The Cocoa Crisis

From Tokyo, Japan and Changsha, China – this is Down to Business English. With your hosts Skip Montreux and Dez Morgan. Hello Dez. Hi Skip. So nice of you to join me today. I know you have had a very heavy schedule as of late. Yeah. I’ve been burning the candle at both ends recently with teaching, grading, and preparing for the upcoming test season. Hm. That is crazy busy. But I’m glad I could carve out some time to get behind the microphone with you today. And we all appreciate that.

I just hope that you are not stretching yourself too thin. No worries. I have it all under control. You know, men our age should be very careful with our stress levels. Are you able to do anything to relax or wind down? I find riding my bike to and from campus is a good stress release. And of course there’s always my end-of-the-day pint of lager. You should try eating dark chocolate. Chocolate? To relax?

Apparently dark chocolate can play a role in how much cortisol our bodies release when we are under stress. And that’s a good thing? Yes. Reducing the cortisol levels in your body helps you to relax. I did not know that. Since when did you become such an expert on the health benefits of chocolate? Well, I don’t really know what I’m talking about Dez. But I did run across that tidbit of information when I was researching today’s business topic. So is our report related to chocolate? Or stress?

Or … or both? Good question. You may or may not be aware of this, but the price of cocoa beans, the main ingredient in chocolate, has reached an all time record high recently. I have seen headlines about that. And a knock on effect of that surge will, of course, be an increase in the price of a chocolate bar. Nothing like raising prices to add stress to one’s life. So this is our story — the record rise in cocoa prices and chocolate? It is. Hmm. Sounds very interesting. I’d like to hear more.

Great. So, let’s do it. Let’s get D2B … Down to Business with the Cocoa Crisis. What is causing this historic price increase? What is the impact on chocolate makers? And what does this all mean for consumers? So the price of cocoa is at an all time high. How much are we talking about, Skip? I’m glad you asked because I checked just before we started to record today. And? What was the spot price on cocoa today? It was $11,885.58 per tonne.

Just slightly down from the record it reached on April 15 which was $12,588 per tonne. That is indeed very high. But can you put that into some context for us? What was the spot price a year ago? At the beginning of May last year, it was approximately $2700 per tonne. From $2700 to $12,000 in 12 months? That’s over a 300% increase. I know, it is a drastic increase, isn’t it? And what is driving this massive spike? Well let me turn that question around on you.

What do you think causes commodity prices to rise in the first place? That’s supply and demand 101. Prices increase when there is either a shortage in the supply of the commodity, or demand is up. Or sometimes a combination of the two. That’s right — basic economics. So which is the primary cause here? A little of both, but to an extreme on the supply side. I know that most of the world’s cocoa comes from West Africa, so I’m guessing drought might be a factor.

Well you are right that West Africa is the world’s largest producer of cocoa beans. In fact, the Ivory Coast produces 44% of the world’s supply followed by Ghana at 14%. And Nigeria and Cameroon, they are major producers too. Is that what’s referred to as the cocoa belt, those four countries? Mm. That’s partially right but the cocoa belt is actually an area of land between 20º north and 20º south of the equator that circles the entire planet. I see.

So this belt would include countries like Indonesia, Venezuela, Brazil, in addition to those four West African countries, That’s right. But roughly 60% of the world’s cocoa supply does come from those West African countries. And drought in Africa is what’s creating this supply shortage? It’s the opposite as a matter of fact. Not a drought but torrential rains. Torrential rains?! Yes. Unseasonable rains late last year and in the spring this year have really impacted the cocoa harvest.

They were a result of the most recent El Nino. El Nino — the weather phenomenon associated with natural warming cycles in the Pacific Ocean? Apparently this last El Nino cycle has been stronger than usual, which has led to a lot of rain in West Africa. And in addition to conditions being too wet for cocoa trees to bloom, the heavy rain has also led to Black Pod Disease spreading through the cocoa crop. Black pod disease? I’ve never heard of that.

It is a fungus that can infect cocoa trees and if not controlled it will completely destroy the tree. So, not only did the floods damage this year's crop, the Black pod disease is killing cocoa trees. Which of course impacts future harvest levels. That is absolutely the case, and it is causing real panic in the industry. Just how bad has the harvest been affected? Estimates are there will be an 11% decline in production for the 2023/24 growing season.

Okay. That’s certainly unfortunate, but does it justify a 300% increase in price? Well, the problem is deeper than just a single bad harvest. Most experts agree that the unusually strong El Nino conditions are likely a result of climate change. That means this will not be a single year event. It will reoccur with some frequency. So the markets are expecting supply shortages on an ongoing basis. Not just a one off? Plus there are other structural issues in the sector.

