Client Update - 19th April 2024

An escalation of the conflict in the Middle East, where Iran launched a drone and missile strike on Israel last weekend, was unsettling to say the least, however these events had been anticipated for the last few weeks. The relatively mild reaction from investment markets further indicated that this incident was not a surprise. While we sincerely hope for a peaceful and swift resolution to the hostilities in the region, please be assured that our investment team is continuously monitoring the situation and is prepared to respond promptly should it escalate further. Market movements have already moved back to a preoccupation with sticky inflation.

As children packed their bookbags and headed back to school this week, signalling the end of the Easter holidays, many of us savoured the final bites of any remaining Easter eggs. Chocolate is of course a major focus of the season, so much so that the NHS felt the need to issue a warning about excessive sugar consumption ahead of the holidays. However, the impact of soaring cocoa prices is enough to dampen anyone’s sweet tooth.

According to the consumer watchdog Which? the cost of treats like Mini Eggs rocketed by 46.2% this year, with a kilo costing £12.95, up by £4 from last year. Easter eggs from popular brands such as Lindt and Cadbury saw similar hikes, with increases of at least 50%. This surge in chocolate prices serves as a subtle yet stark reminder that, while global food inflation is broadly easing, there are still pockets of pressure present.

The primary driver of the recent rise in cocoa prices is a global shortage in supply, triggered by a disastrous harvest season in West Africa. The Ivory Coast and Ghana, which together account for about 80% of the world’s cocoa production, have suffered catastrophic harvests this season. This has been exacerbated by El Niño—a phenomenon characterised by above-average sea surface temperatures—which has caused unseasonal heavy rainfalls followed by intense heat waves in these regions. This erratic weather has drastically impacted crop yields. Consequently, the scarcity of supply has prompted a significant surge in cocoa bean prices, which this month exceeded £7,900 per tonne for the first time, making cocoa beans approximately 11 times more valuable than oil by weight.

Compounding the issue of erratic weather is the presence of deep-rooted structural challenges, including chronic underinvestment in cocoa farms. While cocoa is primarily cultivated by smallholder farmers, the financial gains from high market prices rarely benefit them directly. Many of these farmers in West Africa live in extreme poverty, with average earnings of less than £1 per day, far below the United Nations' threshold for absolute poverty. Consequently, these financially constrained farmers are unable to reinvest in their lands. This results in older, vulnerable cocoa trees that are less resilient to harsh weather and disease, leading to progressively lower yields over time.

In addition to reducing cocoa supply, adverse weather conditions have also disrupted its distribution. The effects of El Niño, particularly evident in the drought conditions impacting the Panama Canal, have exacerbated global trade delays. This is especially critical given that South America is another key cocoa-producing region. The drought has significantly reduced the canal’s capacity to handle cargo, including the vital shipments of cocoa. As a result, trade through the Panama Canal has plummeted by 32% compared to last year, further straining already stretched supply chains.

In this narrative, we see a striking demonstration of the Butterfly Effect, where small changes in one part of a system can cause significant impacts elsewhere. The same rising water temperatures that are contributing to the 'chocflation' affecting our love of an Easter treat are also responsible for the unseasonably dreary weather we have been experiencing here in the UK. The El Niño phenomenon, originating off the coast of Peru, influences global winds and the jet stream. This, combined with warmer waters along our southwest coast, has fuelled a low-pressure system, leading to increased rainfall across the UK.

As we navigate the repercussions of these interconnected global patterns, it becomes clear that our climate and economic health are inextricably linked. These forces shape our world in significant ways, altering everything from the price tags on our chocolate to how often we find ourselves reaching for umbrellas. Do have a good weekend. I hope it’s a dry one.