For the third consecutive year, cocoa production is less significant than demand – why is it not growing and how will it (and in what way) affect the margins of confectionery manufacturers?
Is “choco-flation” just another excuse for raising the prices of chocolate eggs, bunnies, and chicks before Easter? Prices for cocoa futures contracts have sharply risen to over 6000 USD per ton, as 2024 marks the third year in a row where supply will not be able to meet demand.
However, the prospects for chocolate manufacturers’ profitability remain robust, suggesting that it will be consumers who will pay the higher price in full. The rise in candy prices still lags behind the increase in cocoa prices, which could lead to many unpleasant surprises for chocolate lovers at the cash register.
To balance the cocoa market – increase its production in response to demand – farmers from West Africa must also benefit from its higher prices to encourage them to produce more and better crops.
Cocoa prices are rising rapidly, as 2024 will mark the third year in a row where supply cannot meet demand. According to Allianz Trade analysis, consumers will pay the price for this. Between 2015-2019, a ton of cocoa cost an average of approximately USD 2500. Currently, the price of cocoa futures contracts has broken a 46-year record, exceeding USD 6000 per ton, as it is predicted that consumption will outstrip production resulting in a cocoa shortfall of 374 000 tons.
To protect margins, candy manufacturers will likely seek savings such as reducing the cocoa content in their products, replacing cocoa with cheaper alternatives, or reducing the size/weight of products. Alternatively, they could simply increase prices or implement a strategic shift in the profile of their products towards premium, high-margin products, thus offsetting rising input costs. The current profitability prospects for major candy/chocolate manufacturers remain robust, and The EPS is expected to rise by an average of +1% for the largest stock companies. This suggests that consumers will bear the direct consequences of rising cocoa prices, while confectionery manufacturers will profit.
The shortage of supply highlights the persistent structural challenges in the cocoa industry.
The global production of cocoa relies on several Western African countries – Ivory Coast, Ghana, Cameroon, and Nigeria – which collectively account for nearly 75% of the world’s production. The sector largely depends on small farmers who consistently received low selling prices regardless of market conditions. Because pricing mechanisms are generally controlled by the governments of these countries, prices are typically below the market value of cocoa. Meanwhile, due to the constrained supply, traders, processors, and chocolate product manufacturers were able to achieve higher margins. This situation created a mechanism of poverty, underinvestment, and falling yields among cocoa farmers. According to the Allianz Trade analysis, the ongoing shortage should be a wake-up call for the sector and governments to address age-old issues of underinvestment and inappropriate agricultural practices. Higher prices received by farmers would encourage necessary investments in plantings and the modernization of cocoa crops, thus ensuring the sustainable production of cocoa and meeting the growing global demand for chocolate.