And by structural issues you mean non-cyclical issues, not part of the regular business cycle. That’s correct. Structural problems tend to be much more difficult to fix. They are. A report by JP Morgan on April 4th this year reported there has been a chronic underinvestment in cocoa farms that stretches back years. Underinvestment plus climate change, not a good mix. Keep in mind that most cocoa farms are small operations and the farmers are paid very little.

The result is that farmers don’t have the capital to invest in infrastructure. You know, planting new trees to replace the ones that are diseased or aging. And I’m guessing that aging trees yield less crops, which further puts pressure on supply. But structural issues, disease, and crop shortages are not even the whole story. There’s more behind the price increases? There is. We have just covered the supply side so I would have to say consumer demand is the other issue. Is demand increasing?

Global demand for cocoa has remained relatively stable throughout all of this, which is problematic in itself as supply decreases. But there is even another issue — investor speculation. Of course. Commodity speculators can drive prices higher on the futures market. Exactly. And currently 60% of all cocoa futures contracts are being held by investment speculators, not manufacturers who actually use cocoa as a raw ingredient in their products.

Skip, perhaps we should take a moment to make sure all of our listeners are on the same page when it comes to futures contracts. Mmm. Good idea, Dez. Let’s clarify what a futures contract is for everyone. Earlier, we were talking about the spot price of cocoa. A spot price is the trading price of a commodity right now. They fluctuate minute to minute, hour to hour, day to day … you get the idea? Spot prices can be very volatile. They sure can.

And if there's one thing that no business wants, it’s volatility. How can you determine a selling price for your goods if the price of the raw materials you use to produce it are always changing? It is no fun for the producer of the raw material either. They can never predict what they will be able to sell their goods for when they eventually bring them to market. And that is where futures contract comes in. This contract is between a supplier of a commodity and a buyer.

The supplier agrees to sell their commodity to the buyer at an agreed upon price on an agreed upon date in the future — no matter what the spot price will be at that time. And futures contracts are typically negotiated through a futures market. In the US there is The Chicago Mercantile Exchange, or CME. And in Europe, probably the largest is the Intercontinental Exchange, or ICE. The concept of futures contracts is easy to grasp.

It's a way for both buyers and sellers of a commodity to hedge their risk. Where it gets complicated though is when speculators get involved. Right. They are not actually in need of the commodity itself, they are just trying to make a return on their investment dollar. So, when you say that 60% of all cocoa futures are being held by investment speculators, you’re saying that they are held by investors — not companies that use cocoa to make their products. Exactly.

And those companies are mainly chocolate companies I would assume. Yes. Companies like Nestlé, Mars-Wrigley, and Mondelez International. I have heard of the first two but I don’t think I’m familiar with Mondelez. You have almost certainly eaten one of their products. They make Cadbury chocolates and Toblerone. You can not go through a duty free shop in any airport without walking past a Toblerone display. Oh sure, I’ve definitely had a Toblerone before.

Not to mention one or two Cadbury’s Fruit and Nut bars. So, what do higher future contract prices mean for these chocolate makers? First, they have been scrambling to buy up whatever futures they can. But with speculators pushing the contract prices higher, they have been paying a higher and higher price. Obviously. So, they will have to pass those increases on to consumers. Hershey's, the American chocolate giant, they have made it clear that higher prices are on the horizon.

Directly as a result of higher future contract prices. A move that I am sure the other chocolate giants will follow. Another influence of these higher prices is that some chocolate makers are revamping their product recipes so that they contain less cocoa. So you mean a Cadbury Fruit and Nut bar might contain more fruit and nuts and less chocolate? Yes, that does seem likely. But there's only so far chocolate makers can go without ceasing to be chocolate makers. Good point.

Another option chocolate makers are considering is making their bars smaller while still charging the same or even a slightly higher price. You're talking about shrinkflation. A term that consumers have come to hate throughout this period of inflation. Pay the same but get less. The real worry for chocolate makers is that the consumers will see the price of chocolate rising and decide to snack on something else.

You mean they cut down on chocolate and start eating other types of sweets, or salty snacks, or maybe even snacks that are healthier? That is a strong possibility, yes. So given these price increases, are people eating the same amount of chocolate or are consumers cutting down on their chocolate consumption?

