Explaining the bitter truth that unfolds in the world of chocolate

India produced around 30,000 tonnes of cocoa in 2022-23. However, this is not enough to meet domestic demand. In the same year, India imported approximately 26,000 tonnes of cocoa beans, 23,400 tonnes of cocoa butter and 48,100 tonnes of cocoa powder. All these are used in the production of chocolate. In line with international prices, average import prices for all three types of cocoa in India have increased in recent months.

The Ministry of Agriculture expects cocoa production in 2023-24 to remain at roughly the same level as in 2022-23. The same goes for predicting the area where cocoa will be grown. As domestic supply will not increase for the time being, domestic agricultural prices have also risen sharply, tripling in less than two months.

The global rise in cocoa prices is unprecedented, but comes after cocoa prices have been fairly low and stable for many years. While this was good for consumers, it was a blow to agricultural livelihoods in major producing countries.

use in combination

Although the rise in the global price of cacao has been rapid, it will still take some time for it to be reflected in domestic prices. That's because major industrial users of cocoa and other cocoa derivatives such as cocoa powder purchase cocoa through supply contracts where prices are fixed for a fixed period of time. Additionally, in the production of some types of cocoa derivatives, such as chocolate compounds (used in the baking industry), vegetable oils are often used with cocoa powder rather than cocoa butter, as they are cheaper.

India imports beans from Africa and South America, but it imports much larger quantities of cocoa butter and cocoa powder processed from cocoa beans from Southeast Asian countries such as Indonesia and Singapore. These cocoa derivatives are further processed here into final products such as chocolate.

Despite these alternatives, domestic wholesale prices are already rising. The wholesale price index (WPI) for cocoa and cocoa powder has increased from an annual growth rate of 3-4% in mid-2023 to 7-8% now.

According to JPMorgan, consumers overseas are starting to cut back on chocolate consumption, and sales in the U.S. are sluggish. JP Morgan says, “To regain market share, some manufacturers are innovating recipes that use less cocoa (for example, chocolate bars with a higher proportion of fruit and nuts), while others are “We are reducing the size of the US market.

If prices continue to soar, a similar trend may emerge in India. However, if this year's crop in major producing countries is good, prices could be suppressed by the second half of 2024.

long term problems

Global cocoa production will decline by 11% in 2023-24. The amount of cocoa that is crushed for processing into cocoa products has decreased by approximately 5%. Cocoa stocks (including cocoa beans carried over from the previous year) as a percentage of crushed volumes in 2023-24 will be below 30%, the lowest in at least a decade. This indicates that cocoa beans available to meet current demand are tight.

Prices could ease later this year if the weather holds and production improves, but long-term issues remain. “Cocoa is a market where producers produce a very high-value commodity, but receive a very low share in the actual value chain. As a result, reforestation rates are very low and cocoa The trees are aging,” JPMorgan agricultural strategist Tracy Allen said in a note this month.

The International Cocoa Organization, the United Nations body for producing and consuming countries, notes that most cocoa farmers still live below the poverty line. They are unable to invest in the long-term health of their farms.

These long-term structural factors were therefore further exacerbated by last year's severe weather. “Especially over the past six weeks, that has manifested itself in investor-driven parabolic price movements,” Allen added. “For example, non-profit investors currently hold more than 60% of the total open interest in cocoa futures and options. With the New York market at historic highs, consumers are losing futures exposure amid scant liquidity. They are eager to hedge against this.”

So even if chocolate prices stabilize this year, the long-term outlook suggests rising costs for chocolate lovers.

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