Cocoa prices: The top 10 most important drivers

1) Concentrated production: Two thirds of the world production of cocoa comes from West Africa with Ivory Coast the biggest world producer. This means that price is chiefly driven by supply issues in cocoa’s major producers. Any hint that supply may be worse or better than expected can have a disproportionate impact on the price of cocoa.

2) The weather: The right mix of rain and sunshine, at the right time, is needed for cocoa pods to mature properly. Climate disturbance at any phase of the growth process (from flowering to the maturing of the pods) can have a direct impact on crops by yielding shrunken or rotten pods. For example, long periods of dry weather are not conducive to cocoa bean growth.

Cocoa traders need to be on the watch for winds from the Sahara desert that typically bring dry weather and coolness to the largest producing countries from December to February.  Known as the Harmattan winds, strong dusty winds can dry out pods and damage crops.

3) Disease: Fungi and various diseases can also reduce output by reducing the yield from cocoa plantations. The most damaging disease is known as ‘Black Rod’ which was estimated to have resulted in the loss of almost half a million tonnes of cocoa in 2010. Its not just diseases afflicting the cocoa pods that can affect supply. The Ebola outbreak in 2014 forced farmers and their families to flee cocoa plantations in Sierra Leone while international buyers of cocoa refused to visit the producing areas.

4) Geopolitics: The major cocoa growers are accustomed to geopolitical uncertainty. When previous economic booms have led to bust, unrest has typically followed. As with many other countries that rely on commodities as a major part of their export revenue, the Ivory Coast has been plagued by corruption and unrest in the battle for power. Although citizens may be placated when times are good, as soon as the economic tide turns the population can turn if they do not feel that they are getting a good deal compared with those in power.

5) Infrastructure: The biggest producers of cocoa do not exactly have world class infrastructure. Something as seemingly benign as unexpected rain in December has proven to be a significant bottleneck in Ivory Cost. When crumbling roads are unadapted for trucking in the rain, transportation becomes costlier, and additional costs are shifted onto the commodity.

6) Consumer tastes: The trend towards dark chocolate (particularly in light of potential health benefits) has helped drive demand. Dark chocolate requires a higher cocoa content than milk chocolate. Meanwhile, chocolate has become increasingly popular in many emerging economies, adding to demand for cocoa.

7) Farmers: The price paid to cocoa farmers is set by the industry regulator. If farmers incomes are cut (perhaps due to a decline in the price of cocoa) then they are less likely to invest in new trees and are likely to cut back on fertiliser and other important inputs that ensure high quality cocoa beans. All of which means that both near-term and future supply prospects are lower. Lower incomes for farmers also raises the risk of civil unrest.

8) Flowering cycle:  It takes cocoa trees 3-5 years to yield a crop. But before that significant investment needs to take place by the farmer to clear and prepare the land for planting. The long lead time between decision to expand supply and the eventual harvest, combined with the risks (many of which are described above) means that supply does not expand quickly enough to respond to higher prices and / or signs of higher demand. This can result in a boom-bust market where farmers only feel confident enough to expand right at the top of the market.

9) Currency movements: Cocoa is typically priced in British pounds while the London cocoa futures contract long been used as the global benchmark for the pricing of physical cocoa. Since consumption of cocoa centred in continental Europe, and a large part of the cocoa processing industry based in the Netherlands and Germany a drop in the Pound versus the Euro increases demand for cocoa since it is now relatively cheaper to import cocoa for processing into chocolate.

10) Stocks: As with other commodities high stock levels may indicate that demand for cocoa is weak, putting downward pressure on the price. Cocoa is perishable however, and depending on how it is stored the quality (and the value) of the stocks may quickly deteriorate.

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