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Rising cocoa prices putting pressure on chocolate manufacturers

16 February 2014

In December 2013, the International Cocoa Organization (ICCO) increased its estimate for the production deficit in 2012/13 and expressed concerns over “a further shortfall in 2013-14”, based on weather concerns in West Africa, an ageing farming population and ageing cocoa trees in Ghana and Côte d’Ivoire. In contrast, estimates for world consumption have been raised, driven by “robust processing activities… in the July to September period”. Surging chocolate consumption in Asia, particularly in China, suggests continued strong demand.

A number of commodity websites have been looking at the chocolate sector in China. According to Euromonitor, chocolate sales in China rose by 6.9% in 2013, with a further increase of 6.6% projected for 2014. According to analysts at Phillip Futures, “China is currently a huge untapped market and as China grows economically, we can expect China to be a major threat that may further worsen the supply shortage situation of the cocoa market.” Three companies – Mars, Nestlé and Ferrero – dominate the Chinese chocolate market, holding collectively 70% of market share. In December 2013, Hershey purchased the Shanghai Golden Monkey Food Company as part of its efforts to penetrate the US$12 billion Chinese chocolate market, while Asian chocolate sector players are also looking to capitalise on the growing market in China.

In the global market, industry commentators see Cargill, the second largest company in the cocoa sector, emerging as the leading candidate to purchase the third largest, ADM Cocoa. This could lead to further concentration of ownership in 2014 in a sector that is already “a very consolidated market”.

Reports on Agrimoney.com noted that prices for March 2014 futures contracts in New York reached the second highest level since September 2011, 30% above the lows of June 2013 and up 21% over the calendar year. They forecast a continued rise in cocoa prices during 2014, projecting price increases of between 4 and 7% over the calendar year. According to Rabobank, consumption will “[continue] to outstrip production”, with stock levels being depleted.

Cocoa: Quarterly price projections for 2014

  1st quarter 2014 2nd quarter 2014 3rd quarter 2014 4th quarter 2014
Rabobank New York price (US$/tonne)

2,850

(€2,096)

2,900

(€2,132)

3,000

(€2,206)

3,050

(€2,243)

Commerzbank London price (£/tonne)

1,775

(€2,130)

1,800

(€2,161)

1,800

(€2,161)

1,850

(€2,221)

Source: ‘Cocoa bucks ags’ in 2013 losses – and to outperform in 2014 too’, 2 January 2014

Note: euro figures added for purpose of comparison across the two projections (US$1=€0.73528; £1=€1.20055, 6 February 2014).

Reports on Confectionerynews.com have commented that cocoa price increases are putting pressure on chocolate manufacturers to increase retail prices, causing “cocoa butter prices, which account for a quarter of the ingredients cost of chocolate, to rise 80%”. However, manufacturers are adopting other strategies, with reports suggesting that the decision to reduce the portion sizes of Mars bars may have been driven by economic considerations, rather than the health considerations highlighted by the company. Another strategy is the use of sweeteners: according to Barry Callebaut, stevia-based products “have been heralded… as the most viable sugar alternative in chocolate that can create a bar with around 30% fewer calories”.

Industry experts are suggesting that a two-tier chocolate market will emerge as brands “position themselves as either premium or affordable”. They believe that “premium chocolate will develop like the wine sector, with cocoa origin blends tailored to meet aromatic profiles”, including “premium products developed to Chinese tastes”. Meanwhile, they suggest that “economical chocolate could explore more cocoa-butter equivalents and alternatives to allay the rising cost of cocoa butter”. 

Editorial comment

Rising Chinese demand and weather-related setbacks in West Africa are playing an important role in supporting cocoa prices. Many western companies are busy positioning themselves to consolidate their cocoa supply base, in order to be able to serve expanding cocoa product markets in Asia. The scope for expansion in China, for example, is enormous. Currently, China’s annual per capita consumption of chocolate is small: the average Japanese consumer accounts for 11 times more, the average American consumer 44 times more, and the average German consumer a massive 82 times more chocolate consumed in a year.

It is unclear how chocolate consumption in Asian markets will evolve. Currently, according to Hershey, “milky candy” makes up 30% of China's confectionery market. However, consumer taste in the chocolate sector is still at an early stage of development and there may be scope to influence taste development towards higher-value dark chocolate. This could then have a major impact on the volumes of cocoa consumed by the Chinese market, and would in turn be likely to have an important bearing on the global balance of supply and demand, and hence on prices.

More broadly, a key policy challenge facing major West African cocoa producers is how to harness rapidly expanding demand for cocoa products in China and elsewhere in Asia, in ways which improve their revenue positions and foster structural development of their cocoa sectors.

For smaller ACP cocoa producers focused on fine/flavoured cocoas, the key policy challenge is how to position themselves vis-à-vis established and emerging producers of premium chocolate brands in ways that enhance their net revenue positions and provide a secure base for long-term investments.

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