Cocoa in focus: Bean costs surge as heavy rainfall and forthcoming EU deforestation regulation impact market

30 Jun 2023 --- Floods in key cocoa production regions have led to increased raw commodity costs, with cocoa future prices on the Intercontinental Exchange in London signaling their highest level since the 1970s earlier this week. The upcoming 2024 implementation of EU deforestation regulation could also further push up prices of confectionery, which are already affected by soaring sugar prices.

West Africa has been stricken with heavy rainfall throughout this cocoa season, which is due to end in September. This week rains have been flooding key growing regions, hampering farmers’ efforts.

On top of this, producers are also bracing to deal with the El Niño weather phenomenon, which could bring warmer temperatures, dry winds and lower-than-average rainfalls. 

Inflationary shocks in cocoa and sugar persist as inflation is easing in other food staples.

High fertilizer prices are also increasing costs for producers and leading to lower yields as some farmers reduce their fertilizer use.

“As much as supply concerns continue to support the rally seen in prices, the demand for cocoa beans could potentially pull the brakes on the price hikes,” The International Cocoa Organization (ICCO) says in a recent report.  

“With prices of other ingredients like sugar rising and inflation causing price increases in other areas of the supply chain, confectionery companies are likely to face hurdles in their operations and passing the cost of production increases to consumers cannot be ruled out.” 

According to Innova Market Insights, on average, three-quarters of European consumers include chocolate in a typical grocery basket.While high cocoa prices will upset consumers, farmers in poor regions might receive some much-needed extra income, as Oxfam found an average fall of cocoa farmers’ net income of 16% in Ghana since the onset of the pandemic.

Chocolate consumption
According to Innova Market Insights, on average, three-quarters of European consumers include chocolate in a typical grocery basket. Furthermore, consumption rates per capita are among the highest in the world, with annual intakes of 10 kg or more in six of the West European nations.

Europe leads the way in confectionery launches, with 42% of the total global releases in 2022. Moreover, half of the global chocolate launches are in Europe, way ahead of the 20% of the Asia-Pacific market.

By value, Europe also led in confectionery and chocolate sales for last year with 38% and 44% of the market, respectively.

Effects of EU deforestation laws
It is unclear how much the EU’s incoming law to combat deforestation will bring prices of chocolate up in the bloc, as it could fail to achieve the global impacts regulators expect – unless the UN delivers a complementary framework to support it. 

João Brites, director of growth and innovation at HowGood, told Food Ingredients First that “the EU’s law poses a risk of ‘leakage,’ which means that if demand for forest land remains the same, no real reduction in deforestation will occur, as deforestation activities will move to less monitored regions.”

However, producers will need to pay for the technology to trace their cocoa farms, requiring expensive investments that might be translated to the consumer.

Some companies have already implemented cocoa traceability systems in their voluntary deforestation pledges. However, this week a report unveiled that pledges to end forest loss by 2030 are way off track and that some of the loss was found adjacent to cocoa farms and has a pattern of small-scale clearings likely associated with cocoa production.

Ghana and Côte d’Ivoire ally for higher prices
Cocoa-producing nations are optimistic higher prices will improve the well-being of farmers.

“Happily, prices today on the world market are still increasing and you will certainly hear from us in October and cocoa farmers will smile,” says Fiifi Boafo, head of the public affairs department at the Ghana Cocoa Board (Cocobod). Many cocoa farmers survive on just US$2 a day.

“The years of effort by both countries to tackle these challenges have failed, even though collectively we supply 60% of the world’s cocoa production, our farmers are smashed with international trading policies, but as we joined forces to tackle these challenges; we are making headway.”

While Oxfam criticized last month the fall of Ghanaian farmers’ income, the NGO found earnings of cocoa giants confectionery divisions from Hershey, Mars, Mondelēz, Ferrero, Lindt & Spruengli and Nestlé increased 16%, making nearly US$15 billion in profits.

According to the report, most cocoa farmers in Ghana cannot earn a living income, which means they cannot afford necessities such as food, clothing, housing and medical care. Many of these farmers survive on just US$2 a day.

Ghana produces around 15% of the world’s cocoa beans but receives only about 1.5% (US$2 billion) of the chocolate industry’s estimated annual worth of US$130 billion.

The Cocobod has been focused on attaining higher prices after it denounced, last year, foul play in the cocoa trading market, as the cocoa regulatory authorities in western Africa claimed that since the COVID-19 pandemic began, some companies have been bypassing payments of a living income differential of US$400 per metric ton of cocoa beans.

By Marc Cervera