The cocoa boom

0:09Not to worry anyone, but have you seen the price of chocolate recently? Cocoa prices have exploded higher in 2024. They're about three times the price that they were this time last year. And obviously, that's a really important input into the price of your favourite choccy bar. Today on the show, we ask, is nothing sacred? What is going on with food prices? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the Financial Times in London, and I'm joined for the first time by commodities nerd Susanna Savage. Hi. That's a compliment, by the way.

0:48Thank you, thank you. First up, what is your favourite chocolate bar? Oh, I don't know. I think I could be really basic and say something like a Kit Kat. Oh. Or twirl, maybe. Not fancy. The Natural Resources editor, he judges me for the chocolate bars I bring into the office. Uh-huh. Apparently, they're only for children. Harsh. So lay it out for those of us who are not commodities nerds. What on earth is going on? Why has cocoa gone so loco? It's gone absolutely crazy. So around a year ago, cocoa prices were around$2 ,000 per tonne in New York. And that's, you know, decent. But then since Christmas, really, it's gone absolutely wild.

1:31So at some point it reached over$12 ,000 per tonne. It's now come back down to over 7 ,000, which is still really high, but it's incredibly volatile. Even intraday trading is up and down. And this is really driven mostly by what's going on in West Africa. So about two thirds of the world's cocoa is grown in two countries, Ghana and Ivory Coast. They've had a whole range of problems, mostly to do with climate change and also the El Nino weather phenomenon. So is it too hot? Is it too cold? Is it too wet? Too dry? What's going on? All of them. So it was too hot when it shouldn't have been and too dry.

2:07And then they had loads of rainfall, which helped these diseases spread among the trees, which really affected their yields. But also they've got lots of structural problems. A lot of the farmers there are really poor. They've not been able to invest in their farms for a long time. So their cocoa trees are really old, which makes them more susceptible to these, you know, changing weather patterns and diseases. and so they're just not yielding as much as they normally would and that's created a big supply problem. So there's just not enough cocoa beans out there? There's just not enough cocoa beans.

2:41Is this something we just have to get used to, you know, weather is changing, climate is changing, or is there a little kind of dollop on top of this that is about terrible speculators pumping up the cost of your Kit Kats? Good question. So definitely one part of this, especially early days of the rally, was speculators seeing that this price was just going up and up. And especially those that use algorithms, they sort of piled into it, made a lot of money and yeah, definitely helped to push the price up higher. I would say though, you know, there are real fundamental reasons driving these price increases and that those are sort of the biggest factor in this.

3:24So I want to sort of think about, you know, who wins and who loses from this whole thing. I mean, how much is the wholesale price of cocoa feeding through to the chocolate that ordinary humans actually buy in the street? More than you would think. So if you think about some bars of chocolate that say they're 70 % cocoa, you know, a lint bar of chocolate, for example, that's quite a lot of cocoa that they've got to find when there's a massive shortage and you can't get hold of the cocoa butter used to make it. And even those where, you know, in a Cadbury's chocolate bar, there's a lot of sugar, there's a lot of milk emulsifiers and things.

4:01There's not necessarily a whole, you know, maybe 10 % cocoa, I don't know, or something like that, a lower amount anyway. Still, it has a big impact on cost because that's hard for those producers to substitute that. So they come up with other sort of crafty ways to keep their costs down. So it is having a real impact on the price of the actual products. Oh yeah, we looked into this around Easter and found that Easter eggs were way more expensive this year than last year for exactly the same egg. Or the price might have stayed the same, but the egg itself was much smaller. Shrinkflation. Shrinkflation.

4:34The other one is where they add bubbles. So you might see more bubbly chocolate around because that's cheaper to make because it's got air in it. Air, pretty cheap as it goes. Because unhedged wouldn't be unhedged if we didn't spend a little time being rude about Americans. So do Americans suffer less from this because their chocolate is so horrible and so unchocolaty? That is a really good question. I'm not entirely sure. I think they have seen the same problems with shrinkflation and recipes changing and prices going up. But because American chocolate is just generally bad, I'd have to ask sort of an American consumer whether they've noticed that recipes have changed.

5:18But why is American chocolate so bad, just as an aside? I've heard it's because they have extra ingredients in them to make sure the chocolate doesn't melt and that just doesn't taste good. Maybe a lower cocoa percentage. You know how in the UK you might go into a supermarket and buy a twirl if you're basic like me, but you might buy a fancy Lindell chocolate bar. One of those gold bunnies. A Lindt bunny. I mean, I've been heckled before by FT readers for calling Lindt a premium brand. But, you know, it's higher end than Cadbury's or Hershey. Let's be honest. So I don't know. Do Americans eat as much of that stuff?

5:52Prepare to receive emails. You will be put right one way or another. But so it definitely has an impact on consumers, makes life generally worse because expensive chocolate is bad. But what's the impact on farmers? As you say, like a lot of the actual producers here, it's a hardscrabble existence, right? Are they kind of suddenly like loaded because the price of chocolate has gone so much higher? Absolutely not. Cocoa is known to be a really problematic industry. Farmers have had really low prices for a really long time. And, you know, they're just very poor. And so that's why you hear a lot about child labour in those countries and deforestation, which is a big problem or has been a really big problem.

6:34And what makes this difficult in terms of the high prices right now is that to sort of mitigate the impact of low prices on global markets, Ghana and Ivory Coast, the governments came together and said, we're actually going to set the prices for our farmers to protect them from that market volatility and sell our crop forward, which when prices are low, maybe offer some protection. but now it's kind of shielded them from high prices. So when the New York price was around$10 ,000 per ton, I spoke to a farmer in Ghana who was only getting$1 ,500. Now since then the government's put it up a bit to I think about$2 ,500.

