How European cocoa demand is fueling price rally

Cocoa prices are soaring to fresh two-week highs, driven by strong demand despite record-high prices. The European Cocoa Association had anticipated a 2 per cent decline in European cocoa grindings, but recent reports show a surprising 4.1 per cent year-on-year increase to 357,502 metric tonnes. Tedd George, Chief Narrative Officer at Kleos Advisory, sheds light on the factors behind this trend. The surge in prices, which are three to four times higher than two years ago and twice the price from last year, has not deterred consumer demand for chocolate. Despite rising prices, people in North America and Western Europe, major consumers of chocolate, continue to indulge in this luxury. Even though companies have implemented strategies like shrinkflation to offset costs, the demand for chocolate remains robust. Major players in the industry like Barry Calibo have recorded a boost in sales and revenue across various markets. The imbalance between demand and production has led to a decrease in stock levels worldwide. However, the sustainability of this trend remains uncertain. Tedd George highlights the historical precedent of cocoa crises in the late 1970s and 2008, emphasizing the need for companies to adapt to consumer preferences in the face of escalating prices. While profits are on the rise and demand shows resilience, there may be a limit to how far prices can be pushed before encountering consumer resistance. Moving on to developments in West Africa, the two largest cocoa producers, Cote d'Ivoire and Ghana, are showing signs of recovery. Cote d'Ivoire has resumed forward sales for the 2024-25 season after a six-month suspension. Analysts predict improved weather conditions in the region, boosting cocoa production prospects. Recent rainfall in Ghana has rejuvenated cocoa farmers, leading to expectations of enhanced soil moisture levels and better crop yields. However, uncertainties linger regarding the impact of the retreating El Nino phenomenon on West Africa and the crucial role of sunlight in pod development. The positive outlook for next season is a welcome relief amidst production challenges faced by both countries. In the trading sphere, higher cocoa futures have prompted traders to reduce their positions, resulting in significantly low aggregate open interest on cocoa futures. With the end of the light or mid-crop approaching, volatility in prices is expected to persist until the start of the new season in October. Regulatory efforts in Ghana and Cote d'Ivoire aim to support cocoa farmers through replanting programs and the distribution of essential inputs like better tree varieties, pesticides, and fertilizers. The success of these initiatives hinges on timely implementation to maximize the incentive for farmers amidst elevated cocoa prices.