26 June 2020
The direct impact of COVID-19 on cocoa remains unknown. The long lags in the release of quarterly grinding data means that the true impact will only become clear in the second half of this year. The expectation is that lockdown measures and economic penalties of COVID-19 will lead to a slowdown in demand due to a strong relationship between economic growth and cocoa/chocolate consumption. It is worth noting that cocoa is ground into butter and powder, and in combination with vegetable oils and sugar are the building blocks of chocolate. Historically, as disposable incomes fall, base consumption of “luxury” items such as chocolate is reduced.
The reduced demand base will likely lead to weaker prices; however, as of now, there appears to have been no supply side disruptions from COVID-19 for the cocoa market. In comparison to a strong global demand base, we have only seen a gradual expansion of production in West Africa over the last few decades, and at present, the impact of COVID-19 on West Africa is still being identified. The market remains sensitive to weather and the corresponding size of their crops. This is a function of prices not giving the incentive to increase production.
Chris Gadd, Macquarie agricultural commodities analyst