February 15, 2024/CSL Research
The price of cocoa, a major ingredient in chocolates, beverages, and cosmetics, has been on the rise in the last two years. According to the International Cocoa Organization (ICCO), as of February 13, 2024, the price of cocoa reached US$5,794.18 per tonne, a substantial year-to-date increase of 34.5%. This surge in cocoa prices can be attributed, in part, to adverse weather conditions such as droughts and floods in key cocoa-producing nations like Ivory Coast and Ghana. These environmental challenges have adversely impacted crop yields.
Additionally, the proliferation of a cocoa pod disease known as “Black Pod” in some major producing countries has exacerbated the situation. This disease has particularly affected aging cocoa trees, hastening the end of their productive lifespan and subsequently diminishing the overall cocoa supply. Furthermore, political instability in certain cocoa-producing regions has disrupted the smooth flow of the cocoa supply chain.
Locally, the rapid ascent of cocoa prices, denominated in foreign currency, stands as a significant economic boon for cocoa farmers in Nigeria. The devaluation of the Naira coupled with the elevated dollar price translates into enhanced earnings for these farmers.
The heightened income presents an opportune moment for increased investments in cocoa production on a broader scale. This positive trajectory may, in turn, stimulate higher levels of exports, a development which may be beneficial for a nation in need of foreign currency. However, it may also result in a decrease in the availability of the commodity for local manufacturers who rely on cocoa for production.
The escalation in cocoa bean prices directly translates to heightened cost of goods sold (COGS) for consumer goods companies (Nestle: Buy; Cadbury: Buy) engaged in the production of beverages, chocolates, and related products that heavily rely on cocoa beans, a factor that could exert pressure on profit margins and potentially impact overall profitability. In response to the rising cost of cocoa beans, manufacturers within this sector may find it necessary to recalibrate their inventory management strategies.
To safeguard their profitability in the face of increased production costs, companies may be compelled to contemplate adjusting product prices for consumers. This strategic move, while crucial for maintaining profit margins, carries the potential to reduce consumer demand and purchasing behavior.
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