Is $10,000 expensive? With the largest supply shortage in sixty years, the price of cocoa may just be starting to rise

Cocoa has become the hottest commodity in the current market, with prices doubling in just two months due to supply shocks, soaring to historic highs.

Yesterday, New York cocoa futures surged to a record $10,080 per ton, reaching an all-time high level, before pulling back slightly to currently trade at $9,622 per ton. London cocoa futures also hit historic highs.

With global cocoa supply shortages for the third consecutive year, prices have risen unprecedentedly. In the past two months, New York cocoa futures prices have doubled, and compared to the same period last year, they have tripled. Just two months ago, New York cocoa futures were trading at less than $5,000 per ton.

The International Cocoa Organization predicts that the global supply shortage may continue, with an estimated shortfall of 374,000 tons in the 2023-2024 fiscal year, the largest supply deficit in over sixty years and five times the 74,000-ton shortfall from last year.

Industry analysts warn that if the supply situation does not improve, chocolate prices may rise by the end of this year or early 2025, and the high cocoa prices are also eroding the profits of chocolate manufacturers.

Supply shocks compounded by short covering

The main cocoa-producing countries, Ivory Coast and Ghana, have seen a significant decline in cocoa bean production due to extreme weather conditions and diseases, with these two countries accounting for about 60% of global cocoa production.

Dutch bank analyst Paul Joules pointed out:

Crops have been affected by black pod disease and swollen shoot disease, and many trees have already reached their maximum yield potential, with no large-scale planting since the early 2000s.

Heavy rains have exacerbated the disease issues, and the El Niño weather phenomenon has led to drier conditions. This year's Harmattan winds have also been more extreme, further affecting crop yields.

At the same time, local farmers have been turning to more profitable crops like rubber trees, and the governments of Ghana and Ivory Coast have set fixed prices for farmers at the beginning of the season, so they have not benefited from the current price surge.

Joules stated:

The worst is yet to come, as the structural issues facing the market cannot be quickly resolved, cocoa prices may remain high for some time.

In addition to concerns about scarce physical supply, financial market pressures are also increasing, with some traders selling futures to hedge their physical holdings. However, as their contracts expire and they need cash to meet margin calls from derivative losses, they may be forced to close out positions in a rising market, which helps drive the cocoa futures rally, pushing technical indicators into overbought territory for months.

Rising cocoa prices erode chocolate manufacturers' profits

The sustained surge in cocoa prices has raised concerns across the industry, as the high cocoa prices are eroding the profits of chocolate manufacturers. Despite large companies taking hedging measures last year, analysts believe that chocolate price increases or "shrinkflation" (reducing product weight) may still be unavoidable The soaring prices have hit chocolate giant Hershey, with the company's earnings remaining flat last year. Hershey's stock price has dropped by about 23% in the past 12 months, while Nestle's stock price listed in Switzerland has fallen by nearly 13% during the same period.

Michele Buck, CEO of Hershey, mentioned in a media interview last month that the company has a hedging strategy in place to manage price fluctuations. Joules commented on this:

Despite the major chocolate companies hedging well last year and not immediately passing on high prices to consumers, the industry's ability to absorb costs is limited.

Consumers may face higher prices or "shrinkflation," where chocolates become smaller. Companies may also adjust ingredients to produce chocolates with lower purity. The price impact will affect dark chocolates, as they have very high cocoa content.

To make matters worse, the upcoming Easter holiday is a peak period for chocolate consumption, and with the surge in cocoa prices, consumers may be affected