LatAm Cocoa Production: Sweet Opportunity

As cocoa prices are skyrocketing to multi-decade highs, the global cocoa market is undergoing a profound shift and Brazil, Ecuador, and Colombia are poised to take advantage of it. In February 2024 London cocoa futures on ICE broke the psychological threshold of GBP 5,000 per tonne, while New York cocoa futures exceeded the USD 6,000 per tonne barrier. Africa’s cocoa beans output has been dropping for a while, creating a supply crunch which seems to be here to last. A February 2024 Reuters poll predicted a global deficit of 375,000 tonnes in the 2023/2024 season, more than double from the previous poll in August, and pointing at a third successive supply deficit for the market. And while cocoa farmers in Ivory Coast and Ghana are struggling, Brazil, Ecuador, and Colombia are ready to rise up to the challenge of alleviating the global cocoa shortage.

Coming from a plant genus aptly called genus Theobroma or food of the gods in Greek, cocoa originated in South America and was first brought to Europe in the 1500s by Hernan Cortés. The Aztec recipe for xocoatl received a rather unenthusiastic welcome at first but once sugar was added to it, chocolate gradually became the universally beloved food that it is today. In 2023, the global chocolate market was USD 119.4bn, according to estimates of Grand View Research, and it is expected to grow at a CAGR of 4.1% from 2024 to 2030, driven by the growing demand for high quality chocolate.

Africa, and particularly West Africa, was responsible for over 73% of the global cocoa beans output in 2022/2023, International Cocoa Organization (ICCO) projections showed. Ivory Coast is the biggest cocoa beans producer in the world with 2.18mn tonnes, followed by Ghana with 680,000 tonnes, and Ecuador with 440,000 tonnes. Cameroon, Nigeria, Brazil, and Indonesia complete the top seven of leading global cocoa beans producers.

The cocoa beans output in Africa has been declining over time due to adverse climate conditions such as rising temperatures, irregular weather patterns, and erratic rainfall as well as plant diseases. Moreover, most cocoa farming in Ivory Coast and Ghana is carried out on a small scale with average plantation size of around 5 hectares. Many African cocoa farmers live below the poverty line and their pay is determined by government-fixed rates rather than by international cocoa prices, thus leading to a shortage of investment capital. Recently adopted European legislation restricts cocoa imports from deforested areas, which further adds to the woes of African farmers and even those who do not grow their cocoa beans on deforested lands, still need money to spend on traceability of their produce.

But as cocoa crops in Africa have been declining, those in Latin America have been growing.

Brazil, Ecuador and Colombia are uniquely positioned to claim a larger share of the international cocoa market and help ease the existing supply crunch. While native forests in Africa are being destroyed to make space for cocoa orchards, cocoa is native to South America and planting it is seen as reforestation rather than deforestation. Also newly planted cocoa orchards are more productive, thus resulting in overall lower costs.

Driven by strategic investments, improved farming techniques, and favourable growing conditions, Ecuador’s cocoa beans output has grown from 365,000 tonnes in 2020/2021 to 440,000 tonnes in 2022/2023, giving the country a prominent third place among global cocoa producers. According to estimates by the National Association of Cocoa Exporters and Industrialists of Ecuador, ANECACAO, production could continue to grow to as much as 800,000 tonnes by 2030. Ecuador will surpass Ghana and become the second largest cocoa producer in the world before the end of this decade, Alberto Nacer, Vice President Soft Merchandiser at StoneX Commodity Solutions, said as cited in the January 2024 edition of the ANECACAO magazine.

In the 1980s a fungal disease decimated the cocoa crops in Brazil, which was then the world’s second biggest producer of the commodity. Now, the crops are reviving. “There is a huge opportunity for Brazil to regain a leading role in the global cocoa supply chain,” Valmir Ortega, the founder of Belterra Agroflorestas, a company which plants cocoa trees in degraded rainforest areas, said as cited by Bloomberg in November 2023.

The country has launched the Inova Cacau 2030 Plan, whose end goal is to help Brazil become an industry benchmark for sustainable cocoa production. The Brazilian government believes that increasing cocoa production is of strategic importance for the country, which is the only cocoa producing country that has all the sectors of the cocoa and chocolate value chain - production units, mills, and chocolate factories. The Inova Cacau 2030 Plan has four strategic pillars. The production pillar envisages boosting cocoa production to over 400,000 tonnes by 2030. The actions under the social pillar aim to increase the turnover of cooperatives and encourage the expansion of the number of associated/cooperating producers by 30% by 2030. The objective of the environmental pillar is to promote cocoa farming as an alternative to rehabilitate degraded land and reduce illegal deforestation. The governance pillar will make sure that the plan’s targets are met.

Colombia is another Latin American country that has become an attractive destination for investment in cocoa. The country sports beneficial conditions for producing specialty cocoa and the industry is considered a strategic priority. According to ICCO, 95% of the Colombian beans fall into the fine or flavor cocoa category and the country is one of the leading suppliers of fine or flavor cocoa. Cocoa growing regulations put a strong emphasis on zero deforestation and promote high domestic prices that favour local producers.

Time alone will tell whether Latin American cocoa producers will manage to snatch the top spots from their African counterparts. The so-called cocoa belt, which lies 20 degrees north and south of the equator, is bearing the brunt of climate change processes and the size of cacao growing regions is likely to decline. As demand rapidly outpaces supply, there is bound to be a shift in the global cocoa market. Investment and sustainability practices might just be the key to taking advantage of this situation.

The original news article and data contributions have been taken from the EMIS database.

 

Original source: EMIS Insights