Some chocolatiers and coffee makers say they will have to pass on the extra cost to consumers
4 min
Global prices for cocoa and coffee are surging as severe weather events hamper production in key regions, raising questions from farm to table over the long-term damage climate change could have on soft commodities.
Cultivating cocoa and coffee requires very specific temperature, water and soil conditions. Now, more frequent heat waves, heavy rainfalls and droughts are damaging harvests and crippling supplies amid ever growing demand from customers worldwide.
“Adverse weather conditions, mostly in the Southern Hemisphere, have played an important role in sending several food commodities sharply higher,” said Ole Hansen , head of commodity strategy at Saxo Bank.
The spikes in prices are a threat to coffee and chocolate makers across the globe.
Swiss consumer-goods giant Nestlé was able to pass only a fraction of the cocoa price increase to customers last year, and it may need to adjust pricing in the future due to persistently high prices, a spokesperson said.
Italian coffee maker Lavazza reported revenue of more than $3 billion for last year, but said profitability was hit by soaring coffee bean prices, particularly for green and Robusta coffee, and its decision to limit price increases.
Likewise, chocolatier Chocoladefabriken Lindt & Spruengli said in its 2023 results that weather and climate conditions played a major role in the global shortage of cocoa beans that led to historically high prices. The company had to lift the sales prices of its products and said it would need to further raise them this year and next if cocoa prices remain at current levels.
Hershey ’s chief executive, Michele Buck , said in February that historic cocoa prices are expected to limit earnings growth this year, and that the company plans to use “every tool in its toolbox,” including price hikes, to manage the impact on business.
In West Africa, where about 70% of global cocoa is produced, powerhouses Ivory Coast and Ghana are facing catastrophic harvests this season as El Niño—the pattern of above-average sea surface temperatures—led to unseasonal heavy rainfalls followed by strong heat waves.
Extreme heat has weakened cocoa trees already damaged from heavy rainfall at the end of last year, according to Morningstar DBRS’s Aarti Magan and Moritz Steinbauer. The rain also worsened road conditions, disrupting cocoa bean deliveries to export ports.
The International Cocoa Organization—a global body composed of cocoa producing and consuming member countries—said in its latest monthly report that it expects the global supply deficit to widen to 374,000 metric tons in the 2023-24 season, from 74,000 tons last season. Global cocoa supply is anticipated to decline by almost 11% to 4.449 million tons when compared with 2022-23.
“Significant declines in production are expected from the top producing countries as they are envisaged to feel the detrimental effect of unfavourable weather conditions and diseases,” the organisation said.
While the effects of climate change are severe, other serious structural issues are also hitting West African cocoa production in the short- to medium-term. Illegal mining poses a significant threat to cocoa farms in Ghana, destroying arable land and poisoning water supplies, and the problem is becoming increasingly relevant in the Ivory Coast, according to BMI.
The issues are being magnified by deforestation carried out to increase cocoa production. Since 1950, Ivory Coast has lost around 90% of its forests, while Ghana has lost around 65% over the same period. This has driven farmers to areas less suited to cocoa cultivation like grasslands, increasing the amount of labor required and bringing further downside risks to the harvest, the research firm said.
The Ivory Coast’s cocoa mid-crop harvest—which officially starts in April and runs until September—is expected to fall to 400,000-500,000 tons from 600,000-620,000 tons last year, with weather expected to play a crucial role in shaping the market balance for the season, ING analysts said, citing estimates from the country’s cocoa regulator. Ghana’s cocoa board also forecasts a slump in the harvest for this season to as low as 422,500 tons, the poorest in more than 20 years, according to BMI.
Neither regulator responded to a request for comment.
Meanwhile, extreme droughts in Southeast Asia—particularly in Vietnam and Indonesia—are resulting in lower coffee bean harvests, hurting producers’ output and global exports. Coffee inventories have recovered somewhat in recent weeks but remain low in recent historical terms. Robusta coffee has seen a severe deterioration in export expectations, while Arabica coffee is expected to return to a relatively narrow surplus this year, said Charles Hart, senior commodities analyst at BMI.
The global coffee benchmark prices, London Robusta futures, are up by 15% on-month to $3,825 a ton. Arabica coffee prices have also surged 17% over the last month to $2.16 a pound in lockstep with Robusta—its highest level since October 2022. Cocoa prices have more than tripled on-year over these supply crunch fears, and risen 49% in the last month alone to $10,050 a ton.
“Cocoa trees are particularly sensitive to weather and require very specific conditions to grow, this means that cocoa prices are especially vulnerable to extreme weather events, such as drought and periods of intense heat, as well as the longer-term impact of climate change,” said Lucrezia Cogliati, associate commodities analyst at BMI.
Cogliati said global cocoa consumption is expected to outpace production for the third consecutive season, with intense seasonal West African winds and plant diseases contributing to significant declines.
Consumers hoping for a return to cheaper prices for life’s little luxuries in the midterm may also be in for a bitter surprise.
“There is no sugarcoating it—consumers will ultimately be faced with higher chocolate prices, products that contain less chocolate, and/or shrinking product sizes,” Morningstar’s Magan and Steinbauer said in a report.
“We anticipate consumers could respond by searching widely for promotional discounts, trading down to value-based chocolate and confectionary products from premium products, switching to private-label from branded products and/or reducing volumes altogether.”
