How Red Sea tension is impacting cocoa prices

Trade tensions and climate change are putting immense pressure on cocoa prices and production in the commodities market, causing uncertainty and volatility. China's call for Iran to rein in attacks by the Iran-backed Houthis in the Red Sea is leading to a surge in freight rates, impacting cocoa prices in December. The ripple effects of these attacks are disrupting global shipping routes, with up to 30% of shipping being diverted away from the Red Sea. Additionally, challenges at the Panama Canal due to climate change-induced water shortages are further complicating the situation, leading to delays in goods and price hikes, ultimately contributing to inflation. In West Africa, the world's largest cocoa production belt, concerns over supply constraints loom large. Cote d'Ivoire, a major cocoa producer, recently halted cocoa export contracts for the 2024/2025 season due to uncertainties surrounding crop yields. Climate change has exacerbated these uncertainties, with flooding and heavy rains disrupting cocoa production in both Cote d'Ivoire and Ghana. The impact of climate change on cocoa production is further exacerbated by the spread of diseases like swollen shoots and black pod, along with unsustainable farming practices contributing to declining yields. Despite efforts to mitigate the effects of climate change on cocoa production, such as investing in new tree varieties and sustainable farming methods, the challenges persist. The current estimates suggest a significant drop in cocoa production compared to previous seasons, leading to a sharp decline in exports and rising prices. The Intercontinental Exchange and London-New York prices for cocoa have already witnessed a substantial increase, with prices hovering around £3,750 per ton, significantly higher than the previous year. Looking ahead, the outlook for cocoa prices remains uncertain, with further declines in production anticipated. Factors such as disrupted supply chains and prolonged transportation times could drive prices even higher, potentially reaching record levels. The need for significant investments in the cocoa sector, including sustainable farming practices and new tree varieties, is crucial to address the challenges posed by climate change and ensure the long-term sustainability of cocoa production. As the commodities market grapples with the impact of trade tensions, climate change, and supply constraints, stakeholders in the cocoa industry face mounting challenges in ensuring the stability of cocoa prices and production levels. The road ahead requires a concerted effort from cocoa suppliers to invest in the sector's resilience and sustainability, laying the groundwork for a more secure and stable cocoa market in the face of evolving global challenges.