Chocolate Crisis Grips the World, Threatens Supply and Consumers

The world of chocolate is facing an unprecedented cocoa shortage so severe that it has attracted an unlikely player to the wild trade: Pierre Andurand, a hedge fund manager better known for his oil bets.

In early March, prices had more than doubled in just 12 months. At that point, many speculators gave up and reduced their bullish bets. That’s when Andurand saw an opportunity to go long. Everything pointed to a massive deficit: the world had enjoyed decades of cheap chocolate, trees were old, and diseases were rampant in West African countries, which supply nearly half of the market.

A bit of bad weather was the tipping point for production in Côte d’Ivoire and Ghana, and many traders now fear that production in these countries has entered a long-term decline phase. Futures have soared rapidly by nearly 70% since early March to hit a record this week.

Impact on the Chocolate Industry:

The crisis has hit chocolate makers around the world. From Malaysia to Germany and Chicago, factories have been forced to close. Companies caught on the wrong side of the rally are facing lawsuits. And now, the lack of liquidity also means that the next phase of the market is likely to be plagued by erratic price movements that raise the specter of corporate bankruptcies.

“The scars of this crisis could be visible for a long time in cocoa volatility,” said Tristan Fletcher, CEO of ChAI, a platform that uses AI to analyze commodity markets. “Speculative traders are entering and exiting positions much more quickly, which will add to this turmoil. This means that markets are much more likely to swing violently.”

Commodity markets are notoriously volatile, but the speed and severity of the cocoa rally has surprised even the most experienced traders and wreaked havoc on the entire global supply chain for the crop, from struggling West African farmers to European commodity brokers and American candy makers.

This week, futures hit a record $10,760 per metric ton, a level unthinkable to most traders and roughly double the previous high, set in the 1970s. Before this rally, the New York market had been virtually below $3,500 since the 1980s.

Citigroup Inc. expects prices to rise to $12,500 in the coming months. Andurand predicts that futures will exceed $20,000 this year. The oil trader’s hedge fund took a small long position in cocoa in early March, a person familiar with the matter said earlier this month.

The dizzying pace of the gains has driven out dozens of investors who don’t want to be caught off guard. And more importantly, many can no longer afford to trade: the cost of margins to support a company’s position has skyrocketed.

Cocoa futures trading has hit historically low levels, with a measure of the number of outstanding contracts falling to its lowest level in 12 years. The market is now caught between an extreme supply shortage and dangerously low liquidity.

“It’s the lack of physical activity – limited only to desperate hedging of nearby physical contracts – that has caused their normal futures activity to dry up, reducing liquidity,” said Pam Thornton, a veteran commodities trader at Nightingale Investment Management, best known for her role at the former cocoa hedge fund Armajaro Asset Management. “So if you have to buy futures, you can easily move the market very quickly.”

When companies cannot afford the margins to support their hedges, they are forced to buy back futures, which drives prices even higher and pushes more people out of the market. This vicious circle of distress was also seen in recent years during the nickel collapse and when European natural gas prices spiraled out of control after the Russian invasion of Ukraine, impacting consumers, manufacturing, currencies and economies.

“That’s what worries me most,” says Jacques Torres, founder and CEO of Jacques Torres Chocolate, a New York-based artisan candy maker. “If this is the future, we’re going to see a lot of people out of business.”

Cocoa Production Shortage:

Double-digit production declines are expected in the cocoa harvests of Côte d’Ivoire and Ghana, which account for around 50% of supply. The shortage is so severe that both countries are renegotiating contracts for future harvests.

The International Cocoa Organization (ICCO) forecasts that production will fall short of demand by 374,000 metric tons in the 2023-2024 season, the third consecutive deficit. Chocolate maker Barry Callebaut AG expects a deficit of 500,000 tonnes, equivalent to a tenth of the world market.