London's LIFFE futures exchange pulled in prices of £1755 (€1958) a tonne for cocoa on Friday, a marked fall from the £2045(€2281) achieved in February on the back of supply concerns.
While other key commodities in the chocolate makers 'basket' have fallen in recent weeks, such as oil and wheat, cocoa inputs have hovered high, offering little relief to manufacturers using derivatives of the cocoa bean.
And in terms of world cocoa grindings, an indicator of cocoa demand, Belgian bank Fortis wrote in its quarterly commodities report released this week that it expects grindings to fall by 3 per cent on the year in 2009.
Consumption of chocolate in the emerging markets of Asia and Eastern has declined “to a lesser extent elsewhere”, which will feed through into lower grindings, said Fortis.
Although feeding the hope that chocolate can be resilient in a time of recession, recent data show European fourth quarter grindings rose 0.1 per cent on the year while US grindings moved up by 1.85 per cent on the year.
But according to the bank, a further indicator of the drop in chocolate sales comes from "the fact that the previously substantial differentials for top quality cocoa beans have now collapsed".
The ICCO estimates that in 2008-09 world cocoa production is slated to fall around 45,000 metric tons short of consumption, despite slowing demand. Although in terms of supplies, the world stockpile of cocoa is estimated at 1.5 million tons.
Hedging tools and price rises to absorb cocoa rises
In this climate, chocolate manufacturers have needed to adapt their business in order to deal with the higher costs.
Announcing Cadbury's annual results last week, Ken Hanna, CFO at the number one UK chocolate maker said the firm had already implemented price increases to cover anticipated input cost pressures which would be felt in 2009.
He added: “It is commercially sensitive and we don’t discuss all of our hedging policies, but if cocoa stays high and it is not as high as it was two weeks ago, the industry will have to look a pricing – I would say modest pricing for 2010.”
But what really is causing the price spiral?
Observers of the cocoa industry continue to speculate on the role investment and hedge funds play in price increases. Recent history has revealed a sharp increase in cocoa price without evidence of a shortage of beans, and a subsequent fall without any absolute news of considerable oversupply.