Chocolate inflation is making a comeback. Cocoa futures have surged more than 80% in New York over the past six months, raising concerns about a repeat of the 2023/24 supply crisis, when prices soared above $12,500 per metric ton.
The rally may have further to run. Goldman Sachs warns that depleted inventories and a potentially severe El Niño could trigger another supply shock in West Africa, the world’s largest cocoa-producing region. But the bank sees less risk of the futures-market liquidity crunch that amplified the previous price spike.
New York cocoa futures are trading around $5,500 per metric ton, up from roughly $3,000 in April. The arrival of El Niño, which threatens growing conditions across major producing countries, has been the main driver of the rally.
For cocoa processors and chocolate manufacturers, physical market conditions may be even tighter than they were two and a half years ago.
“This time, the physical market may be less prepared than in 2024, with (likely) lower inventories and much of the demand destruction having already occurred, leaving less room to absorb a poor harvest,” Goldman Sachs analysts Lina Thomas, Sam Darbyshire and Daan Struyven wrote in a report on the global cocoa market.
The analysts see a “significant risk” of further price increases as tight physical supplies leave little cushion against another disappointing crop.
El Niño, which is showing signs of becoming one of the strongest episodes on record, increases the likelihood of poor harvests and further supply constraints, according to the bank.
West Africa accounts for roughly 65% of global cocoa production, making the market particularly vulnerable to adverse weather in the region.
In countries including Ivory Coast, El Niño increases the risk of extreme swings between excessive rainfall and drought, potentially disrupting cocoa tree development throughout the growing cycle.
Early indications are troubling.
According to Goldman Sachs, the current crop season began with excessive rainfall in May and June, followed by a shift toward drier conditions.
“Farmers report low pod survival rates and weaker fruit development,” the analysts wrote.
Conditions could deteriorate further if El Niño extends the dry spell into the December-to-February period, when dry, dust-laden Harmattan winds from the Sahara typically sweep across West Africa.
Excessive moisture also raises the risk of crop diseases. Among the most damaging is cocoa swollen shoot disease, a viral infection that attacks cocoa trees rather than their pods and has already been affecting production in Ghana, according to Goldman Sachs.
Why This Rally May Be Different
Despite the worsening physical supply outlook, Goldman Sachs believes financial participants in cocoa futures markets are better prepared to handle another price shock than they were in 2024.
The distinction is crucial. While supply shortages triggered the previous rally, a breakdown in futures-market liquidity turned an already severe shortage into an unprecedented price surge.
“What made the 2023/24 cocoa price spike exceptional — and what we do not readily assume will happen this time — was a breakdown in futures market liquidity that amplified a tight physical supply environment into an unprecedented price rally,” the bank said.
Between early 2023 and February 2024, cocoa prices climbed from about $2,600 to $5,500 per metric ton.
As prices surged, US and UK cocoa exchanges raised margin requirements, forcing traders to commit more collateral to maintain their positions. Higher trading costs reduced participation and drained liquidity from the market.
With physical supplies already severely constrained, the deterioration in liquidity magnified price swings and helped push cocoa above $12,500 per metric ton, according to Goldman Sachs.
The bank considers a similar scenario less likely this time, partly because market participants have had relatively little time to forget the lessons of the previous crisis.
“While a liquidity squeeze similar to that of 2023/24 is not impossible, we assume such a shock would result in less amplification, partly because the recency of the episode has likely prompted the market to strengthen liquidity and risk-management safeguards,” the analysts wrote.
That suggests cocoa prices could continue climbing as El Niño threatens production and physical inventories remain depleted, but without necessarily revisiting the extremes of the previous supply crisis.
For cocoa buyers, processors and chocolate manufacturers, the outlook still points to mounting cost pressures. For futures traders, however, Goldman Sachs sees a market better positioned to absorb the shock.
This story was translated from the original Portuguese with the assistance of artificial intelligence and reviewed by The AgriBiz editorial staff.
