The price of chocolate may increase even further if the new cocoa harvest in West Africa disappoints. Over the past year, cocoa prices have soared by about 47% due to concerns about bad weather and crop disease impacting the output in Ivory Coast and Ghana, major cocoa-producing countries that supply two-thirds of the world's cocoa. The situation could worsen if an El Nino weather phenomenon occurs, and analysts predict a third consecutive global shortage for the upcoming season.
As a result, inflation in the treat aisle is expected to persist, even as cost pressures ease for other food items. Leading chocolate manufacturers like Hershey Co. and Lindt & Spruengli AG have already warned of possible price hikes, and there are indications that the higher prices are affecting demand in Europe and Asia, two significant markets for chocolate consumption.
Darren Stetzel, the Vice President of Soft Commodities for Asia at broker StoneX, said that unless there is a significant improvement in the outlook, the current situation looks bleak. He also mentioned that further price increases could negatively impact consumption.
New York cocoa futures reached a 12-year high in mid-September, coming close to a price last seen in 1979; however, they have since slightly eased. The rally in prices was driven by excessive rainfall and outbreaks of pests and diseases that affected crops in West Africa.
The main question now is the size of the larger annual harvest that recently began in Ghana and is about to start in Ivory Coast. The cocoa sector is facing challenges related to complying with the cocoa traceability rules of the European Union, tackling produce smuggling, and dealing with climate change, according to Yves Kone, the Managing Director of industry regulator Le Conseil Cafe-Cacao.
Kone spoke at a ceremony in the capital city, Abidjan, to welcome the new season and highlighted the threat posed by climate change to cocoa production. However, he did not provide a production outlook.
In July, Ivory Coast forecasted a nearly 20% decrease in output for the main-crop season, which runs from October 1 to March, compared to last year. The forecast could still change as some farmers held back supplies from the smaller mid-crop, anticipating higher prices in the new season.
The country recently raised the price for farmers starting from Sunday, but the increase of 11% to 1,000 CFA francs ($1.61) per kilogram fell short of growers' expectations of a 44% raise.
Rabobank and Marex analysts anticipate a drop in West African cocoa output for the 2023-24 season. Marex predicts a global deficit of 279,000 tons, surpassing the combined shortfalls of the previous two seasons.
The tight market conditions are evident along the supply chain, with cocoa factories around the world slowing down the process of converting beans into confectionery products. Trader Cargill Inc. recently mentioned that high prices are beginning to impact demand growth in Asia, and Swiss grinder Barry Callebaut AG reported lower sales in July.
The harvest in Africa has also been affected by higher costs and shortages of inputs like fertilizers and pesticides, along with farmers living below the poverty line. Their pay is determined by authorities, which means they don't immediately benefit from higher futures prices.
These challenges make it difficult to improve and treat disease-ridden cocoa trees. Swollen-shoot disease, which affects about 20% of Ivory Coast's crop, is the most underestimated threat to cocoa output, according to Steve Wateridge, the Head of Research at Tropical Research Services.
Farmers in the Daloa region of Ivory Coast expect a smaller crop due to a lack of pods, while those in San Pedro predict a delayed harvest following flooding caused by heavy rains. However, some Ivorian growers may reap larger crops due to young trees that are more resistant to diseases.
In Ghana's Kwarbeng region, approximately 10% of last season's harvest was lost to black-pod disease and chemical shortages, according to Michael Acheampong, who oversees more than 1,500 growers. Wateridge mentioned that there is a risk that Ghana's cocoa output is now on a downward trend due to aging trees.
Ghanaian growers have received a boost in pay as the country raised their wages by more than 60% to discourage smuggling into Ivory Coast and encourage investment. This increase could potentially lead to increased production, according to Acheampong.
However, it may take time for any increase in output to translate into lower prices, and concerns remain about the El Nino weather pattern potentially causing dryness later in the season, posing a threat to crops.
Additionally, there are worries that new European deforestation rules will raise costs for the chocolate industry and, ultimately, consumers.
Currently, the performance of West Africa's harvest will be the determining factor for cocoa prices.
StoneX's Stetzel stated, "Chocolate is a luxury good, so it does not always follow an elastic price-against-demand correlation. But higher prices will ultimately mean fewer consumers."