Only a few weeks ago the chocolate manufacturers Cadbury’s announced that it was changing the recipe for its Creme Eggs provoking an eggstreme reaction from its British fans. The change – a reduction in the cocoa content from 20% to 14% has been blamed on recent high cocoa prices. This is unlikely to have been the first or indeed the last example of so called ‘shrinkflation’ by manufacturers desperate to sidestep rising commodity costs. So are consumers going to have to get used to less cocoa in their favourite chocolate?
Source: London Strategy Unit
To recap, cocoa futures prices surged by almost two-thirds since early 2013 as Asian consumers rapidly developed a sweet tooth, leading to a depletion in cocoa inventories. Prices reached a three year high in September of $3371 per tonne amid concern that spread of Ebola would disrupt the harvest and shipments of cocoa from West Africa (home to 70% of global cocoa supply). In the end there was no disruption to supply and the spread of Ebola in the region appears to now be under control.
Manufacturers were left spooked by Ebola. Many are thought to have taken precautions, bulking up on purchases to assure themselves of not facing a shortfall if the worst case scenario of Ebola disrupting the Ivory Coast occurred. Now that fear has subsided it has left the market vulnerable to a further spill as those that bought forward aggressively no longer needed to shore up stocks.
Cocoa futures prices fell to a one year low on Friday of $2755 per tonne as demand from cocoa processors fell sharply. The Cocoa Association of Asia announced that grindings in the fourth quarter of 2014 fell 17% from a year earlier. Grindings data measure the tonnage of cocoa beans factories process and are considered a barometer of cocoa demand. European and North American processors also announced larger than expected declines.
While weaker economic growth is likely to keep cocoa prices under pressure, the longer term outlook looks a lot more challenging. According to agricultural trader Olam, global consumption of cocoa powder used in ice creams, cereals and beverages will rise by 44% by 2024-2025 while demand for cocoa butter, a product that accounts for as much as 20 percent of the weight of a chocolate bar, will grow 48% over the same period.
Olam estimate that prices will need to rise to $3300-$3600 per tonne to boost cocoa production currently constrained by land scarcity and low yields. Given that it takes 3-4 years for cacao trees to mature and produce blossoms it could be some time for recent high prices to result in a supply response and an improvement in yields.
In summary, the recent downturn in cocoa prices is likely to be brief. Enjoy your favourite chocolate while it lasts.
Related article: What risk does Ebola represent to commodity markets?