Statistics show that sweets, particularly chocolate products, are one of the most popular gifts for Valentine's Day. However, it seems we may soon need to change our habits unless we want to bear exorbitant costs. This is due to the historical valuations of cocoa and, interestingly, there are no major prospects for improving this situation.
For Valentine's Day, additional shelves for chocolates, pralines, and other chocolate products can be observed in stores. However, chocolate may soon become a luxury good due to its availability, which is not as obvious. The supply chain is quite long, starting from producers of sugar, milk, and primarily cocoa. In the case of the latter, such turmoil has not been observed since the 1970s. Cocoa prices have risen to levels above $5,500 per ton, which is more than a twofold increase compared to levels a year ago. Can cocoa prices go even higher?
What makes up Valentine's chocolate?
The sweetest chocolate is largely made of sugar and powdered milk, but the whole flavor is provided by cocoa. The main ingredient of dark chocolate is cocoa powder, while in standard chocolate, the cost of cocoa is about 10%. With other ingredients remaining unchanged, the price of chocolate should increase by about 11-12% over the year (cocoa prices have risen exactly 112% in the last 12 months). Meanwhile, since the beginning of this year, cocoa prices have risen by almost 35%! However, other components must be remembered – sugar prices have fallen slightly, powdered milk is clearly cheaper, and packaging prices have drastically dropped. At the same time, labor costs are rising, and transport is not much cheaper. Therefore, it is cocoa that largely accounts for the rise in the price of standard chocolate. Of course, a price jump of 11-12% does not seem large, but it should be remembered that many manufacturers contract for the long term and have reserves purchased at much lower prices. When the price of chocolate is measured by the current price of cocoa, prices could skyrocket much more than the mentioned 11-12%.
The tragic situation in West Africa
Over 65% of all cocoa production comes from West African countries, primarily the Ivory Coast and Nigeria. Climate changes have led to weather anomalies in the form of extreme droughts during the maturation of cocoa fruit seeds and heavy rainfall during harvests. The first anomaly leads to reduced production prospects, and the second to the emergence of diseases in cocoa trees, causing not only the destruction of current crops but also reducing future yields. In the case of the two mentioned countries, there have been production and supply declines of over 30%, and it is expected that it will not get any better in the coming years. The current season is the third in a row with a significant deficit in the market, and producers have problems delivering contracted cocoa.
No prospects for increased production
The difficult weather situation is one thing. Another element is the low prices offered to farmers. For years, financial markets have maintained a situation of excessively high short positions on cocoa futures contracts. Cocoa producers are usually small, family-owned plantations that lack bargaining power and receive a predetermined purchase price, usually little correlated with the market price. Often, producers received a price that barely covered production costs and did not allow for increasing the cultivated area. Moreover, the decrease in demand during the pandemic led to a lack of willingness to increase investments. It should also be emphasized that even if producers now start reacting to higher prices, growing new supplies will take 3 to 5 years before they hit the market.
High prices are also a result of the war in Ukraine
The war in Ukraine has led to huge turmoil in the market for energy and agricultural commodities. However, it did not directly affect the cocoa market. Nevertheless, producers complained very strongly about the extremely high prices of fertilizers, one of the main producers of which is Russia. Reduced access to fertilizers and their high prices in 2022-2023 led to their lower consumption. This, in turn, translated into reduced current cocoa yields and increased susceptibility of crops to diseases.
What about demand?
In the long term, demand is growing moderately, averaging about 2-4% annually. The largest consumers are, of course, European countries and North American countries, while the fastest-growing consumer is Asia. China and India, the two most populous countries in the world, are experiencing the largest increase in consumption, though it is still at a relatively low level. Changes in consumer behavior will lead to the fact that in the distant future, the largest demand for cocoa will come from Asia. At this moment, this is not a problem, but if supply does not adjust to demand, it cannot be ruled out that by 2030 the price will double and even reach $10,000 per ton of cocoa!
On the other hand, excessive price increases may meet with the phenomenon known as demand destruction. Moreover, chocolate is not a necessity, and there are potential cheaper substitutes in the form of other sweets. Even now, a reduced sales volume is visible in the United States. Although the total sales value continues to grow, there is a clear decline in the quantity of chocolate sold, and this is not due to consumers adopting a healthier lifestyle.
Chocolate and Valentine's Day
Studies in the USA show that over 90% of consumers intend to give sweets (including chocolate) as a Valentine's Day gift. Meanwhile, in Europe, research indicates that the sale of sweets during Valentine's week increases 2-3 times compared to a standard week. At the moment, traders still have large cocoa reserves, which results in a limited increase in product prices. However, it cannot be ruled out that next year's Valentine's Day could see us paying not just a few percentage points more for chocolate, but possibly even twice as much.
XTB Research
