Chocolate crisis looms as cocoa prices surge

The surge is primarily attributed to the severe global shortage of cocoa.

Cocoa prices have surged to nearly $10,000 per metric ton in March 2024.

According to J.P. Morgan’s report, the primary driver behind the price surge is a severe global cocoa shortage. West Africa, which supplies nearly 80% of the world's cocoa, has been hit hard by climate change-induced droughts. The International Cocoa Organization also predicts a sharp decline of nearly 11% in global cocoa supply for the 2023/2024 season.

Compounding the issue are structural challenges, including chronic underinvestment in cocoa farms. Many cocoa farmers, predominantly smallholders, struggle to earn a decent living and lack resources to reinvest in their farms, resulting in declining yields over time.

“Cocoa is a market where the grower produces a very high-value good but receives a very low share of the actual value chain. As a result, replanting rates are very low and cocoa trees are ageing,” said Tracey Allen, agricultural commodities strategist at J.P. Morgan. 

Dry weather conditions and a strong Harmattan season in West Africa have also exacerbated supply issues, driving investor-driven price hikes.  Currently, non-commercial investors hold over 60% of total open interest in cocoa futures and options in the New York market.

The rising cocoa prices are putting pressure on chocolate brands to increase prices. Ken Goldman, lead equity research analyst for U.S. Food Producers and Food Retailers at J.P. Morgan, anticipates that over the next year or two, Hershey and its competitors like Mars and Lindt will likely raise chocolate prices in response to cocoa inflation.

However, higher prices could lead to reduced consumer demand. 

“Companies will have to be careful about how they manage the elasticity of demand for chocolate, especially as consumers might not be able to take the price hikes needed to offset the huge increase in cocoa costs,” noted Celine Pannuti, head of European Staples & Beverages at J.P. Morgan.

“We have seen some shifting away from chocolate to other products, whether that’s cookies or salty snacks. We think chocolate’s losing a bit of share, so consumers are certainly reacting to higher prices,” added Goldman.

To combat this, some manufacturers are innovating with alternative recipes requiring less cocoa or reducing product sizes, a practice known as 'shrinkflation.'

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However, Pannuti said, “But whilst these are some avenues that companies are taking, consumers will ultimately have to face up to higher prices.”

J.P. Morgan Research forecasts that cocoa prices will remain elevated but may decrease slightly to around $6,000 per metric ton in the medium term.

Prices may move off the peak but will likely stabilise at elevated levels until there’s a genuine supply-side response.

Changes in global climate patterns, such as a potential transition from El Niño to La Niña, could improve cocoa yields in key producing regions, offering some relief from high prices. Increasing cocoa plantings will be essential for long-term supply stability and price moderation.