Impact of Cocoa Crisis on Chocolate Industry and Strategies of Leading Players

Cocoa Bean
Published Apr 19, 2024
Winds exacerbating dry conditions in West Africa are heightening crop damage concerns, compounding existing challenges like unfavorable growing conditions and crop diseases, particularly in Ivory Coast and Ghana, the world's leading cocoa producers. Cocoa prices have surged across all levels, with Ivory Coast raising its official cocoa farmgate price by 33.33% and Ghana following suit with up to a 50% increase to deter bean smuggling. Global cocoa prices have reached historic highs, with the ICCO daily price soaring by 276% YoY in 2024. Leading chocolate manufacturers are expected to pass on these increased costs to consumers, potentially leading to price hikes of up to 8%. While larger multinational companies like Nestlé and Mars may weather the storm better due to their financial resources and diversified product portfolios, smaller chocolate companies face closure risks, with estimates suggesting up to half could shut down within a year due to cocoa price surges. Despite their resilience, even industry giants face challenges in maintaining competitive pricing and managing cost pressures amidst rising cocoa prices, potentially influencing consumer behavior and demand for alternative products.

Impact of Challenges in West African Cocoa Production

Winds exacerbating dry conditions are raising concerns of crop damage in West Africa, compounding existing challenges such as unfavorable growing conditions and crop diseases. These factors have constrained cocoa production in Ivory Coast and Ghana, which collectively produce more than two-thirds of the world's cocoa. The unfavorable weather pattern heightens worries about potential reductions in cocoa yields, which could further limit global cocoa production.

Amidst these challenges, cocoa prices surged across all levels, from farmgate to export prices. In Ivory Coast, the Coffee and Cocoa Council (CCC) implemented a significant increase in the official cocoa farmgate price, rising to USD 2.47 per kilogram (CFA 1,500/kg) from USD 1.65/kg (CFA 1,000/kg), marking a substantial 33.33% increase effective April 2. While this increase is expected to benefit local cocoa farmers by improving profit margins, they still receive significantly lower prices compared to neighboring countries like Togo and Uganda. In response to the Ivorian price increase, Ghana, the world's second-largest cocoa producer, has also re-evaluated its farmgate price, raising it by up to 50% to increase farmer’s profits and deter bean smuggling.

Global cocoa prices have soared to historic highs. The International Cocoa Organization's (ICCO) daily price, which measures the average of the quotations of the nearest three active futures trading months on ICE Futures Europe (London) and ICE Futures US (New York), reached USD 10,526.38 per metric ton (mt) on April 12, marking a 276% increase from 2023.

Figure 1: ICCO Daily Price

Source: ICCO

Impact on Chocolate Prices

To cope with rising cocoa costs, leading chocolate manufacturers are expected to pass on these expenses to consumers, perpetuating the bullish trend in the chocolate industry. For instance, Barry Callebaut anticipates potential price increases of up to 8%, while the price of Mondelēz International's Cadbury Freddo chocolate has surged over 150% year-on-year (YoY) in 2024.

Strategies of Leading Players and Outlook

The soaring cocoa prices have put chocolate makers in a precarious position, especially considering their low inventory levels over the past 15 months in anticipation of a price correction that never occurred. Smaller chocolate companies are particularly vulnerable, with estimates suggesting that up to half of them could face closure within the next year due to the surge in cocoa prices. However, large multinational companies like Nestlé, Mars Inc., and Ferrero may have an easier time weathering the cocoa price storm due to their substantial financial resources. While they dominate the chocolate market and sell a vast array of chocolate products, many of their offerings contain lower cocoa content compared to smaller, high cocoa-content brands.

These larger companies often have diversified product portfolios that include a wide range of confectionery items, not solely reliant on high cocoa content chocolates. Additionally, they may have long-term contracts or hedging strategies in place to mitigate the impact of cocoa price fluctuations. Moreover, their global presence allows them to adjust pricing strategies and allocate resources across different markets to manage cost pressures effectively. However, even for these industry giants, the surge in cocoa prices presents significant challenges. While they may have greater financial resilience, they still face pressure to maintain competitive pricing and protect profit margins. Additionally, rising cocoa prices could influence consumer behavior, potentially leading to shifts in purchasing patterns or demand for alternative products.

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