Cocoa price forecast: Will demand fall further as inflation bites?
The US cocoa future prices continued to fall over the past month as global inflationary pressures and recession fears capped consumption and hit demand.
The September New York Cocoa contract traded on the Intercontinental Exchange (ICE) fell to $2,356 a metric tonne (t) on 6 July, down 6.5% from a month ago. The September cocoa contract price was also 2.3% lower year-on-year, ICE data showed. Previously, the September contract hit a high of $2,841/t on 10 February 2022, the highest since 5 July 2016.
Cocoa prices were rising since the end of 2021, hitting multi-year highs as global demand bounced back following the easing of Covid-19 restrictions in the US and Europe. This boosted consumption of chocolates, in turn lifting the commodity price.
Cocoa beans are a key raw material for the manufacturing of chocolates. The ICE Cocoa contract is the global benchmark for the soft commodity.
The cocoa price uptrend was halted by reduced demand as inflation led to lower consumer purchasing power.
“Inflation, which is reputed to weaken the purchasing power of consumers, could possibly
constrain the consumption of non-essentials and luxury goods including cocoa products should the situation persist,” said the International Cocoa Organization (ICCO) in its market report published in May.
US chocolate sales grew in 2021 but cocoa content set to fall
Chocolate and candy retail sales hit a record high of $36.9bn in the US in 2021, up 11% from a year ago, data from industry association the National Confectioners Association (NCA) showed in March. The total confectionery category is projected to reach $44.9 billion in sales by 2026.
According to the NCA, retail sales of chocolates grew by 9.2% year-on-year to $16.7bn in 2021, while unit and volume sales climbed by 2% and 4% respectively.
“While dollar sales were boosted by inflation, total chocolate and candy improved in unit and volume sales as well — making 2021 a true record-high performance,” said NCA in a 2022 report.
The higher retail sales and demand were also reflected in one of the world’s largest chocolate producers Mondelez International’s (MDLZ) first-quarter financial results. The US-based chocolate and confectionery maker includes brands such as Cadbury Dairy Milk, Toblerone chocolate, OREO etc.
Mondelez’s net revenue increased to $7.76 bn in the first quarter, up 7.3% from the same quarter last year. The company’s gross profit climbed by 0.6% year-on-year to $2.98bn.
Despite higher revenue and gross profits, Mondelez’s gross profit margin shrank by 260 basis points to 38.4% “primarily driven by lower mark-to-market gains from derivatives”, the company said on 26 April.
The chocolate maker also cited higher raw material, transportation costs as factors which reduced its profit margin and is expecting the high production costs to remain for the rest of 2022.
In March, the company announced that in response to the higher production costs it will be cutting the size of its Dairy Milk sharing bars by 10% while maintaining the same retail price. This is one of the “cost discipline” approaches that chocolate producers commonly undertake during periods of high inflation, and is an example of shrinkflation.
World cocoa production expected to fall in 2021/2022
According to the ICCO’s forecast published on 31 May, the global cocoa production was expected to fall to 4.923m tonnes for the 2021/2022 season. As a result, cocoa output for the season was expected to be 6% below the record production volume of 5.24m tonnes achieved in the previous season.
The fall in output is primarily driven by lower production in Ghana, the second-largest grower by volume after its neighbour Ivory Coast. The top five cocoa producers are the Ivory Coast, Indonesia, Cameroon, Nigeria and Ghana. Together they account for 70% of the world’s cocoa production.
Ghana produced 1.05 million tonnes of cocoa in 2020/2021 – the first time the country’s output exceeded a million tonnes. However, the output was expected to plunge to 800,000 tonnes in 2021/22, down 24% from the previous season.
Cocoa growing conditions in Ghana were impacted by the unseasonably harsh yearly Harmattan wind blowing from the Sahara this year, causing a period of severe drought and stunting the growth of cocoa pods in Ghana.
Amid lower output, cocoa bean grinding volume increased in the first quarter this year.
Cocoa grinding takes place before the refining process to make cocoa butter, the key ingredient for chocolates. The level of grinding activity therefore reflects overall consumer demand.
According to the European Cocoa Association’s data, the volume of cocoa beans processed in the first quarter of 2022 increased to 373,498 tonnes, up 4.4% from the previous year.
Cocoa price forecast for 2022 and beyond
Amid mixed data and market outlook, analyst cocoa price predictions varied widely. Dutch agricultural bank Rabobank warned that weather risks remained high this year, which could impact soft commodities output and support the cocoa price forecast.
“Weather risks are high, with a heat wave in the US and Europe and an active La Niña. Energy prices are still pushing costs of pretty much everything up, and container scarcity is far from over,” said Rabobank in June.
According to the World Bank’s cocoa price forecast for 2022, the organisation expected the average cocoa prices at $2,450/tonne during the year. The price was projected to continue rising to $2,500/tonne in 2023 and $2,530/tonne in 2024.
In World Bank’s previous forecast released in October 2021, the organisation saw cocoa price to reach $2,730/tonne in 2030. Due to the market volatility caused by the war in Ukraine, analysts are reluctant to provide a long-term forecast and the World Bank has since withdrawn its previous cocoa price forecast for 2030.
According to financial data provider TradingEconomics’ cocoa price forecast, the commodity was expected to trade at $2,215.17/tonne by the end of the third quarter. The site expected cocoa prices to fall further to $2,072.25 in the next 12 months..
The algorithm-based forecasting service Wallet Investor was more bullish, forecasting the commodity to rise to $2,411.72/tonne in the next 12 months. It expected cocoa prices to continue to climb to $2,737.18 in five years’ time.
Gov.Capital’s algorithm-based cocoa price forecast was even more bullish, expecting the commodity prices to reach a new record high in 2023 and continue to climb in the next five years. According to Gov.capital’s cocoa price forecast 2025, the commodity price could be just under $9,000 a tonne in 2025, an all-time high.
Note that analysts and algorithm-based cocoa price predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never invest or trade money you cannot afford to lose. Remember that past performance does not guarantee future returns.
FAQs
Is cocoa a good investment?
Whether cocoa is the right investment for you depends on your investing goals, risk tolerance, and portfolio composition. You should always conduct your own research and never invest money that you cannot afford to lose.
Will cocoa prices go up or down?
According to the World Bank’s cocoa price forecast for 2022, the organisation expected the average cocoa prices at $2,450/tonne during the year. The price was projected to continue rising to $2,500/tonne in 2023 and $2,530/tonne in 2024. Note that analyst predictions can be wrong and shouldn’t be used as a substitute for your own research.
Should I invest in cocoa?
Only you can decide if cocoa is the right investment for you or not. You should always conduct your own due diligence before investing. And never invest money that you cannot afford to lose.
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