A jump in cocoa prices is expected in the next period, with producers expressing their strong concern ahead of the holidays.

After an explosive rally in the first quarter of the year, cocoa prices have calmed somewhat. Having started the year at around $4,400 a tonne, cocoa futures peaked at $12,000 in April – well above the inflation-adjusted decade average of $3,400. However, by May, prices had fallen to $7,000 a tonne. But this respite is likely to be temporary. The prospect of a multi-year structural supply-demand deficit in cocoa beans means prices will soar, according to the Financial Times.

This is likely to affect many chocolate makers who are betting on a riskier prolonged price decline, which in turn leads to stockouts. The increased number of grains recorded from May to August had raised hopes among manufacturers that the recovery in production would replenish stocks, especially after a shortfall of 500,000 tonnes in the 2023-2024 season – the third consecutive annual shortfall and the largest ever. This shortfall is attributed to a 13% drop in global cocoa production due to much weaker production in Ivory Coast and Ghana – which account for more than half of global production.

For many the El Niño phenomenon is the main factor behind this poor harvest, waiting for a transition to the La Niña cooling pattern to revive yields. However, recent evidence has dashed those hopes. Bean numbers in key producing areas have deteriorated and the 2024-25 season is now forecast to show a shortfall of 160,000-200,000 tonnes, according to Forestero, a leading cocoa research firm, and this time from a depleted stock base.

Stocks in Europe and the US have fallen from 400,000 tonnes in December 2023 to just over 100,000 tonnes — the lowest on record. This drawdown in inventories adds to concerns about a prolonged supply squeeze. However, the weather alone cannot shoulder all the blame. Structural issues are at the heart of the crisis. New deforestation laws have discouraged farmers from expanding plantations, while a global fertilizer shortage, exacerbated by Russia’s war in Ukraine, has led to lower rates of use. West Africa is also struggling with aging tree stock and the spread of the cacao swollen stem virus.

The virus has long been recognized as a production killer. Once symptoms appear, trees generally die within four years with yields significantly affected from the first year. A recent study by Forestero, using a new DNA-based technology developed by SwissDeCode, concluded that the current prevalence of CSSV on cocoa farms in West Africa is around 67%, much higher than the 30% previously thought.

Assuming most infected trees develop symptoms, this would indicate an imminent collapse of production in Ivory Coast and Ghana. Cocoa expert and head of research at Tropical Research Services, Steve Waterridge, noted that Ivory Coast’s production could be halved over time due to the spread of CSSV, in line with other production shocks related to diseases.

In some markets, eliminating demand through higher prices can close a supply gap. But the demand for chocolate – and therefore for cocoa beans – is relatively inelastic.

Similar inventory-to-demand levels led to an inflation-adjusted peak of $28,000 per ton in 1977 after a five-year rally. With the current rally only a year old and an increase in supply-suppressors for at least four years, conditions appear ideal for cocoa prices to reach new inflation-adjusted highs.