The bitter truth unfolding in the chocolate world, explained

India produced about 30,000 tonnes of cocoa in 2022-23. This, however, is not enough to meet domestic demand. That same year, India imported about 26,000 tonnes of cocoa beans, 23,400 tonnes of cocoa butter and 48,100 tonnes of cocoa powder—all of which are used to make chocolate. In line with international prices, India’s average import prices of all three cocoa variants have risen in recent months.

The ministry of agriculture has forecast that cocoa production for 2023-24 will remain at about the same levels as 2022-23. The forecast for acreage on which cocoa is grown is similar. With no increase in domestic supply in the immediate term, domestic farm prices have risen sharply as well, tripling in less than two months.

While the global rise in cocoa prices is unprecedented, it comes after years of fairly low and stable cocoa prices. While this was good for consumers, it hit farming livelihoods in the main producing countries.

Mix and match

The rise in global prices of cocoa, sharp though it has been, will still take time to filter down to domestic prices. That’s because major industrial users of cocoa, and other cocoa derivatives such as cocoa powder, buy cocoa through supply contracts where prices are fixed for a period of time. Further, the manufacture of some types of cocoa derivatives such as chocolate compounds (used in the baking industry) often uses vegetable oil along with cocoa powder, rather than cocoa butter, since it is cheaper.

While India imports beans from Africa and South America, it imports far greater quantities of cocoa butter and cocoa powder, processed from cocoa beans, from South-East Asian countries such as Indonesia and even Singapore. These derivatives of cocoa are then further processed here into final products like chocolates.

Despite these alternatives, domestic wholesale prices have already escalated. The Wholesale Price Index (WPI) for cocoa and cocoa powder has increased from annual growth of 3-4% in mid-2023 to 7-8% currently.

Internationally, consumers have begun cutting down on chocolate consumption, with sales in the US on a downturn, according to JP Morgan. “In a bid to regain market share, some manufacturers are innovating with recipes that call for less cocoa—for instance, chocolate bars containing a higher proportion of fruits and nuts—while others are reducing the size of their products,” said JP Morgan about the US market.

If the price surge continues, similar trends may emerge in India. However, a better crop in the major producing countries this year could moderate prices by late 2024.

Long-term issues

Global cocoa production fell 11% in 2023-24. The volume of cocoa being ground to convert into cocoa products fell by around 5%. The ratio of cocoa stocks (which includes cocoa beans held over from previous years) to the amount ground in 2023-24 fell below 30%—the lowest in at least 10 years. This indicates the tightness in cocoa beans available to satisfy current demand.

While prices could ease later this year if the weather holds and production improves, longer-term problems remain. “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,” Tracey Allen, an agricultural commodities strategist at JP Morgan, said in a note this month. Ghana estimates that 40% of its cocoa trees need to be replaced.

Most cocoa farmers still live below the poverty line, points out the International Cocoa Organization, a United Nations body of producer and consumer countries. They are unable to invest in the long-term health of their farms.

These longer-term structural factors were thus made worse by last year’s bad weather. “It has now manifested in an investor-driven parabolic move in prices, especially over the last six weeks,” Allen added. “For instance, non-commercial investors now hold over 60% of total open interest across cocoa futures and options in the New York market, a historical high. Consumers are now scrambling to hedge forward exposure in thin liquidity.” 

Thus, even if chocolate prices stabilize this year, the long-term outlook suggests higher costs for chocolate lovers.

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