The record-breaking rally for cocoa and coffee is likely more than just a flash in the pan, according to Citi analysts, as adverse weather conditions and strong demand trends are likely to support prices in the months ahead. The U.S. bank estimates Arabica coffee futures in a range of $1.88-$2.15 a pound for the current year, but said projections could be lifted if the outlook for 2024-25 tightens further.
At the heart of it all, climate change is set to play a major role, as the impact of extreme weather events could exacerbate the pressure on cocoa and coffee supplies, according to market watchers.
“I don’t expect prices to remain at these levels, but if we continue to see more unusual weather as a result of global warming then we certainly could see more volatility in terms of cocoa yields going forward, which could impact pricing,” said Paul Joules, commodities analyst at Rabobank.
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4 min
U.S. investors’ enthusiasm over Japanese stocks at this time last year turned out to be misplaced, but the market is again on the list of potential ways to diversify. Corporate shake-ups, hints of inflation after years of declining prices, and a trade battle could work in its favor.
Japanese stocks started 2024 off strong, but an unexpected interest-rate increase in August by the Bank of Japan triggered a sharp decline that the market has spent the rest of the year clawing back. Weakness in the yen has cut into returns in dollar terms. The iShares MSCI Japan ETF , which isn’t hedged, barely returned 7% last year, compared with 30% for the WisdomTree Japan Hedged Equity Fund .
The market is relatively cheap, trading at 15 times forward earnings, about where it was a decade ago, and events on the horizon could give it a boost. Masakazu Takeda, who runs the Hennessy Japan fund, expects earnings growth of mid-single digits—2% after inflation and an additional 2% to 3% as companies return more to shareholders through dividends and buybacks.
“We can easily get 10% plus returns if there’s no exogenous risks,” Takeda told Barron’s in December.
The first couple months of the year could be volatile as investors assess potential spoilers, such as whether the new Trump administration limits its tariff battle to China or goes wider, which would hurt Japan’s export-dependent market. The size of the wage increases labor unions secure in spring negotiations is another risk.
But beyond the headlines, fund managers and strategists see potential positive factors. First, 2024 will likely turn out to have been a record year for corporate earnings because some companies have benefited from rising prices and increasing demand, as well as better capital allocation.
In a note to clients, BofA strategist Masashi Akutsu said the market may again focus on a shift in corporate behavior that has begun to take place in recent years. For years, corporate culture has been resistant to change but recent developments—a battle over Seven & i Holdings that pits the founding family and investors against a bid from Canada’s Alimentation Couche-Tard , and Honda and Nissan ’s merger are examples—have been a wake-up call for Japanese companies to pursue overhauls. He expects a pickup in share buybacks as companies begin to think about shareholder returns more.
A record number of companies have also delisted, often through management buyouts, in another indication that corporate behavior is changing in favor of shareholders.
“Japan is attracting a lot of activist interest in a lot of different guises, says Donald Farquharson, head of the Japanese equities team for Baillie Gifford. “While shareholder proposals are usually unsuccessful, they do start in motion a process behind the scenes about the capital structure.”
For years, money-losing businesses were left alone in large corporations, but the recent spate of activism and focus on shareholder returns has pushed companies to jettison such divisions or take measures to improve them.
That isn‘t to say it is going to be an easy year. A more protectionist world could be problematic for sentiment.
But Japan’s approach could become a model for others in this new world. “Japan has spent the last 30 to 40 years investing in business overseas, with the automotive industry, for example, manufacturing a lot of the cars in the geographies it sells in,” Farquharson said. “That’s true of a lot of what Japan is selling overseas.”
Trade volatility that hits Japanese stocks broadly could offer opportunities. Concerns about tariffs could drag down companies such as Tokio Marine Holdings, which gets half its earnings by selling insurance in the U.S., but wouldn’t be affected by duties. Similarly, Shin-Etsu Chemicals , a silicon wafer behemoth that sells critical materials, including to the chip industry, is another potential winner, Takeda says.
If other companies follow the lead of Japanese exporters and set up shop in the markets they sell in, Japanese automation makers like Nidec and Keyence might benefit as a way to control costs in countries where wages are higher, Farquharson says.
And as Japanese workers get real wage growth and settle into living in an economy no longer in a deflationary rut, companies focused on domestic consumers such as Rakuten Group should benefit. The internet company offers retail and travel, both of which should benefit, but also is home to an online banking and investment platform.
Rakuten’s enterprise value—its market capitalization plus debt—is still less than its annual sales, in part because the company had been investing heavily in its mobile network. But that division is about to hit break even, Farquharson says.
A stock that stands to benefit from consumer spending and the waves or tourists the weak yen is attracting is Orix , a conglomerate whose businesses include an international airport serving Osaka. The company’s aircraft-leasing business also benefits from the production snags and supply-chain disruptions at Airbus and Boeing , Takeda says.
An added benefit: Its financial businesses stand to get a boost as the Bank of Japan slowly normalizes interest rates. The stock trades at about nine times earnings and about par for book value, while paying a 4% dividend yield.
Corrections & Amplifications: The past year is expected to turn out to have been a record one for corporate earnings in Japan. An earlier version of this article incorrectly gave the time frame as the 12 months through March. Separately, Masashi Akutsu is a strategist at BofA. An earlier version incorrectly identified his employer as UBS.
