well.”

Chocolate’s undeterred craveability
While cocoa prices are expected to remain relatively high, even inflated prices have done little to deter consumer appetite.

Dollar sales of chocolate confections continued to grow in 2023 due to manufacturer price increases, highlights CoBank. Retail chocolate candy prices are 17% higher than they were just two years ago, as per Euromonitor. According to USDA, the price of sweets overall increased 9.2% this year alone.

Pointing to a robust global innovation pipeline keeping up with demand, Innova Market Insights data indicates a 2% average annual growth globally in cocoa ingredient use for food and beverage launches. 

Confectionery continues to lead in these launches, with chocolate being the frontrunner, but Innova highlights “fast growth” of cocoa use in meat substitutes with 61% growth from October 2018 to September 2023.El Niño dry spells have sent chocolate prices soaring to a record high ahead of Valentine’s Day.

Risk at the farm-level
Shocks to the global chocolate market have a rippling effect across the value chain, all the way through to farmer-level. 

Global advocacy watchdog Voice Network discloses that while chocolate manufacturers have enjoyed record profits over recent years, many farmers at the base of the supply chain have been unable to meet the basic needs of their families due to low cocoa prices and unfair contract terms.

While supply shortages last September caused by a low harvest drove up cocoa prices, small-scale growers in West Africa hoped to begin reaping greater rewards for their labor, notes Voice Network.

“Instead, the companies supplying major chocolate brands have refused to buy cocoa at the increased market prices, claiming that doing so would ‘create too much risk’ for them, if the chocolate companies refuse to pay the asking price down the line,” states the organization.

“Clearly, there is a double standard at play. When prices are low, cocoa companies claim ‘you can’t interfere with the market.’ But suddenly, when prices are high, they want intervention in the market. This position is untenable.”

Though higher farm gate prices are only part of what’s required to ensure cocoa growers earn a living income, they are a key prerequisite, stresses Voice Network. 

“There is not a business case for higher productivity if prices for farmers are too low and their risks too high. But that has been the stark reality for a very long time now. Farmers cannot simply grow their way out of poverty. But that has been the industry’s flawed approach to poverty alleviation.”

“Smallholder cocoa farmers do not have the capacity to avoid risk — risks of prices falling due to windfall harvests, or risks of crops failing due to weather or pests and diseases. They absorb the full brunt when prices are low. And even when prices are high, they hardly benefit, as prices are only high when harvests are bad.”

By Benjamin Ferrer