🚩Supply shock concerns rise as African factories stop production
In the fourth year of a market deficit, the cocoa crisis seems to be deepening, with futures gaining today 5% today, reaching new historic highs. African cocoa-processing factories are running out of bean stocks, and major plants are not accepting high purchase prices for the commodity. Major African factories in Côte d'Ivoire and Ghana (60% of global production) have halted or reduced processing of the beans. According to four sources cited by Reuters, factories are abandoning purchases of the expensive cocoa.
- One of the largest producers, Transcao, relayed that it has stopped buying cocoa due to prices. Reuters anonymous sources indicated that there is virtually no production at the plant, although Transcao maintains that it is processing the stocks it has
- Another anonymous Reuteres source believes that some of the large state-owned plants in Ivory Coast, which produces nearly half of the world's cocoa, may close. Due to the rally in raw material prices, profitability and production capacity are falling
- Cargill was said to be struggling to source beans for its main processing plant in the Côte d'Ivoire, which halted operations for about a week in February
- In Ghana, which is the second-largest cocoa producer Cocoa Processing Company (CPC) has repeatedly suspended operations for several weeks after the start of the season (October 2023). The company has indicated that it is processing beans at about 20% of capacity
Is the mechanism winding itself up?
- High cocoa prices are causing large farmers to sell beans on the spot market, rather than honoring long-term supply contracts for middlemen, at predetermined (usually lower and regulated prices)
- On the other hand, some middlemen-dealers overpay for supplies in order to secure them, then sell them on the spot market instead of supplying them to targeted buyers like global traders or companies like Hershey and Nestle
- This year, however, the factories have not received the proper quantities of cocoa they ordered in advance and cannot afford to buy at higher spot prices.
- Due to problems in the production chain, global chocolate prices may rise, and demand is still at a record high and growing especially in Asia. According to Tropical Research, the market needs to enter a phase of demand destruction that will free up supply.
Retail chocolate prices in the U.S., in 2023, rose 11.6% year-on-year. Global cocoa production is expected to decline by about 11% this year, according to ICCO estimates. Processing is expected to decline by nearly 5% due to more difficult availability of cocoa beans. On the other hand, it should be remembered that chocolate is a discretionary product, and with consumers being more cautious, companies like Hershey (HSY.US) may struggle to make margins on sales and as a result, avoidng price increases. The futures market is buying and expect a further rally driven by supply shock.
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Source: xStation5
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