THE COCOA CRUNCH: INSIGHTS FROM ISLANDS CHOCOLATE
Hi there, Wilf Marriot here, founder and CEO of Islands Chocolate. As you may be aware, the cocoa industry is experiencing an extraordinarily turbulent time right now which is feeding through into sky-high prices, with lots of connected factors at play.
So I wanted to talk about what we’re seeing from our unique position in the cocoa market. I say unique because unlike most, we are both cocoa growers and chocolatiers
The Cocoa Price Surge
You've probably heard the buzz about cocoa prices skyrocketing lately, and let me tell you, it's been quite a ride – upwards only! Just a year ago, cocoa was trading at around $3,000 per tonne. Fast forward to now, and we're seeing prices breaking the $10,000 level on the New York exchange. An increase of over 300% in just twelve months!
What’s Driving The Price Surge?
So, what's causing this cocoa craze? Well, it boils down to a perfect storm of three main connected factors.
Poor Harvests
Firstly, three years of poor harvests in West Africa, where most cocoa is grown, have left the majority of the cocoa market facing a whopping 30% supply deficit in 2024. From the El Niño effect disrupting growing cycles, unseasonal weather leading to the double-whammy of both droughts and floods, and rampant diseases wreaking havoc with harvests, it's been a rough time for cocoa farmers.
Structural Problems
This is the visible part which everyone is latching onto. But underneath all this is a more serious and longer term structural problem. Ivory Coast and Ghana are the world’s largest cocoa producers, making up around 70% of supply. Both have central marketing boards that fix prices to farmers. This leads to two problems:
Firstly, the prices paid are pitifully low at under $2,000/tonne which means farmers have very little incentive to invest in their farms, leading to a steady decline in production.
Secondly, crops are regularly sold forward on the futures market by their governments and because of this, they are invariably well behind the price curve – case in point, farmers won’t start to benefit from the recent price surge until well into next year – and this time lag is likely to exacerbate the problem.
Together, these factors make farms less and less productive and with increasing demands for cocoa products from consumers in developed countries, all it needs is a few things to go wrong for the market to be short. What we are currently seeing is a perfect storm of these factors.
A Disjointed Commodity Market
Margin Calls
Traders and larger chocolatiers who hedge their prices are being hit hard with multiple margin calls as the value of their hedges are overtaken by surging prices, forcing them to scramble to find money to finance these calls. The issue the market is facing is that many companies cannot afford the numerous margin calls and are being forced to close out their short positions to avoid defaulting. Having already lost a significant amount of cash, they are then having to buy cocoa back at a much higher price in future, further contributing to increases in cocoa prices.
Failed contracts
The other issue we’re hearing about are unfulfilled contracts floating around the market. Some traders and even governments have sold large quantities of cocoa on futures contracts which they cannot deliver on. This is due to suppliers being unable to deliver on the stated month, or in some cases, reneging on their contracts and opting to sell to others buying for a higher price. Both of which have detrimental impacts in the form of hugely inflated prices.
In Summary
Using a pressure cooker as an analogy – the structural problems in farming are due to low prices leading to increasing temperature and pressure in the pot, which has boiled over due to bad weather and harvests and is finally exploding due to a broken commodity market.
The Road Ahead
One thing we are not going to do is predict the price. We can however look at expected futures and what’s realistic in the coming years. Although lower than they are now, the futures market is indicating a price of $6,000-$7,000 for next year, so still double what we have been used to for decades. And with continued mismanagement and underinvestment in Africa, cocoa trees needing at least five years to grow to a reasonable level of production and all the while an increasing world demand for chocolate, for sure the days of $3,000 per tonne are over for at least the next 3-4 years and there will be a new baked-in norm set at a significantly higher level...
How Does This Impact Islands?
When it comes to chocolate, we're fortunate to have our own cocoa supply from St. Vincent, a rare ability to control both production and supply within the cocoa industry. This means we are somewhat insulated, but in no way are we immune to price hikes. Our cocoa butter costs have soared, and that's trickling down into our chocolate production, increasing the overall cost of producing our chocolate. At the same time we still have high inflation, staff squeezes, logistics issues re Brexit and EUDR etc.
The price of cocoa powder is usually determined by the price of its parallel derivative — cocoa butter. Fortunately, rather than buying cocoa powder on the open market, we obtain ours by pressing beans we buy from the Caribbean. This enables us to keep the cost more ‘real’ as well as more even. Nevertheless powder is inevitably costing more to produce with open market prices significantly higher.
How Does this Impact Our Clients?
Unfortunately, due to the issues described above, we will need to increase our prices across the board in the weeks and months ahead. However we will be trying our best to keep these as marginal as possible.
Lessons Learned
So, what's the takeaway from all of this? It's clear that the current cocoa crisis stems from a deeper issue and not just the weather as some would like us to believe – the plight of cocoa farmers. For too long, the huge multi-national chocolate companies, the companies that buy from them, and ultimately their consumers have continued to demand cheaper and cheaper chocolate (as well as ignoring the associated ethical issues such as poverty, child-labour and deforestation). This approach has come home to roost – as the old adage goes; there’s no such thing as a free lunch.
Being farmers, we know what it costs to produce cocoa ‘properly’ – looking after our farmers and staff and our beautiful environment. At Islands, we directly employ over a hundred people in St Vincent and are the largest agricultural employer on the island, paying above Fairtrade rate and ensuring that cocoa farmers receive a fair price for this miraculous raw material we love so much. Because of this, our core pillars of cocoa quality, craft and conscience never falter through our supply chain.
Watch our video below to find out more about the crisis we’re currently seeing in cocoa.