Cocoa stockpiles plunge to record low
Chocolate makers grab available reserves to counter acute global shortage
Stocks of cocoa in London and New York have plunged to all-time lows in the latest sign of a shortage that has forced chocolate makers desperate to meet Valentine’s Day demand to seek alternative ingredients.
Traders and chocolate manufacturers have withdrawn most of the lower-quality surpluses at the world’s largest commodity exchanges as the market struggles to cope with years of poor global harvests.
The scarcity of chocolate has curbed the profit margins of chocolate makers and presented consumers with smaller bars, new formulations that scrimp on the cocoa. In the US, retail chocolate prices are up to a fifth higher this Valentine’s Day than last year, according to Wells Fargo.
Inventories at Intercontinental Exchange’s London marketplace have dropped from more than 100,000 tonnes of usable cocoa a year ago to about 21,000 in recent months, company data shows.
“That is absolutely tiny, the tiniest we’ve ever seen,” said Jonathan Parkman, co-head of agriculture at commodity broker Marex. “There is no slack in the system, that’s what it tells you: We’re very, very tight.”
Independent licensed warehouses in New York are also looking worryingly empty, added Parkman. Total stocks are around 90,000 tons. “That is incredibly low for this time in the season,” he said.
The dramatic drawdown has upped the pressure on the cocoa industry, already stretched by bad weather and disease that have battered crops in the world’s main producing countries Ivory Coast and Ghana.
Prices of cocoa have tripled since the start of 2023, hitting their highest levels in 50 years in London, after three consecutive years of harvest deficits.
Warehouses serve an unobtrusive but crucial role in the commodities market. Buyers and sellers can agree to a deal for a specific amount of cocoa at a pre-determined price on a future date. The warehouses hold the physical goods that are supplied so the deal terms are met.
But owners also typically store their surpluses in the exchange warehouses, using them not for supply but to fulfil futures contracts that hedge against sudden adverse price moves.
Consequently they are often filled with beans from Cameroon or Nigeria, which are less favoured by chocolate makers than those from Ivory Coast or Ghana.
“You would expect cocoa that’s delivered against the futures market to be the cocoa that is least required within the cocoa supply chain . . . generally people deliver to the market what they don’t need themselves,” said Parkman.
However scarcity is so high that even these stocks are being depleted. Last month Hershey requested permission from the US derivatives regulator to buy up to 90,000 tonnes of cocoa through the New York exchange — nine times more than the permitted limit.
“People have been letting their futures expire so that they would get physical cocoa. And I don’t think there’s any incentive for traders to supply cocoa to those warehouses right now,” said an executive at a large chocolate maker who declined to be identified.
The industry’s readiness to snap up even lower-grade supplies has already forced some to re-evaluate the make-up of the chocolate itself.
Standard chocolates, such as those eaten in Western Europe and North America, are made from cocoa butter and cocoa liquor. Compound chocolate, however, is made from cocoa powder mixed with a substitute fat.
Fuji Oil, a large supplier to the industry, reported this month a drop in sales of industrial chocolate, the raw material used in consumer products, and a rise in revenue of substitutes, like those that derive from other plant-based oils and fats. The Japanese company also reported that their sales of compound chocolate had increased significantly.
“What chocolate makers are talking about is the new products that they’re bringing out, which will have less and less cocoa in them, and more of the other things that are less expensive than cocoa fat,” said Parkman.
Some executives question if the shortage — and the risk of not being able to fulfil a contract — would mean buyers and sellers bypass the exchange.
Michele Buck, chief executive of Hershey, admitted earlier this month that “we are seeing very low commercial participation on the exchange”.
She added that the US company had been looking at alternatives to its supply chain, including buying directly from growers.
Global prices have dropped by nearly a fifth from their December peak. Growers and sellers point to early data indications that suggest a reduced crop deficit or a potential global small surplus.
But Nicko Debenham, former head of sustainability at Barry Callebaut, the world’s largest chocolate maker, warned that would-be buyers had little alternative if exchange warehouse inventory had been depleted.
“The only way to get cocoa is to pay up on a physical differential, irrespective of what the futures price is,” he said, referring to the extra amount buyers must pay to secure an immediate supply.
That could amount to $1,500 a tonne on top of the prevailing futures price for in-demand Ivory Coast cocoa, he said.
Senior executives at chocolate companies say they are looking at all ways to cope with the high cocoa price, from more cost savings to reassessing their supply chain.
For consumers, Parkman said this means “they’re gonna have less cocoa in their chocolate, and they’re going to be paying more for it for a considerable length of time”.