A failed harvest, followed by a wave of financial speculation, has sent cocoa prices on a roller coaster ride this year, shaking up an industry dependent on cheap crops and labor.

This is not the normal course of things on the cocoa market. For much of the past decade, the price of cocoa in a key global index has remained around US$2,500 per metric ton. Last year, after poor harvests in West Africa, the price began to climb – reaching US$4,200 per tonne in December, a threshold that had not been crossed since the 1970s.

Then financial speculators began to flock in – betting that prices would continue to rise. They pushed the price above US$6,000 per tonne in February, US$9,000 per tonne in March and US$11,000 per tonne by mid-April. Since then, the price has seen wild swings, dropping nearly 30% in just two weeks before rebounding again. On Thursday, the price was US$8,699 per tonne.

Big food companies have increased their prices and warned that they will have to continue doing so if cocoa does not stabilize. Companies that use more pure cocoa — rather than the palm oil and other fillers found in many candy bars — will be hit hardest, although some high-end chocolate makers note that they have always paid much higher prices to compensate farmers fairly.

The situation does not seem to be calming down any time soon. Here’s what you need to know.

A combination of low rainfall, plant diseases and aging trees has led to a disappointing harvest in Ivory Coast and Ghana in 2023. The two countries produce about two-thirds of the world’s cocoa, so the shortage has hit hard hit the global market. It continues: The International Cocoa Organization recently forecast that global production will fall short of demand by 374,000 tonnes this season, which ends in September, after a shortfall of 74,000 tonnes last year.

There is no quick fix to this problem. Cocoa trees take years to produce fruit, giving farmers little incentive to plant more since they don’t know what the price of the crop will be when they bear fruit. Some may prefer to use more of their land to grow rubber or mine for gold.

“Yes, there are fundamentals that trigger the move, but then these financial considerations add up and make it worse,” said Judy Ganes, a commodities consultant. “It’s driven by money. »

Like any raw material, cocoa has many different prices.

In Ghana and Ivory Coast, the government sets a seasonal rate at which cocoa farmers are paid, in an effort to protect them from the volatility of world prices. After market prices soared in April, Ivory Coast’s agriculture ministry agreed to raise the rate for the rest of the season — but it’s still well below the increase on global commodity markets.

In other countries, farmers are paid market rates.

But large buyers, like Hershey and Mondelez, and commodity traders buy and sell cocoa on global exchanges, where they trade physical beans as well as futures contracts that may require them to take delivery of beans on a specific date. future.

It is on the world stock exchanges that prices have become disconnected from reality on farms.

The global benchmark price for cocoa is a futures contract traded on the Intercontinental Exchange – and a buyer in this contract accepts a price for a metric ton of cocoa beans to be delivered to one of multiple east coast ports the United States.

A major factor behind the price surge this year is that these futures contracts are settled by physical delivery of cocoa – meaning traders who sell the contracts must maintain large reserves of cocoa beans. This can lead to an upward spiral, with traders forced to buy more cocoa to replenish their stocks.

Trading volume can also affect price action.

But that trading volume fell sharply starting in April – when prices peaked – and the smaller number of trades led to wild price swings over the past two weeks.

Although prices have come down from their highest point, they are likely to remain high for some time, said Paul Joules, an analyst at Rabobank, “due to systemic issues that will take some time to resolve.”

Chocolate prices are increasing overall. When Hershey and Mondelez, owner of brands like Cadbury and Toblerone, released their results recently, price fluctuations were a major talking point.

Mondelez said it raised prices about 6% in the first three months of the year, and Hershey about 5%, and both said they would be willing to push prices higher if the cost cocoa remained high. Both companies reported that their profits increased by double-digit percentages from the previous year as consumers continued to buy their products despite the price hike.

Luca Zaramella, Mondelez’s chief financial officer, told analysts on April 30 that the market was “overreacting” and would most likely correct in the second half of the year.

“[Nevertheless], he added, “it is absolutely essential for us to be prepared in case cocoa remains at these levels. » Mondelez could protect its profits, Mr. Zaramella said, by trying to secure large orders for cocoa during market downturns or by reducing costs of other inputs, such as ingredients.

Some “bean-to-bar” chocolate makers, who have historically paid a premium for the cocoa they get from small farmers, say they have a different experience.

“The price of premium cocoa has never changed,” said Dan Maloney, who runs Sol Cacao, a chocolate company in New York, with his two brothers. “It’s almost like the bulk price has caught up with the premium price, but we’ve still paid the premium price. »

Mr Maloney said he already pays between US$9,000 and US$12,000 per tonne for premium cocoa, which he sources from farmers around the world, particularly in Latin America and Africa. Sol Cacao charges US$8 for a 53g bar, while a 113g Hershey bar costs around US$2.