We’ve recently written about the challenges in the coffee trade due to the price levels being at record highs, which you can revisit here. As if to underscore our thoughts about these challenges both generic and current, the market and the invisible hand of Adam Smith have responded – but for a different commodity.
Cocoa prices have been all over the place as of late and the trading cycle has changed with a remarkable price drop over these last few weeks. Let’s take a closer look.
One of the primary reasons why commodity businesses face financial challenges is the inherent volatility of the markets in which they operate. Commodity prices are influenced by numerous factors such as global supply and demand dynamics, geopolitical events, weather conditions, and economic cycles. These unpredictable variables can lead to substantial price fluctuations that impact profit margins.
For instance, a sudden oversupply of a particular commodity can drive prices down, making it difficult for businesses to cover their production costs. On the other hand, unexpected increases in demand can result in scarcity and artificially inflated prices, leading to market speculation. Commodity businesses must constantly monitor and adapt to these price movements, as failing to do so can lead to significant losses.
Global cocoa market
In general, weather conditions are always a critical factor in agricultural commodities and cocoa is no exception. Cocoa production requires very specific weather conditions, both in temperature and rainfall. The global warming can have far-reaching consequences for cocoa farmers and the overall supply of cocoa, and is indeed have a huge impact right now. Chocolatiers all over the world are raising consumer prices as a result of poor harvests.
Moreover, in terms of pricing, the oligopolic position of these countries has resulted in price fixing. The Ghana Cocoa Board is a Ghanaian government-controlled institution that fixes the buying price for cocoa in Ghana, while the GUCE in Ivory Coast does the same. Ghana is the second biggest producers of cocoa in the world (behind Côte d’Ivoire, the two countries together being responsible for 60% of global production), where trading houses are said to face losses of at least one billion dollars on cocoa derivates due to supply shortage, according to sources at Reuters. The news agency had previously reported that as much as 350,000 tons of beans will have a delaid delivery into next season due to poor crops, as bean disease decimates harvest in Ghana’s key cocoa farming region.
Price levels
The current dynamics in the cocoa trade are not a night-and-day type of scenario. Indeed, as developments on the production side, climate change and the dynamics of hedging have taken hold, it has been a very interesting moment of volatility in the market for a while now – as we’ve already addressed after this year’s World Cocoa Conference. After a rather steady rise in the price of cocoa beans over the last few years, we’ve seen huge spikes in the Spring – with future contracts setting new heights.
At the time, we were heading towards a record supply crunch for the third year in a row, with the International Cocoa Organization expecting production to fall short in 2024 once more. Indeed, we’re looking at an 8.5 percent shortage with another deficit looming, resulting in a chaotic market. Late in April, the rain in drought-ridden western Africa, home to four-fifths of the global crop, resulted in the biggest-ever intraday price fall.
Production shortages and price forecasts
Last May, sources at Confectionary News warned for panic buying in the US market, at a time when the expected delay in Ghana production was less sizeable than current numbers. More recently, Confectionary News reported that the mid-July number for the Ghana cocoa season production sat at fewer than 430,000 metric tons, or less than 55% of the country’s average annual output. Major league commodity trader Pierre Andurand goes so far as to claim we might be running out of cocoa altogether.
“Basically, we have a massive supply shortage this year”, he told Bloomberg (previous link). “I mean, we see production down 17% relative to last year. Most analysts out there have it down 11%, but that’s because they tend to be very conservative. We’re in a situation where we might actually run out of inventories completely.”
At the same time, Allied Market Research forecasts a significant growth in the global cocoa market, driven by rising chocolate consumption and a demand for premium products. Indeed, Barry Callebaut, the world’s leading manufacturer of high-quality chocolate and cocoa products, has reported a sales volume gain of 0.4% and a sales revenue gain of 23% in the nine-month period ended May 31, according to Food Business News. The Allied Market Research report, called Cocoa Market by Product Type, Process, Nature, Quality, and Application: Global Opportunity Analysis and Industry Forecast, 2021–2027, states that ‘the global cocoa market size was valued at $12,874.0 million in 2019, and is estimated to reach $15,501.1 million by 2027, registering a CAGR of 4.3% from 2021 to 2027.’
Cocoa and Agiblocks
CTRM solutions for cocoa need to handle the general complexities of any particular commodity, along with providing features such as usability, performance and integration. However, cocoa trading has a number of very specific aspects to it that not every CTRM solution will be able to handle with ease, or even at all. We will walk you through some of them, as Agiboo has made it its mission to handle all of them – with Agiblocks.
While Agiblocks is a strong contender across many commodities, it is extremely strong in terms of meeting the specific requirements of the cocoa markets with a number of customers implemented and using the software to support their cocoa trading businesses. Agiblocks provides all of the that are specific to cocoa – including the market dynamics.
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Agiblocks CTRM is our flagship software solution. Agiblocks software supports trading management as well as financial management from the same source of data and within the same easily accessible application. Its modular structure allows you to implement an end-to-end solution or to select individual functions to implement only the functions you need.
Would you like to have a demo of our Sampling module in Agiblocks? Feel free to reach out to us to get a full picture of the Agiblocks suite.
