Cocoa prices in London and New York are tight as shortages bite

A frenzied hunt by chocolate makers for top-quality cocoa has left a number of old, poor-quality beans in London warehouses, leading to a rare price divergence between the UK and the US.

Last month, cocoa futures traded in New York rose sharply, reaching above $10,000 last week, while prices in London fell, falling below $6,400 earlier this month. Despite the sell-off in recent days, US prices are down just 3% since the start of last month, compared with a 16% drop for the UK contract.

Cocoa prices in both markets rose sharply earlier this year as bad weather and disease decimated crops in Ghana and Ivory Coast, where two-thirds of the world’s cocoa beans are grown, and as hedge funds have accumulated on the market.

But the global shortage has led to a race among cocoa bean processors to secure high-quality beans while avoiding older varieties. Harvested bean stocks are emptying, with US stocks at their lowest level in 15 years and London warehouses at their lowest level since 2021.

What’s left in London is a “poison pill,” said Martijn Bron, who was global head of cocoa and chocolate trading for agricultural giant Cargill until 2022.

The capital of Great Britain has historically been the market for large buyers of cocoa. But at the end of August, more than a quarter of the 54,650 metric tons of cocoa beans held in ICE’s London exchange warehouses were more than three years old, according to exchange data. Moreover, almost 80% of this older stock is bulk storage beans grown in Cameroon, which are widely seen in the industry as being of inferior quality for chocolate making.

“You have this duality where a significant amount of these (cocoa) stocks are old and of non-preferred origin,” said Oran van Dort, commodities analyst at Rabobank.

“Anyone who . . . wishes to receive delivery – that is, not a speculator – has a high probability of receiving this old and less favored cocoa. And you might want to avoid that if you’re a chocolate maker,” he said. “The consequence is that there is less demand for those things in London, which drives prices down.”

Potential buyers in London face another complication as they try to make up for the global cocoa shortage. Until August, chocolate processors were aggressively buying beans from London to build inventories ahead of new EU deforestation legislation that comes into force in January 2025.

These new rules force traders and chocolate companies to prove that the cocoa they import into the EU has not been grown on deforested land.

Some traders and industry executives hoped the incoming rules would allow inferior material to be written off as unusable. But the EU has allowed older, existing stocks to be “bundled” in bulk – meaning they could still be bought and sold.

People “thought this was a way, maybe, to clear up the old cocoa and get rid of it and London would be the premium market representing fresh cocoa with documents. And actually these old (bulk shipments from Cameroon) will continue to sail (go),” said Pamela Thornton, a veteran cocoa trader.

The pressure is felt in London. Open interest, a measure of market depth, fell, reducing market liquidity and making prices more volatile.

Commercial players such as chocolate companies have looked to New York – historically an attractive market for speculators such as hedge funds – to find high-quality cocoa.

Many hedge funds shorted – betting on a lower price – the New York contract, believing that ample supply would drive the price down. But the weight of money buying better quality cocoa has forced funds to hedge their bets, driving up the price, traders say.

That meant the New York market traded at a premium to London. Cocoa stock on the New York Stock Exchange is newer than London, according to Thornton. “There are no bulk delivery units or cocoa that has been sitting for five years.”

As for the old Cameroonian cocoa on the London Stock Exchange, some of it may still be found in chocolate bars and other products, industry insiders say.

Companies have a few options to cut costs as raw material prices rise, Oran said. They may reduce the size of the chocolate bars, add more other ingredients such as fruit and nuts, or buy lower-quality cocoa, he said.

Larger companies can add a small amount of cheaper Cameroonian cocoa – which, with a better color than taste, is normally used to make powders rather than chocolate – into a mix, but are constrained by their own quality protocols, Thornton said. Smaller or private companies, on the other hand, “have more flexibility to cut costs,” she said.

“This will change the taste,” Thornton said, “but to be honest with milk chocolate, until you add the sugar and the milk, you can pretty much get away with anything.”