7:15But still. But still it's a lot less, right? So that means they don't have the cash to invest in their cocoa plantations that would help supply and demand balance out a bit. But even if they did, it takes a few years to get these trees established. Yeah, exactly. So even, I mean, in parts of the world where it doesn't work like that, Ecuador, for example, we looked into this recently. And yeah, farmers are planting cocoa because they're seeing high prices and they're like, hurrah, going to get a really good price for this crop. So they're planting loads. But that's going to take three to five years to come into production.

7:51And, you know, some of the analysts I spoke to said the sad thing is by that time, the price will probably have come down because everyone's done the same thing. Everyone's planted. And so, yeah, it's tricky. But it does mean that there's not going to be an abundance of supply anytime soon. So with the situation as it is, climate change being what it is, that's going to push the price of food up for everybody. That has a really outsized impact on poorer families, for example, all over the world. Is it time for the world to come together and say, no more speculation in food prices. We just don't need this extra level of price volatility on top of the weather.

8:26And is that even something that's possible to achieve? I think the exchanges would say that speculation plays a role in, you know, that supply and demand relationship, that high prices cure high prices, right? Because it helps to adjust things. When I speak to either farmers in Ivory Coast or government regulators that set these prices, they say something completely different you know so they say speculators are to blame right for pushing up these prices they're the ones profiting not the farmers they're making it difficult for poor families who are already struggling with food costs and so you could argue both sides now i know like at the ft we've run a bunch of stories around how climate change is affecting like really important crops like olives in spain and it has a real input into coffee prices all the stuff that we hold dear what are the crops that people say are most susceptible here to climate change?

9:22There's a lot of them. So yeah, cocoa, massive, orange juice. I spoke to someone today who told me that orange juice might not be made with oranges going forward because citrus fruit trees are just not very good in really hot weather without much rain. So they're going to have to switch to mandarins. Might still be called orange juice, but won't be made with oranges. So that's one. Olives. are we going to have decent olive oil? I don't know. Spain's had a really difficult time with this because of drought and that's the world's biggest producer but also all the Mediterranean countries they're kind of struggling with it.

9:57I've been speaking to Italian friends recently who are getting it shipped in direct from Sicily because it's just too expensive in British supermarkets now. So it's not just in parts of Europe where you know olives are in short supply and olive oil prices have gone a little bit crazy. That's kind of you were in Morocco recently right talking to farmers over there about it. What's their experience? They're in the same boat. I met one guy who was absolutely delighted because he just got some government help to irrigate his olive groves. And he was working with a fertilizer company, so he was using sort of personalized fertilizer.

10:31So he'd seen his yields go through the roof just as olive oil prices skyrocketed. And so he was doing really well for himself. And he was super chuffed, showed me his new car type thing. He was really happy. So some people, you know, it is good for some people. I spoke to another olive oil producer in Sicily, who said, this is what people should be paying for olive oil. Sure. And maybe that's true for cocoa too. Maybe these higher prices are what is needed to produce these crops and make a decent living. So you know, there is the sort of flip side of it where climate change is making everything harder, making prices higher for consumers but maybe you know there's some middle ground where where producers can do better yeah but funny how those smaller producers of cocoa and ivory coast and whatever somehow they never see the benefits of the marvels of capitalism right i know well because there is a thing about how much of a chocolate bar you know the price of a chocolate bar actually gets back to those farmers and i the last time i looked into it i think it was around five percent roughly so it's very low so all of that value that is added to it is added elsewhere mostly in in europe is where that happens yeah so yeah they're they're not doing too well out of it yeah well that's the cool thing about writing about commodities prices right agricultural commodities is like this is like markets in real life like stocks and bonds whatever like what's the cost of my chocolate bar and how much money is the farmer getting for it and and how cool is it that there is you know things like orange juice futures yeah pretty cool yeah yeah okay well we're going to be back in a second with long short you can be long orange juice if you like maybe

12:16okay now it's time for long short that part of the show where we go long a thing we love short a thing we hate susanna you haven't done this before what you got so my short is AI and this is because it'll never catch on I just don't believe in it no it's because Scarlett Hanson has said that OpenAI has used a voice in its chat box that sounds eerily like her own and you know they've denied that they've stolen that they've said this is just a coincidence and maybe it is but I for one wouldn't want there to be a voice being used by a chat box that sounded like mine or you know could be mistaken for mine because then you could be made to say anything or people might think you were saying anything plus creepy very yeah very just very creepy yeah so i am long gardening long gardening okay i went to the chelsea flower show this morning for a little thing very nice it was too apparently foreigners don't really understand what the chelsea flower show is but google it it's like a big deal if you care about gardening and plants at all.

13:24Loads and loads of lovely stuff. But I'm also very busy in my own garden and because I'm worthy like this, I do community gardening, like little bits of green space on my road. I'm one of those busybodies that keeps them looking nice. So it's basically all that I do at the moment. At what point in someone's life do you think they become interested in gardening? Because it does seem to be one of those thresholds that gets crossed, right? As in, And you don't sort of start off as a kid loving, most people don't start off as a kid loving gardening. It's not a teenage pastime. But at some point you'll be old and boring like me and then you'll go and buy yourself a trowel and you'll think, oh, I remember that time I was really mean to Katie saying that she was old because she likes gardening now.

14:07I think I'm probably old enough. I'm probably behind. I should definitely be into gardening. I'll bring you one of my spare tomato plants if you want. I'll try and, you know, keep it alive. Yes. And listeners, if you can stay alive, then please tune in later this week for more Unhedged.

14:47go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.