Market research released in January by Mintel suggests that consumption has remained relatively steady in most markets but it also shows some contradictory demographic differences between areas. What exactly does that mean? Take Canada for example. A greater number of younger people aged 18-34 reported eating more chocolate in 2022 than older age groups. So that suggests a strong future for chocolate companies with a loyal following as these people get older. It does.

But the picture in the UK is quite different. Consumers responded that they made less impulsive chocolate purchases in 2023 compared to 2022. The opposite of what is happening in Canada. Yes. But some of that is due to new legislation in the UK, not higher prices. New legislation? What would that be? Yes, apparently in the UK, foods that are classed as HFSS or High in Fat, Sugar or Salt are now restricted as to the areas of the shop where they can be put on display. I didn’t know that.

So, shops can no longer display chocolate bars next to the cash register. That’s right. Shoppers can’t make an impulse purchase of HFSS items. They have to go to the confectionary aisle and purposely hunt them out. And who wants to go to the trouble of doing that? That’s correct. So you can see that even without the recent hike in cocoa prices, it’s fair to say that chocolate makers are facing other headwinds as well. Which just leaves me with one final question.

Do analysts expect prices to remain high? The predictions are that prices will remain at an elevated level for some time until the supply side of the equation can be improved. But experts are expecting the price to come down somewhat off the current highs, to somewhere around $6,000 a tonne, in the interim. That’s still incredibly high. Well luckily for me I don’t really eat chocolate very often.

Neither do I. But I know a lot of people who do and they are facing much higher prices for that treat in the future. And on that note, I think it's time for us to get D2V … Down to Vocabulary. I will start us off today with the noun ‘a knock-on effect’, which means a secondary or indirect effect of an action. In the story Skip said that a knock-on effect of the increase in cocoa prices will be an increase in the price of chocolate bars.

I was saying that an indirect effect of increased cocoa prices will be more expensive chocolate bars. Can you give us another example of knock-on effect? I can, right from our report actually. Later in the story I explained how new legislation in the UK is restricting where HFSS foods can be put on display in a supermarket. Right — the government trying to make everyone more healthy. Well, that legislation is having a knock-on effect on the amount of chocolate bars people are buying.

It’s a useful expression. I often use it when I’m discussing my workload and how spending too much time on one task has a knock-on effect on other jobs that I need to get done. As much as I love recording D2B, sometimes it has a knock-on effect on my teaching prep. I’m so sorry to hear that, Dez. It was just an example. Next, I have the verb to revamp. Which can be broken down into the prefix ‘re’ which means again and ‘vamp’ which means to improve function or appearance.

So ‘revamp’ means to change something again to improve it. In the story I reported that chocolate companies are revamping their recipes to include less cocoa and more of the other ingredients, such as fruit or nuts. In other words they are changing their recipes to include less cocoa. It is common for companies to try and revamp their products or images. I think it’s important to point out that ‘to revamp’ something is not as radical as ‘to redesign’ it.

Redesigning would include changing a product completely. Mm. Good point. Can you give us an example? I can. Currently I have a Fitbit Sense smartwatch. Fitbit recently revamped the Sense and came out with the Sense 2. I was considering upgrading to it but I decided against it because it’s not really that much of an upgrade over the Sense 1. So, no new smartwatch for Dez? I'm afraid not. I will finish D2V today with the noun headwind.

Idiomatically a headwind is a difficulty or a challenge that you face. It is a naval expression from the days of sailing ships. You can imagine that sailing into the wind would be more difficult for a ship than sailing with the wind behind it. In the story Skip said that chocolate makers are facing other headwinds in their industry, not just the increase in cocoa prices. He was saying that they were facing other difficulties or challenges. The opposite of a headwind is a tailwind. That’s right.

Something that’s making things easier for you. In an election year it is common for financial analysts to look for stocks that will get a tailwind if a particular candidate is elected. Or indeed which stocks face a headwind if a particular candidate is elected. Would you like to help D2B reach more people wanting to improve their Business English skills? Be sure to follow D2B on Apple Podcasts, Google Podcasts, Spotify, or any place podcasts are found.

While you are there, leave a rating and a review and tell everyone how much you enjoy the show. Thank’s Skip for that report on rising cocoa prices. You are welcome Dez. It looks like we’re in for some expensive chocolate snacks in the future. I for one will be cutting down on my chocolate intake. Not that I eat a lot of chocolate in the first place. D2B Members, the Bonus vocabulary for today’s episode will be released within the next 24 to 48 hours through your Members-only RSS feed.

The words and phrases we will focus on in that Bonus D2V episode