Cocoa's Record Price Surge: Will Chocolate Santas Become a Luxury?

Sharp rises in cocoa prices in the first half of this year sparked fears that chocolate would become a luxury good in the near future. For years, prices hovered near $2,500-$3,000 per tonne, but by the end of 2023, cocoa had reached $4,000. However, this was not the end of the price rally; the price first doubled just before Easter 2024, and then almost tripled by the end of April. Although the situation calmed down for a while with the start of the new harvest season, uncertainties regarding future production have resurfaced. Are new records just a stepping stone to further increases? Will chocolate Santas become a luxury item in the future?

A Season of Loss

The 2023/2024 harvest season brought the largest deficit in history due to a sharp decline in production in West African countries. In Ghana, production fell by nearly 50%, while in the Ivory Coast, the decline reached 30%. Although cocoa demand in 2024 was lower than the previous year, the huge disparity between demand and production led to a sharp increase in commodity prices. Since the beginning of the year, prices have almost tripled, which has created uncertainty about maintaining high chocolate demand.

Chart: The deficit in the 2023/2024 season was the largest in history. Source: Bloomberg Finance LP, XTB

Uncertainty about the future manifested itself in a total capitulation of investors in the futures market. Concerns about supply and high holding costs led to a significant drop in market liquidity. The number of open positions fell to a more than 10-year low in November, while exchange inventories (used by merchants and chocolate manufacturers) fell to a 20-year low. It seems that with current concerns, stocks could quickly fall to historic lows.

Chart: The number of open positions on cocoa futures has fallen to the lowest levels in over 10 years. This means that liquidity in this market is extremely low, which favours large price movements. Source: Bloomberg Finance LP, XTB

Although exchange stocks and general stocks are quite different, it is worth mentioning that all held cocoa bean stocks relative to consumption have fallen to just 27%. In the past, stocks represented as much as 40-50% of annual consumption. Further production problems could mean that, without improvement in the next 2-3 years, cocoa will become a scarce commodity.

Chart: Exchange stocks have fallen to the lowest level in 20 years. Source: Bloomberg Finance LP, XTB

A Season of Uncertainty

After the disastrous 2023/24 season, expectations were that production in the Ivory Coast and Ghana would return to normal. West African countries account for nearly 75% of global cocoa production, so problems in this region put pressure on the global cocoa and chocolate market. The harvest in the main season, which runs from 1 October to March, went very well, with deliveries to ports in the Ivory Coast even 30% higher than a year ago. Consequently, the beginning of Q4 led to a significant price drop. Traders and manufacturers held back on purchases, expecting further price falls. However, it turns out that the improvement was only temporary.

Parts of Côte d'Ivoire were hit by heavy rains, resulting in the evacuation of many farms, some of which were destroyed or the trees attacked by diseases. A large proportion of the beans arriving at domestic ports in recent weeks were moldy, so even if they were initially approved for delivery, they will not reach the European or American markets. Many of the remaining deliveries did not meet quality criteria. The number of beans per 100 grams started to exceed 100, while only batches containing 80-100 beans per 100 grams are classified for delivery.

In other regions of the Ivory Coast and Ghana, very high temperatures and droughts are observed, which bodes poorly for the mid-crop season, which starts in April. Processors have used most of their stocks and now face the decision of whether to wait further for lower prices or rebuild stocks now at record high prices. The entry of those investors who wanted to wait out high prices could mean that we will not stop at around 12,000 points. On the other hand, the futures market itself predicts that prices will be lower in the future. On the other hand, exactly the same predictions were made a year ago, and the final spot prices on the market are significantly higher than the prices of current contracts quoted a year ago. The entry of numerous entities into the market could mean that prices will not stop at testing recent historical highs, but exceed at least $12,000 per tonne and reach significantly higher levels. 

Will Chocolate Santas Become More Expensive?

Germany is one of the largest producers of chocolate Santas in the world. In 2022 alone, almost 170 million units were produced. The vast majority are sold within the country, as it is a very common gift during St. Nicholas Day or Christmas. On the other hand, as many as 30-40% of chocolate Santas are destined for export. However, chocolate consumption itself may fall, given the continued price increases. Last year, "only" 167 million Santas were produced, while this year it is estimated that 164 million Santas will hit the market. So right now the market is slowly shrinking. 

Of course, the increase in chocolate prices is not only due to the price of cocoa itself, but also to the increase in the prices of other products such as milk and sugar. We must also not forget the costs of production, transport and sales themselves. Nevertheless, cocoa prices will weigh more and more heavily on the increase in chocolate prices. Manufacturers in Europe already in Q3 did not show as much willingness to buy as in previous quarters, as they currently have to contract at high prices. Nevertheless, given the lack of availability of cocoa beans in warehouses, they will have to start buying at high prices. According to the CFO of one of the world's largest chocolate manufacturers, Mondelez, the owner of brands such as Milka, Oreo and Toblerone, uncertainty regarding the future of cocoa prices is very high. According to Luca Zaramelli, the company is waiting for lower prices, although it must also prepare for a potential further price increase.

Does this mean that standard chocolate will become more expensive? Not necessarily. There is also a fairly common practice among manufacturers in the form of "shrinkflation". The price of the product itself does not change, but its weight is reduced or less raw material is used. Although cocoa seems difficult to replace, the prospect of significantly reduced corporate profits seems unacceptable, which is why the use of other beans is already being tested to replace mainly cocoa butter. In addition, the proportion of sugar in the products themselves may increase relative to cocoa. Ultimately, the products themselves may not become more expensive, although it will certainly not be the same high-quality chocolate that we can still enjoy now. On the other hand, a suitably communicated price increase could also be used by manufacturers to justify price increases. Therefore, it cannot be ruled out that chocolate Santas next year may be less cocoa-rich, but at least more expensive.

Chart: The price of cocoa has risen to the highest level in history, breaking the levels from April this year. Source: Bloomberg Finance LP, XTB]