After languishing for months due to weak demand in the wake of pandemic induced lockdowns, cocoa prices have surged in the last several days following supply uncertainties that have cast a shadow over the market. Renewed optimism over demand is also a factor. On ICE in New York, cocoa is up by a fifth to $2,753/tonne (November 24) from around $2,250 a tonne early November, with potential for further rise.

Until October, weak grinding figures and poor demand growth following coronavirus-related movement restrictions had depressed cocoa prices. Lower grinding figures (6 to 10 per cent) were reported from North America, Europe and Asia. Clearly, demand was hit hard because reduced incomes and restricted mobility weighed on snack sales.

Suddenly, risks hang over supply outlook. Sustainable production is a key aspect of purchase for large buyers; but key producers are not too keen to embrace it without a price premium. Two of the world’s largest cocoa producers – Ivory Coast and Ghana – have announced plans to suspend programmess that normally allow buyers to verify if cocoa is grown sustainably.

Ivory Coast and Ghana seek to impose a premium called Living Income Differential (LID) in order to alleviate poverty and the premium is $400 a tonne. While there is general support from chocolate companies for LID premium payment, the producers suspect some buyers may seek to avoid it.

So, there is now dispute over LID price premium between producers on the one hand and confectioners and traders on the other. Of course, the bargain over higher prices is not new, and in the past threats to suspend supplies had fizzled out.

However, if implemented this time, the supply chain risks getting disrupted. Producers will incur additional costs to be able to produce sustainably and ethically, while buyers will have to pay a premium to claim that the raw material they have sourced is sustainably produced.

But that’s not all. Supplies from Ivory Coast face weather threat and the country is seen facing risk of civil unrest following politically controversial re-election of the President. All these have translated into elevated supply risks and elevated market prices.

At the same time, the demand side is beginning to present a cautiously optimistic picture with the hope that the Corona crisis will be overcome sooner rather than later because of positive reports about vaccines hitting market.

To take advantage of supply uncertainties and anticipated demand recovery, short-term oriented market participants have switched their positioning in cocoa which had been briefly net short early this month to net long again. This shows their expectation that the supply risks will continue to be on the agenda for some more time.

It would be speculative to assert whether or not the supply risks will materialise. If they don’t, then prices are likely to fall back over time. At the same time, new lockdown restrictions such as in Europe (world’s largest consumer) are not supportive of demand.

So, the cocoa market is buffeted. By the end of the year, cocoa could trade anywhere between $2,400 and $2,700 a tonne.

Interestingly, producing countries are turning grinders. Ivory Coast and Ghana, which together account for 60 per cent of the 4.7 million tonnes produced worldwide, grind almost a third of their beans themselves. Similarly, world’s third largest producer Ecuador (330,000 tonnes) has also started to expand its grinding capacities. In other words, primary producers want to capture higher value domestically.