Red Sea, climate-juiced weather heat up cocoa prices
State of play: Prices for the benchmark cocoa contract, traded on the Intercontinental Exchange in New York have risen relentlessly, crossing $5,000 last week and setting a fresh record at $5,611 on Thursday.
The big picture: About two-thirds of the world's cocoa production happens in the West African nations of Ivory Coast and Ghana, a large portion of which is exported to Europe.
- Soaring costs could also weigh on the bottom lines of candy producers like Hershey, which warned about rising costs in its fourth quarter earnings call on Thursday.
- The Red Sea crisis could act as a fresh catalyst in driving up already high prices, as freight rates impacting international trade react to conflict in the region, according to a recent report by the International Cocoa Organization (ICCO).
Driving the news: On Thursday, just as prices probed new highs, Hershey reported flat sales in Q4 compared to last year. The candy giant struck a cautious tone as spiking cocoa and sugar costs squeezed sales volumes.
- In its recent earnings report, CEO Michele Buck said that "historic cocoa prices are expected to limit earnings growth this year."
Be smart: Cocoa harvests are twice a year — mostly from October to March for the main crop and from May to August for the mid-crop.
- But last year, frequent El Niño conditions set the world's top cocoa producers into a prolonged dry spell, impacting production.
- During the last quarter of 2023, heavy rains that swept West Africa led to the spread of black pod disease and swollen shoot virus, threatening the output.
What they're saying: Climate change and El Niño conditions are playing a much bigger role in driving up the prices, according to Tedd George, founder and the Chief Narrative Officer at Kleos Advisory.
- "A major crisis is underway in the cocoa sector and any kind of surplus that might have existed in the sector has gone," said George. "With climate change, it's going to be impossible to continue."
State of play: The Ivory Coast cocoa regulator, Le Conseil Cafe-Cacao, recently stopped selling contracts for cocoa exports forward sales for the 2024-25 season, due to declining production numbers.
What we're watching: With consumers already reeling from high food prices, sky-high cocoa could drive up costs for chocolates and candies, something to keep in mind as Valentine's Day approaches.