Major African cocoa plants in Ivory Coast and Ghana have stopped or cut processing because they cannot afford to buy beans, four trading sources said, meaning chocolate prices around the world are likely to soar.
Chocolate-makers have already increased prices to consumers, after three years of poor cocoa harvests, with a fourth expected, in the two countries that produce nearly 60% of the world’s cocoa.
Cocoa prices have more than doubled over the last year, scaling numerous all-time highs.
“We need massive demand destruction to catch up with the supply destruction,” Tropical Research Services’ Steve Wateridge, a world expert on cocoa, said.
Chocolate-makers cannot produce chocolate using raw cocoa and rely on processors to turn beans into butter and liquor that can be made into chocolate.
But the processors say they cannot afford to buy the beans.
The same two sources said even global trader Cargill struggled to source beans for its major processing plant in Ivory Coast, halting operations for about a week last month. Cargill did not respond to a request for comment.
In No. 2 cocoa grower Ghana, most of its eight plants, including state-owned Cocoa Processing Company (CPC), have repeatedly suspended work for weeks since the season started in October, two separate industry sources said.
CPC said it is operating at about 20% of capacity because of the shortage of beans.
DISRUPTION AT THE FARM GATE
The price rally has derailed a long-established mechanism for global cocoa trade, through which farmers sell beans to local dealers who sell them on to processing plants or global traders.
Those traders then sell beans or cocoa products – butter, powder and cocoa liquor – to global chocolate giants such as Nestle (NESN.S), opens new tab, Hershey (HSY.N), opens new tab and Mondelez (MDLZ.O), opens new tab.
In normal times, the market is heavily regulated – traders and processors purchase beans from local dealers up to a year in advance at pre-agreed prices. Local regulators then set lower farmgate prices that farmers can charge for beans.
However, in times of shortage like this year, the system breaks down – local dealers often pay farmers a premium to the farmgate price to secure beans.
The dealers then sell the beans on the spot market at higher prices instead of delivering them at pre-agreed prices.
As global traders rush to purchase those beans at any price to meet their obligations with the chocolate firms, local processors are often left short of beans.
Ivorian and Ghanian authorities normally try to protect local plants by issuing them with cheap loans or by limiting volumes of beans that global traders can purchase.
This year, however, plants are not getting the cocoa they pre-ordered and cannot afford to buy at higher spot prices.
