The bitter taste of cocoa
Cocoa has smashed its all-time records. At the beginning of April, the cocoa futures contract topped 10,000 dollars per tonne on the New York stock exchange after averaging 3,000 dollars over recent decades. A 260% surge in one year, outstripping the annual rise posted by the current star stock, Nvidia!
Admittedly, this may be good news for some of the producers and certainly for a few speculators; however, these soaring prices mostly reflect the challenges faced by the entire production chain. Chocolate fans, already impacted by massive inflation on food prices over the past two years, are seeing their sweet indulgence come under attack – even if the price of cocoa only accounts for 5 to 10% of the price of a bar of chocolate.
As with all extraordinary market phenomena, fundamental and speculative factors combine to concoct this bitter brew. The latter amplify the former, as speculation can only flourish in the right soil conditions once the seeds of the crisis have begun to sprout.
What are these seeds, how can they be managed and what can markets do about it? The most obvious seeds are more local: too much rain followed by too much sun plagued the main cocoa producing countries in Africa. The Harmattan winds ruled.
Other seeds tell us more about the state of the world. As a backdrop, the climate drift, regularly intensified by the El Niño cycle, suddenly accelerated and generated weather disruptions in 2023 that even the most alarmist climate experts are unable to explain: 0.2°C excess average temperature across the globe, a record increase. This may signal a disruption to the plant cycle, which points to irregular harvests in years to come. Some will be better, of course, but the trend does not suggest a durable return to ancestral conditions. We shall have to adapt!
The other fatal ingredient, valid for both agriculture and finance, is a lack of diversification. The classic production-driven approach to farming has fostered the creation of industrial cocoa plantations with little or no soil diversity, where plants grow in mechanically impoverished soils taken from old fertile woodland, sometimes primary forests. It only takes a small spanner in the works – in this case wind or rain – to disrupt the system entirely, as all the trees are in fact only one. If the conditions are ripe, parasites prosper as the natural self-defence mechanisms enabled by the diversity of species no longer operate. The same phenomenon is affecting industrial pine tree plantations in Europe and Canada, for example.
The cocoa crisis has exposed one last diversification failure, already witnessed during industrial crises: poor supply diversification. Just as the manufacturing of high-tech chips is concentrated in Taiwan, exposing the economy to potential local tensions, Côte d’Ivoire and Ghana account for 60% of the production of cocoa. A better distribution globally, admittedly at the expense of the concentration of short-term production benefits and therefore the cost price would, however, balance out environmental risks and consequently smooth out prices over the long term.
Between the lines, the cocoa crisis has put the finger on the risks inherent to monoculture and industrialised farming. One recipe is well known to counteract these wrongdoings, whether industrial or agricultural: sustainability. Though sustainable practices are complex to set up, costly at the beginning, and difficult politically – they can, however, maximise long-term profitability. Diversification of species, crop rotation, transient set-asides, sustainable prices for producers, controls on speculation, environmental and cycle restoration: we have all the ingredients at our disposal, though these are not applied spontaneously.
Approaches of this type are partly in the hands of capital markets, which can direct investment flows towards more thoughtful and sensible sources of profit. Evidence has been provided by LBP AM – of which La Financière de l’Echiquier is now part. The group is steadily strengthening its sustainability ambitions, without sacrificing any of its financial objectives. It has recently published an updated version of its biodiversity policy, which includes 6 pledges. Naturally, this will not solve the current cocoa crisis. However, the initiative does demonstrate that investments can be partly directed towards healthier practices, that will be more resilient in a crisis. A condition for a sweeter future… and for chocolate to remain a timeless indulgence.
Disclaimer: The opinions expressed in this document are the fund manager’s own. LFDE shall not be held liable for these opinions in any way. Stocks referred to are given by way of example. Neither their presence in the portfolios nor their performance are guaranteed.