Global inflationary pressure poses threat to cocoa demand

BY ONOME AMUGE

The month of May was marked by inflation spikes across the European Union as monthly inflation rates rose 8.1 percent, representing the highest level of monthly inflation rates reached over the last decade. The US economy also suffered a similar fate as consumer prices jumped 8.3 percent amid surging energy and food prices fuelled in part by the ongoing Russia-Ukraine war.

This ripple effect was felt by the industrial price index of manufactured chocolate products which increased by 5.0 percent in the European Union and by 7.7 percent in the United States, making chocolate manufacturing more expensive compared to the past few years.

As a result, manufacturers like Mondelez International (owner of Cadbury Dairy Milk) indicated that the size of sharing bars will be reduced by 10 percent while maintaining the same price, with growing expectations that other companies will follow suit or even increase the retail prices of their products.

Reports on the chocolate industry also indicated that over the 13-week period ending May 15, sales of chocolate products had dropped by 6.3 percent in the U.S while prices of chocolate products on the same market were inflated by 11 percent.

“Inflation, which is reputed to weaken the purchasing power of consumers, could possibly constrain the consumption of non-essentials and luxury goods including cocoa products should the situation persist,” the International Cocoa Organisation (ICCO) stated in its cocoa market report for May 2022.

Cocoa supply shrinks as Ghana, Ivory Coast record lower output

In the period under review, cocoa production and supply in the global market recorded a downward movement in May and moved in a similar direction in the first week of June 2022, with arrivals of cocoa beans at Ivorian ports estimated at 1.926 million tonnes, lower by approximately 5.1 percent compared to the volume of 2.027 million tonnes recorded during the corresponding period of the 2020/21 cocoa season.

In Ghana, production of the 2021/22 crop plunged to about 800,000 tonnes compared to the historic volume of 1.047 million tonnes recorded during the 2020/21 crop year.

Despite the decline in supply for the ongoing 2021/22 season, stocks of cocoa beans held in Intercontinental Exchange (ICE) Futures licensed warehouses in Europe and the United States were generally high compared to the previous season.

The ICCO attributed the high volume to the 2020/21 record production which, it said, contributed to the high level of carryover stocks held in warehouses on both sides of the Atlantic for the 2021/22 season. Hence, the reduction in cocoa production for the 2021/22 season did not seem to be reflected in the level of stocks held in the Exchange-licensed warehouses.

Cocoa futures trade downwards

During May, prices of the front-month cocoa futures contract followed a declining trend on both the London and New York markets with the MAY-22 contract prices settling at a nearly two-year low at $1,993 per tonne in London and almost a five-month low at $2,408 per tonne in New York.

While approaching its maturity date on 16 May, prices of the MAY-22 contract plunged deeper, falling 6 percent from $2,207 to $2,076 per tonne and by 5 percent from $2,632 to $2,502 per tonne in London and New York, respectively.

According to market reports, the adequate climate conditions reported in the main cocoa areas of West Africa contributed to pressuring down cocoa futures prices.

Generally, the daily settlement prices of the JUL-22 did not demonstrate any significant trends on both markets and were range-bound. In London, the JUL-22 contract prices averaged $2,179 per tonne and traded between $2,138 and $2,222 per tonne. In New York, the average price of the front-month contract was pegged at $2,460 with minimum and maximum settlement values of $2,408 per tonne and $2,503 per tonne.