Food Producers' Strategy in a Volatile Raw Material Market: Butter, Stabilization Systems, and Chocolate

Therefore, when there was a shortage of butter on the market, everyone quickly found the main explanations for the price increase fr om the same market analysts: the inaccessibility of butter imports from Latin America; the introduction of fat balance control at factories within the framework of "Mercury"; global changes in the dairy fat market; "behind-the-scenes battles" of Russian and Belarusian butter packers; plus the traders and even some producers playing the price hike game, seemingly on cue. Now, everyone is making their decision based on the current moment and, not expecting fundamental changes in 2024, are gradually starting to handle the import of this product themselves.

The conclusion is clear: purchasing exchange-traded raw materials is no longer simple arithmetic, wh ere you only need to keep in mind the demand and current price and by simple multiplication, get the budget and start ordering the product confidently. Here, you additionally need to know global trends for this product; the peculiarities of the national market that adjust global trends; arguments from local producers about the price dynamics of this raw material; opinions of traders who often pursue their interests and market analysts who, of course, will not simply answer your strange questions – you also need to prove to them that you are deeply immersed in this topic. In other words, these challenges are closer to algebra and equations with many unknowns or tasks with two stars. After all, you also need to determine among the raw material suppliers – who to prefer in shares and for what period: large traders (percentage), the spot market (percentage), and raw material producers (percentage)?

And when suddenly at the beginning of 2024, the price of chocolate soared three times, many, realizing the scale of the disaster, just shrugged: "What happened all of a sudden, why, and why isn’t it dropping?"

And immediately the similar case of 2022 with stabilizers for ice cream – carob gum (hardened resin) came to mind. Then the price increase for gum started back in 2019 and lasted until the end of 2022, rising several times as well.

The shortage arose against the backdrop of a poor harvest of carob beans in 2018-2019 – the harvest is collected once a year. The volume of carryover stocks was decreasing, while demand significantly exceeded the harvest. A poor harvest led to a global shortage, as the demand for this component was high, and the geography of carob trees is very limited – mainly Portugal, Spain, and Morocco. The price rose very dynamically and then set all historical records – at that time, a good harvest was only in Morocco, and they do not comply with European price regulation and decided to make money "like for the last time". Many companies worldwide began to abandon this component, as the purchase price from the factory reached over 170 euros per kg. The alternative was combinations of carboxymethylcellulose (chemical thickener - E466) with guar and tara – and many manufacturers switched to it.

And it was during this time that we decided to visit the leaders in natural stabilization systems in Denmark (pioneer of this market), Switzerland, and Russia, who work both on natural carob gum and mixtures with carboxymethylcellulose. They explained to us the difference in functionality for different ice cream mixes, price forecasts, and the development of the stabilizer market on natural and chemical bases – undoubtedly, each had its pros and cons. Only a few European ice cream producers remained adherents of pure gum, and many switched to a carboxymethylcellulose system with various combinations.

But the situation with the price began to stabilize after the good harvest of 2022–2023, and the price was also strongly influenced by a decrease in global demand for this component – a 30% drop compared to pre-crisis times. As a result, for 2023 and the current moment – prices have dropped almost to the pre-crisis period. Now there are still stocks from the last harvest, but the collection of the new harvest has already begun. The price remains at a relatively low level, but further declines are not expected, as this does not cover production costs. Farmers are also holding back the harvest, hoping that the demand situation will change, and they will be able to sell raw materials at a higher price.

The conclusion here is even more complex compared to exchange-traded products – you need to not only track global trends and monitor the national market but also understand the intricate intricacies of stabilization systems. If you need a "clean label" – then you choose a stabilizer from egg yolk, citrus fibers, or potato starch, but this is expensive and requires an almost perfect cold chain – after all, these natural ingredients were "invented by the Lord" not for stabilizing the water-fat emulsion (as in the ice cream mix). If you need it without "E" – then it's a system based on carob gum – but there is always a price risk with this. They say that new types of methylcellulose will soon be synthesized, and compositions with it will be cheaper and better, but what about naturalness then? Answering all these questions is difficult for producers themselves, and you need either a strong in-house R&D lab or close contact with the world's gurus of stabilization systems, who are ready to help, but you must clearly formulate the task, which is also not easy – good and cheap don't happen!

At the beginning of 2024, another "fruit" appeared on the market – cocoa beans with an unprecedented dynamic price increase for all products containing cocoa – just this year it rose from 3,500 British pounds per ton to 10,000 pounds, briefly "went down" to 5,900, and now stopped at around 6,100 pounds – the price increase several times brings unprecedented instability for ice cream producers and does not guarantee a return to old levels even next year, for this season all leaders contracted before spring and now look only to 2025.

