Commodity traders, especially traders of agricultural commodities may currently be at the zenith of their trading fortune. Indeed, cocoa prices have recently soared to new heights. Since the start of 2024, cocoa prices soared more than 125%. What triggered the cocoa prices to rise astronomically?
First, the bad weather played an important role in the price increase. West Africa, particularly the Ivory Coast and Ghana, produces the majority of the world's cocoa beans. Rainy seasons in Ivory Coast run from April to October, but the region is currently facing a hotter-than-usual temperature, which could extend its lack of abundant rainfall. These regions have been hit by rough weather conditions like heavy rain, dry heat, and disease which have significantly reduced cocoa bean yields.
Cocoa Prices soaring above $9,000 per metric ton
Source: TradingEconomics
Second, market forces also played a role. With a lower supply of cocoa beans and steady demand for chocolate, the price of cocoa naturally goes up. With less cocoa beans available due to factors like adverse weather conditions, pests, diseases, or other issues affecting cocoa production, there's less cocoa to meet the existing demand. In response, buyers may compete for the limited available supply, driving prices upward. As a result, cocoa futures have more than doubled to record since the beginning of the year, with prices now surpassing $9,000 per metric ton. At the outset of 2024, cocoa was trading below $4,200 per ton.
Chocolate manufacturers are facing higher costs for cocoa beans, and some of these costs are being passed on to consumers. You might have already noticed chocolate bars costing a bit more at the store. Some companies are trying to keep prices the same by reducing the size of their chocolate products. This is known as "shrinkflation."
According to Jeff Kilburg, CEO and Founder of KKM Financial, momentum is a big component of the rise in cocoa prices. He believes that there is no end in sight yet for the rise in cocoa prices. In fact, he wouldn’t be surprised if cocoa prices jump another 50% before the rally ends. He stated:
“The additional speculative component of cocoa futures has the ability to exaggerate moves. And I think that exaggeration is currently being priced in because I believe the supply gap or supply disruption was priced in probably 25% to 30%. Commodities—which are much thinner volumes, lighter volumes, and as massively traded as a typical U.S. equity index like the S&P500, have the ability for these moves to overshoot. Whenever you see the pendulum swinging too far, there’s no rationale on when it’s going to turn around.”
Overall, the imbalance between supply and demand creates an environment where cocoa prices naturally rise as buyers are willing to pay more to secure the limited available supply, leading to higher prices for cocoa beans and ultimately impacting the cost of chocolate and other cocoa-derived products.