What is the story behind the rise in cocoa prices and what does climate change have to do with it?

2024-05-28 2024-05-28T11:04:16Z

ArabiaWeather - The sharp rise in food commodity prices is a rare phenomenon. However, this is what is happening now in the cocoa market. During the past year, cocoa prices in New York rose by more than 200%, and have continued to rise by 97% since the beginning of 2024.

In London, cocoa futures prices rose even more, with May 2024 contracts gaining 105% since the beginning of the year.

Cocoa prices will double in 2023 as a result of poor harvests in Ivory Coast and Ghana, the main producers, as well as a scramble by processing companies to obtain cocoa beans.

What is the relationship between high cocoa prices and climate change?

Answer: According to a study conducted by Saxo Bank and published by Al Arabiya Business, the significant rise in cocoa prices is due to a group of factors, especially in West Africa. Ivory Coast and Ghana are the leading global producers of cocoa beans, and since last year these countries have been experiencing difficult climatic conditions, especially high temperatures, which has negatively affected cocoa production.

In addition, the increasing costs of pesticides and fertilizers have placed financial pressures on farmers, making it difficult for them to purchase these essential crop maintenance components. The spread of pests targeting cocoa plants has exacerbated the reduction in yields.

The impact of rising cocoa prices on traders and investors

Ole Hansen, head of commodity strategy at Saxo Bank, explained that the current conditions in the cocoa market pose a major challenge for traders and investors.

He noted that the decline in cocoa production - evidenced by a 40% decline in the number of arrivals at Ivory Coast ports compared to the previous season - led to a crisis in the supply chain. This reduction in supply occurs at a time when a significant portion of cocoa has been previously sold to companies and manufacturers of cocoa and chocolate products.

Hansen stressed, in his statements, that these entities find themselves forced to search for alternative sources to fulfill their obligations, which has led to increased pressure on the futures market for cocoa prices.

The repercussions of high cocoa prices on the consumer

On the other hand, Hansen explained that consumers may not notice the direct impact of rising cocoa prices immediately, as it takes 6 to 12 months for these increases to be reflected in the retail prices of the products. However, Saxo Bank expects that consumers should prepare for higher chocolate bar prices in the near future.

Hansen also pointed out the possibility of an increase in the phenomenon of shrinkage, where the volume or quantity of chocolate in chocolate bars is reduced while maintaining the same price, which means that the quantity supplied at the same price will decrease.

As for hedge funds, Aaron Leslie John, senior market analyst at Century Financial, noted that major cocoa factories in Ivory Coast and Ghana have stopped or significantly reduced processing because they cannot buy the beans, which increases the possibility of global chocolate prices rising. As Easter approaches.

John confirmed that hedge funds began piling into the cocoa market since the end of 2023, exacerbating the record rise in prices as a result of poor harvests in West Africa. He pointed out that prices in the London market reached 7,454 pounds, while cocoa futures contracts in New York reached an all-time high of $8,959.

John explained, citing statements by Martijn Bruhn, former head of cocoa and chocolate trading at Cargill, that the exposure of hedge funds to cocoa market risks is the largest historically and although hedge funds are not the primary source of this rise, they can amplify justified market movements. Essentially to extreme levels in a low liquidity market environment.