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THE IMPACTS OF THE RUSSIAN-UKRANIAN CONFLICT ON THE COCOA MARKET

By: Alexis Rubinstein, Managing Editor - Coffee Network

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THE IMPACTS OF THE RUSSIAN-UKRANIAN CONFLICT ON THE COCOA MARKET
 
Leonardo Rossetti, Arthur Machado
Alexis Rubinstein
 

CocoaNetwork (New York) – Last week, on March 29th, the Russian-Ukrainian conflict entered its 34th day, with diplomatic negotiations at an impasse and continued economic damage – so far, according to the Ukrainian government, the invasion of Russia has reached the $565 billion mark in damage to infrastructure, loss of economic growth and other economic factors. Regarding negotiations between both countries, a new three-day round was scheduled to start on March 28th in Turkey.

However, despite Ukraine's President Volodymyr Zelenskiy indicating that he would be willing to accept the demand for "neutrality" - which, according to the President, would still have to be approved in a popular referendum - the Russian government has been skeptical about the possibility of an agreement being reached in the short term, as Ukraine has said it is not willing to discuss some of its demands, such as the demilitarization of the country. Furthermore, in the face of Ukrainian resistance, Russia appears to change its military tactics. The recent movement of Russian forces in Ukrainian territory seems to indicate the beginning of a new stage, in which Moscow is reducing its battlefront in the country's capital, Kyiv, and starting to focus on what it calls the "liberation" of the Donbas region. Considering that it is still too early to assess in depth, it is important to point out that such a change, in fact, could be an attempt to regroup its forces and carry out war efforts in one focal point – something far from the beginning of the end of the conflict.

In light of this, the continuation of the conflict in Eastern Europe – and, possibly, of the Western sanctions against Russia – should continue to impact international commodity markets, especially grains (corn and wheat), energy and fertilizers. In the case of cocoa, on the other hand, as both countries are not producers, the conflict has had an indirect impact on the international market for the bean and its by-products, especially due to the limited logistics and supply of agricultural inputs. Thus, with regard to global logistics, in addition to the increase in sea freight and route restrictions, the closing and diversion of airports has been one of the main points of attention, given that airports are one of the main channels for consumption of chocolate.

As cocoa-processing countries, both Russia and Ukraine have large chocolate-producing companies on their territory, so that, on the one hand, in Ukraine, the conflict makes maintaining operations in parts of the country unsustainable, due to the threat to staff and facilities. While, on the other hand, in Russia, production barriers are related to the rising cost of inputs – since the Russian ruble has been showing strong devaluation against the dollar; the sanctions imposed by the West, which hamper international payment methods and, consequently, limit Russia's participation in the global market; and, also, to the economic uncertainties generated by the conflict.

As far as chocolate-producing companies are concerned, some important companies such as Nestlé, Lindt and Mars endorsed the sanctions imposed on Russia and announced the reduction or suspension of their activities in the country, with the interruption of the sale of a series of products and with the of new investments in its brands in the country.

On the international trade side, as pointed out above, both countries are net importers of cocoa and derivatives. It is estimated that, in 2020, Ukraine imported around 16,450 tonnes of cocoa beans, especially those from Côte d'Ivoire and Ghana (99.1% of the total), while, in relation to by-products, the country imported 14.03 thousand, 13.9 thousand and 8.23 ​​thousand tons of cocoa paste, powder and butter, respectively.

UKRAINE'S MAIN PARTNER REGIONS
In the case of Russia, according to government data, in 2021, the country imported about 67,600 tons of cocoa beans, mainly from West Africa (82.6% of the total) and Central and South America ( 17.2%). Regarding the main by-products, in 2021, Russia imported 42.67 thousand tons of pulp; 40.92 thousand tons of butter; and 58.78 thousand tons of cocoa powder. Considering only by-products, Russian demand corresponds to around 2.9% of global grindings, estimated by the International Cocoa Organization (ICCO) at 4,959 million tons in the 2020/21 season. By adding to this account the almonds imported by the country, which are processed domestically, this account may exceed 4.0% in the potential negative impact of sanctions imposed on Russia on global milling.
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Russia'S MAIN PARTNER REGIONS

From the point of view of production, what raises concern is the availability of fertilizers in the global market, since Russia is one of the main producing countries of the input. According to IHS Markit, most cocoa producers in Côte d'Ivoire and Ghana – the world's leading producers, representing more than 60% of global production – import potassium and nitrogen fertilizers from Russia and Belarus, another country sanctioned since the beginning of the conflict for having allied with Russia. Thus, considering that most cocoa trees in producing regions are old and the soil does not provide all the necessary nutrients, the perspective is that the limitation in the world supply of fertilizers will impact both quantitatively and qualitatively the production of many countries. Consequently, in the international market, if the conflict is prolonged, the tendency is for an increase in production costs, which would certainly impact the international prices of cocoa and its by-products.

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