Cocoa prices drop on surplus forecast
The world of commodities is always volatile and subject to many external factors that can affect prices. One such commodity is cocoa, which is used to make chocolate, and the latest forecast is projecting a surplus of cocoa beans, leading to a drop in prices.
The International Cocoa Organization (ICCO) is a body that monitors and provides data on the cocoa industry. According to their recent report, the world production of cocoa beans is expected to increase by 4.7% to 4.85 million tonnes in the 2020/21 season. At the same time, the global grindings of cocoa, which is the process of converting cocoa beans into chocolate, is expected to only see a 1.4% growth to 4.69 million tonnes. This is causing concern amongst cocoa traders and investors, leading to a significant drop in cocoa prices.
So, what are the factors behind this surplus forecast, and how does it impact the chocolate industry and the broader market?
Factors affecting cocoa prices
1. Weather conditions
One of the primary factors that can affect cocoa prices is the weather. Cocoa is primarily grown in West Africa, with Ghana and Ivory Coast being the two largest cocoa-producing countries in the world. These regions are susceptible to extreme weather conditions, such as drought and floods, which can affect cocoa production. Dry weather conditions can reduce yields, while floods can damage crops, leading to a shortage of supply and an increase in prices. In recent years, the cocoa industry has also been affected by climate change, which has led to unpredictable weather patterns, making it harder to forecast prices accurately.
2. Demand and supply
The demand for cocoa is mainly driven by the demand for chocolate and other cocoa-based products. The more chocolate is consumed globally, the higher the demand for cocoa beans. At the same time, the supply of cocoa beans is affected by a combination of factors, including weather conditions, labor, and disease outbreaks in cocoa farms. When supply exceeds demand, prices fall, and when demand exceeds supply, prices rise. For example, the recent surge in demand for premium chocolate has led to an increase in prices of cocoa beans used in these products.
3. Currency exchange rates
The cocoa industry is global, and currencies play a significant role in determining prices. Fluctuations in exchange rates can affect the world market prices of cocoa. For example, if the US dollar strengthens against other currencies, cocoa prices, which are usually priced in dollars, will increase. On the other hand, if the dollar weakens, cocoa prices will likely fall.
Impact on the chocolate industry and broader market
The projected surplus in cocoa beans has caused concern amongst cocoa traders and investors, leading to a significant drop in cocoa prices. This drop has far-reaching implications for the chocolate industry and the broader market.
1. Chocolate manufacturers
Chocolate manufacturers are the primary users of cocoa beans. Therefore, a drop in cocoa prices is good news for these companies since it lowers their production costs. A lower cost of production may translate into lower prices for chocolate, which could lead to increased demand for chocolate and other cocoa-based products.
2. Farmers and producers
For cocoa farmers and producers, a drop in cocoa prices can be devastating. Many small-scale farmers in West Africa depend on the cocoa industry for their livelihood. When prices fall, they earn less for their crops, making it harder for them to make a living. In some cases, farmers may be forced to abandon their farms or switch to other crops, leading to a shortage of cocoa supply in the long run.
3. Investors
Cocoa investors are also affected by the drop in cocoa prices. Many investors buy cocoa futures contracts, which allow them to bet on the future price of cocoa. When prices fall, these investors lose money, and if the trend continues, it may discourage them from investing in cocoa in the future.
In conclusion, the forecasted surplus of cocoa beans is causing a drop in cocoa prices, which has significant implications for various players in the cocoa industry and the broader market. While the chocolate industry may benefit from lower production costs, cocoa farmers and producers may be adversely affected, leading to a shortage of cocoa supply in the long run. Investors are also likely to face losses due to the drop in cocoa prices. As always, the commodity market is volatile and unpredictable, and it remains to be seen how cocoa prices will evolve in the coming months and years.
References
- International Cocoa Organization (ICCO). (2020). Quarterly Bulletin of Cocoa Statistics.
- Reuters. (2020). Cocoa faces surplus after 2019 deficit; virus hits Asian demand.
- World Cocoa Foundation. (2020). Cocoa Fast Facts.