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The Bitter Truth About Chocolate: Why Prices Are Rising

FOOD & AGRICULTUREThe Bitter Truth About Chocolate: Why Prices Are Rising

Confectionery and desserts are currently the fastest inflating category of products in stores, having increased in price by over 14% this January alone. And it’s not the end of the increases, as cocoa is becoming increasingly expensive worldwide. On American stock exchanges, its price has risen above 6,000 dollars per ton. The situation is slightly worse in Europe, with the value of this commodity on British exchanges already reaching close to 6,000 pounds. According to experts, the prices of cocoa beans may soon exceed the level of 7 thousand dollars per ton. As a result, sweets and desserts will continue to rapidly increase in price. The same will happen with other products containing cocoa, such as cosmetics, medicines or supplements. In addition, market experts suggest that the so-called phenomenon of shrinkflation may occur.

Cocoa prices have been on the rise on the global markets for the past two years. Recently, for the first time, the price of the raw material on American exchanges surpassed 6,500 dollars, or over 25,800 zlotys, per ton. There was more volatility on European exchanges. In the United Kingdom, one have to already pay close to 5,800 pounds, or 29,200 zlotys, per ton. Almost 75% of the world’s harvest of cocoa beans are provided by four countries – Ivory Coast, Ghana, Cameroon, and Nigeria, where particularly poor harvests were noted, which is the main reason for the current situation.

“Countries from this region are grappling with the consequences of climate change, rising freight prices caused by the war in Yemen and Israel, and with fertilizer prices, which have gone up following sanctions on Russia,” says Dr. Piotr Arak, chief economist at VeloBank. “Producers need between one-and-a-half years to three years to reduce the cocoa deficit. Additional investments were launched in Brazil and other South American countries last autumn. This year’s global cocoa deficit may reach 375,000 tons,” the expert adds.

As a result, the quotations on the New York Stock Exchange have increased by over 36% from the last local peak in the first half of December 2023 to reach a new record in late February of over $6,500 per ton. There are also suggestions that we may soon see the next threshold of 7,000 dollars per ton being exceeded. This is the view held by experts at UCE RESEARCH, who point out that the situation is very dynamic. There are too many problems stacking up for prices to start easing. After all, they have been rising for two years. It is also hard to imagine that African supplies can be simply replaced.

“Heat and drought threaten plantations due to the weather phenomenon known as El Niño. In addition, diseases of cocoa trees in Nigeria and Cameroon further deepen the problem of cocoa shortage in the world markets,” explains Dr. Joanna Wieprow from WSB University Merito Wrocław. “The World Cocoa Organization forecasts larger yields in the coming years, but the steadily increasing demand for cocoa, especially in China, suggests that further increases in the price of chocolate and other sweets are inevitable,” emphasises Dr. Wieprow.

According to Grzegorz Rykaczewski, an analyst at Bank Pekao, it is hard to say whether prices have already peaked. The improvement in mood is not helped by the fact that over the past two seasons, demand on the global market has exceeded supply, which has resulted in declining stocks. “The negative impact of high cocoa prices on the producers of sweets will be partially offset by the decline in quotations for sugar. Nevertheless, they remain at historically high levels. Their decrease will therefore not be able to neutralize the increase in cocoa costs completely,” adds the expert.

Cocoa is a key ingredient needed for the production of chocolate. The increase in prices impacts not only producers. Consumers will also feel it. According to the monthly report titled “RETAIL PRICE INDEX”, in January this year, the prices of sweets and desserts increased year-on-year by over 14%. This can be seen, for example, in chocolate bars and wafers, which have increased in price by nearly 22% and over 16%, respectively.

“These are products for which demand may drop in a short period in case of high prices. They are not staple goods, and the promotion of a healthy lifestyle further supports the rejection of these from the daily diet. However, due to the increasing cost of the raw material, we may also feel price increases in other categories, such as cosmetics, medicines or supplements that also contain cocoa,” predicts Dr Justyna Rybacka from WSB University Merito Gdynia.

Analysts remind that the upcoming Easter season is, alongside December, a time of the largest increase in sales of chocolate products. The heavy price rises of cocoa on the global markets will be felt by producers of food products, processing plants, and also confectioneries and restaurants. As a consequence, all these entities will shift higher product costs onto the end consumer. There is no other option. The first symptoms of this will be felt before Easter.

“Chocolate sweets and desserts will become more expensive in shopping baskets. We may also be dealing with the so-called shrinkflation, reducing the size of bars and chocolates or changing their compositions to cheaper ones for producers, with significant differences in weight and product volume,” warns Dr. Piotr Arak. Meanwhile, experts from UCE RESEARCH believe that consumers will not immediately notice the differences, but over time they will become more and more noticeable.

“The cost of cocoa in a bar of chocolate accounts for between 5% and 7% of its price. Even if the raw material prices double, the product will only increase by this threshold,” Michel Arrion, executive director of the International Cocoa Organization, eases pessimistic moods. “If the price of the raw material increases, it will be an incentive for farmers to produce more cocoa to balance supply and demand. But increasing production takes an average of four or five years. This is how long it takes for a cocoa tree to bear fruit,” the expert explains.

On the other hand, Piotr Bielski, director of the Department of Economic Analyses at Santander Bank Polska, points out that although rising global cocoa and sugar prices favour price rises for sweets and desserts on the Polish market, this trend is at least partially hampered by the strengthening zloty exchange rate. “However, if cocoa prices continue to skyrocket, we may have to start factoring in an increase in the cost of buying sweets and desserts in Polish shops. The full pass-through to domestic retail prices may take at least six months,” director Bielski analyses.

An expert from Santander Bank Polska reports that the financial markets are currently not betting on a continuation of the black scenario. Futures contracts on the exchanges in New York and London predict a gradual drop in cocoa prices in the coming months, in the order of several dozen percent over the year. Meanwhile, the World Cocoa Organization notes that most cocoa farmers live in extreme poverty. “Significant increases in international prices are a necessary but not sufficient condition for raising purchasing prices and achieving an income that allows farmers to subsist,” concludes Michel Arrion.

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