Throughout the post-Soviet space, chocolate products, candies, and products containing cocoa and its components are used everywhere and consumed very actively – no wonder Russia ranks 5th in the world (or 7.7% among 13 countries with high chocolate consumption), and any changes in our markets affect many products – ice cream is no exception.

All this prompted the "Shin-Line" team to pack their bags and head to the chocolate capital of Belgium to figure out the situation – visit industrial chocolate producers, talk to market experts, get inspired by ideas in chocolate museums, and enjoy the fabulous tastes of dark delicacies from local "Chocolatiers".

Cocoa trees grow only on a narrow strip of land near the equator – 10 degrees south and 10 degrees north – and need constant temperatures throughout the year, as well as abundant rains. Cocoa can grow in 50 countries, but the main production is concentrated in Central Africa – Ghana and Côte d'Ivoire: they account for about 65-70% of the world's supply of these valuable fruits. In Côte d'Ivoire alone, 1.3 million farmers are engaged in cocoa beans – each has 1 to 3 hectares of land with an average yield of 300 to 500 kg of ready-to-use cocoa beans per hectare. In Côte d'Ivoire, two cocoa bean harvests are taken off per year: in August, farmers harvest the main crop, and the intermediate one in May. The smaller, intermediate harvest is usually reserved primarily for local chocolate producers, whose products are exported either as ready-made sweets or as processed bean products – cocoa liquor and cocoa butter. In 2024, Côte d'Ivoire's national regulator banned contracts for beans from the March harvest until at least the end of June. This means that exporters will compete for raw materials with companies that have their chocolate factories in Côte d'Ivoire. According to unofficial information, officials generally prohibited buying beans from companies that do not have their processing facilities in the country.

To increase the area under cocoa trees, jungles are being cut down – this changes the ecosystem, which is already suffering significantly from climate change – temperature balance and humidity change, leading to reduced yields and diseases of the trees. This time, too many dark stars aligned in the sky, and traders, as always, heated up the situation.

Two-thirds of Côte d'Ivoire's trade income comes from cocoa production, but the industry is endangered by dependence on child labor. The infographic above shows that farmers receive a smaller share of this industry's profit – only 6.6% compared to 16% in 1980, and moreover, 93% of farmers live below the poverty line, with only 30% of their children being able to read and write. The chocolate industry is called upon to continue developing and funding programs that help rescue and rehabilitate children working on cocoa farms. This involves 1.6 million children engaged in hazardous work on cocoa farms in Côte d'Ivoire and Ghana.

Cocoa Market Analysis

"Bearish" Exchange Factors for Cocoa Market Decline:

1. Côte d'Ivoire and Ghana raised cocoa prices by 50%.
2. Continued reduction of net long positions in funds.
3. Geopolitical tension.
4. Record prices in London and New York will lead to reduced demand.
5. Reduced grinding means free processing capacity will be available in the coming months.
6. The world's six largest cocoa processors reported a -25.8% year-on-year decrease in cocoa processing.

"Bullish" Exchange Factors for Cocoa Market Growth:

1. Côte d'Ivoire's supplies dropped by 28% compared to last year.
2. Ghana's supplies decreased by 35% compared to last year.
3. Concerns that West African cocoa suppliers may not fulfill delivery contracts.
4. ICE-tracked cocoa stocks stored in US ports fell to a three-year low of 4,025,112 bags.
5. Upcoming pressure from the new European Deforestation Regulation (EUDR), which comes into effect in January 2025.

Positive Developments in the Market:

1. Rainfall has been above average in most cocoa-growing regions of Côte d'Ivoire, raising hopes for a mid-crop outlook after weeks of dry weather.
2. The number of flowers for future fruits in the summer of 2024 reached a standard level, suggesting an increase in the bean harvest.
3. World leaders began investing large sums in the fermentation and processing of cocoa beans on the African continent itself.
4. These leaders, along with the state, are investing in building schools and recruiting teachers.
5. Experts expect the price in the second half of 2025 to range from 4,000 to 6,000 pounds, with some suggesting contracting once futures settle at 4,700, but... everything is said with the current state of the market – the stars in the sky might align differently again.

The conclusions in this chocolate case are even more non-trivial: here, market trends, social problems on a distant continent, research in one's R&D laboratories of various chocolates and glazes, and joint work with academies of world leaders in industrial chocolate production intersect. Chocolate with a capital "C" requires the same approach as Perfume – it’s like two true arts, and sometimes real magic happens only after 1,000 trials and errors.

At the end of the visit, for dessert, we visited several shops of Belgian "Chocolatiers" to draw inspiration from the packaging designs, intricate decorations of artisanal chocolates, candies, and desserts, and the amazing aromas and tastes of extraordinary but completely natural Belgian chocolate.