I had an unhealthy obsession 10 years ago.
You know those Lindor chocolates? Those sweet, round, balls of goodness? Those that melt in your mouth– Ok I will stop before it gets sus.
Back then, the Ringgit was sort of strong. So, I often ate a lot of them. But a conversation with my wife sparked a light bulb in my mind.
Cocoa (used to make chocolates) prices have more than doubled to US$9,858 in April 2024 from US$4,196 in December 2023.
Holy crap!
But what is the impact on us — the regular consumers? And does it have any impact on companies in Malaysia?
Let’s look into it!
Context: This is the Highest Cocoa Prices They Have Ever Been
The chart above on U.S. Cocoa prices said it all.
2024 has been an unprecedented year for cocoa. Prices have never been this high in past 15 years.
From 2014 to 2023, prices averaged around US$2,647, where it was relatively stable. It was only from June 2023 onwards, that prices began to shoot up.
So, what happened? Or more importantly, what are the forces of demand and supply at work here?
Let’s look at the supply side first.
75% of the world’s cocoa is produced in these four countries — Ivory Coast, Ghana, Cameroon, and Nigeria.
And production has been falling since 2020. According to data from Statista, global cocoa production fell from 5.2 million tons in 2020 to 4.4 million tons in 2023.
Less supply equals a higher price. People are competing for fewer volumes so suppliers raise prices.
What’s the reasoning then?
Long agooo .. well not too long ago. A war broke out between Russia and Ukraine in 2022. Because both these countries produce fertilisers for crops, a shortage in fertilisers sent prices soaring. This raised the cost of producing cocoa.
And weather. Oh, everyone loves talking about the weather. It’s El Nino season now, and that means West Africa is having its worst drought since 2003.
Cocoa doesn’t grow well in dry conditions. Hence, the planting of cocoa has been negatively affected.
For 2024, weather conditions have deteriorated further for cocoa, and now, diseases are also threatening cocoa farming.
We get it. Supply is declining so prices are going up. What about demand?
Demand is also heating up … tremendously.
Europe (66%) is the biggest consumer of chocolates, followed by North America (16%), South Asia (9%), Asia (6%) and finally, South America.
Revenue of chocolate confectionary products grew by an average annual rate of 5.1% from 2018 to 2023. And this trend is expected to continue with the market growing by 5.6% every year until 2028 for a total revenue of US$316 billion.
The picture is clearer now.
Lack of supply and strong demand are pushing cocoa prices up.
Which Companies Will be the Most Affected?
In the market right now, there are two types of companies. First, you have the traders-grinders that buy, refine, and sell cocoa. Secondly, you have the manufacturers that buy these products from the trader-grinders.
The traders-grinders include Barry Callebaut, Cargill, Cemoi, Cocoanect, Ecom, Olam, Sucden, and Touton. Meanwhile, chocolate manufacturers are the likes of Ferrero, Hershey, Mars, Mondelez International, and Nestle.
If the cost of cocoa increases, so will the cost of making chocolates. Companies have two choices. One, suck it up and sell their products at the same price for lower profit margins. Two, raise the prices of their products and pass the cost increase to customers.
In economics, we have this theory called the price elasticity of demand. If the product is inelastic, no matter how the prices change, customers will still buy them and vice versa.
Think of it as brand loyalty or worse, monopolies.
In my opinion, the companies listed above are all going to increase their prices.
And we will still buy their products.
But some analysts are saying there is a limit to how much they can increase prices.
My opinion is that this is true to some degree. But if cocoa prices stay high for an extended period of time, that limit will be breached as the whole market will raise prices.
For now, this is the share price performances of Ferrero, Hershey, Mondelez and Nestle, where the market thinks that profitability will be affected.
But my view is that the companies will raise prices and regain their profit margins. They are close to monopolies after all.
What Does that Mean for Us, the Consumers?
Well, for all consumers, higher chocolate prices for sure.
The impact will be felt the most in Europe and North America, as they are the two biggest consumers.
According to data from Circana, retail chocolate prices have risen by 11.6% in 2023.
What about Malaysian consumers?
We do like Milo. That’s the most direct impact in my opinion for the country.
Will Milo prices increase?
For now, not yet. Based on February 2024’s inflation data, cocoa drinks inflation only came to 0.3%. Meanwhile, chocolate, cocoa & cocoa-based food products prices only increased by 2.0%. Both of these products make up just 0.2% of Malaysia’s inflation basket.
Here is a chart for a comparison of how high prices have grown for cocoa drinks and food & beverages in general. Cocoa drink inflation is still relatively low.
Right now, for Malaysians, no need to worry. But probably by the end of the year, we could be seeing some increases in chocolate product prices.
Granted, that is assuming cocoa prices remain at this high level until then.
We better pray that it is not so.
