Tracey Allen, JP Morgan’s agricultural commodities strategist, discusses the outlook for cocoa supply and prices.

Cocoa prices have remained high due to persistent supply shortages, despite some improvements in production. Disease pressures in West Africa, particularly in the Ivory Coast and Ghana, have significantly reduced global supply, even as output grows in countries like Ecuador and Brazil.

Although there has been a slight shift in income distribution along the supply chain, West African farmers still receive only about 40% of the international market price. Increased local processing is capturing more value at the origin, but the long-term outlook suggests that high prices will persist until supply deficits are resolved.

Why low cocoa supply means prices will stay higher for longer

These heightened prices have really had this flow-on, lagged impact for the industry as a whole. Higher costs of doing business, passing those prices through to the consumer does have that lagged influence. The supply side is improving, however, so there is some better news going forward. But, you know, there is this ongoing deficit in the market, big depletion of availability of cocoa beans and availability of products. So higher prices for longer here, I'm afraid. Climate change, is that something that chocolate lovers worldwide need to be conscious of in those trading commodities? Certainly those trading commodities and perhaps more of us coffee lovers have definitely been far more exposed to the climate change specific impacts, particularly here. Cocoa production, the cacao tree, the flowering process, pod development phase is immensely susceptible to weather related risks. But climate change specifically, I would say, is a lesser risk than it is for some of the other markets like coffee, particularly, which is growing at much higher altitude. Deforestation risks, but disease pressure, particularly in West Africa, has been the big factor really pulling back that global supply. And now we've had this advent of growth in output in particularly in South America. We're seeing widespread expansion of very healthy trees in Ecuador, particularly Brazil, moving on the cards up there in terms of the supply input as well. I spent a lot of time looking at this, gosh, it was about 20 odd years ago, and how the producers of the cocoa beans struggle to be able to add value to the product before it's exported as well. And basically, the big kind of processing companies want to do it elsewhere in Europe and elsewhere because they want to get the real juice out of the profit chain on this one as well. Has the balance changed at all in the last decade or so? My understanding was changing a bit where actually they do process more of the product on a local basis. So actually, who makes the most money out of this down the supply chain has just tweaked a little bit. You're right, Steve, there has been a bit of a change with respect to that income distribution. But I would say that the big issue, similar to 20 years ago, is still that West African farmers, particularly those in the Ivory Coast and Ghana... Which is exactly the country I started. And they're still the largest producers in the world, although Ecuador is certainly getting up there. They only receive about 40% of the internationally traded market price. So at the farm gate, there is not a lot of strong price incentive or pass back to the grower. The government's, of course, marketing those crops there. We are seeing increasing volumes of grinding. When those beans are available at origin to capture more of that value added market share there. But I think importantly to note here with respect to the longer term supply outlook, free market conditions are very much in play across other destination origins. Ecuador, Brazil, looking at Nigeria, Cameroon, elsewhere from that perspective. And so farmers are really seeing this impact of much stronger prices here and incentive to be improving supply.

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