Chocolate makers may have no alternative this year but to hike prices as all inputs such as cocoa, sugar and energy have turned pricier. Prices of cocoa surging to fresh 46-year high are the major cause for concern.

According to BMI, a Fitch Solutions unit, high cocoa prices have compounded chocolate producers’ problems with sugar and energy prices also weigh on margins. “In 2023, the FAO’s sugar price index was 26.7 per cent higher than 2022 and 60 per cent above its pre-pandemic average (2015-19),” it said.

“We do not expect supply-side concerns to ease in H124 and we expect that 2023-24 will be the third consecutive deficit year for the market. We expect that upward momentum will be tempered by demand-side adjustment to elevated prices,” the research agency said. 

Supply constraints

On Monday, cocoa futures in London surged to a new peak of £3,771 per tonne ($4,709.8) on prospects of continued constraints in cocoa supply from West Africa.

The Trading Economics website quoted Tropical Research Services as saying that  Ivory Coast and Ghana are facing structural barriers to production including swollen-shoot virus and an ageing tree stock that could continue to affect crops even if weather conditions improve.

The International Cocoa Organization (ICCO) said the black pod disease and swollen shoot virus due to the excess rains during the last quarter of 2023 heightened continued concerns of a shortfall in supply.

BMI said cocoa prices gained 60 per cent over the course of 2023, while the average price level of $4,218 per tonne in December was the highest nominal average price for a single month since July 1977. 

“The main factor behind the upward price momentum in 2023 was supply-side restrictions, mainly driven by unfavourable weather conditions in West Africa, where 75 per cent of global cocoa is produced,” it said. 

Volatile outlook

ICCO said during 2023, supply was the major contributory factor that fuelled bullish prices. Tropical Research Services said the outlook for cocoa supply and prices in 2024 remains volatile.

ING Think, the economics and financial analysis wing of Dutch multinational financial services firm ING, said London cocoa has traded at record levels. With expectations of a third consecutive deficit, the cocoa market is likely to remain volatile through 2024. 

“Given current stock levels, however, it is difficult to justify the degree of strength that we have seen in the market,” it said. 

BMI said climate-related concerns pose the most significant upside risks, with the likely continuation of El Niño into April 2024 expected to bring below-average rainfall in West Africa. 

Q423 grindings down

“The EU Deforestation Regulation also contributes to bullish sentiment as industry players are warning that the law could reduce the supplies of cocoa available for sale in the EU by prohibiting the sale in the bloc of commodities covered by the law that are not deforestation free,” it said.

Last week, the European Cocoa Association, the Cocoa Association of Asia (CAA) and the National Confectioners Association of North America reported a decrease in grindings for the last quarter of 2023. 

In Europe it was 2.5 per cent lower year-on-year, 8.5 per cent y-o-y in Asia and 2.9 per cent y-o-y in North America. “The slowdown in grindings confirms our expectations for a softening in volumes of cocoa consumption in Q423 given elevated price pressures,” the research agency said.

BMI said the decline reported by the CAA was only the second year-on-year decrease in Asia since 2016 other than 2020, the height of the pandemic.

Bullish sugar

ICCO said with the recent surge in freight rates due to tensions in the Red Sea area, international trade is likely to be affected. With already high cocoa prices, an additional cost resulting from high freight rates may be daunting for cocoa users and could affect demand.

In the case of sugar, which has been volatile over the past 1-½ years, prices have gained 12 per cent year-on-year, mainly on lower production in India. According to analysts, Indian sugar prices are likely to rule firm to higher this season to September in the domestic market. Globally, an additional 5 million tonnes supply from Brazil is expected to cap gains.