The global cocoa market is a focus of much attention at the moment. Global prices are close to record highs and are likely to stay strong for some time to come. Just two weeks ago we learnt of the single largest cocoa trade in 14 years with a hedge fund manager purchasing 240,000 tonnes of cocoa beans (seven per cent of the entire world’s supply) valued at £650m ($992m) and sufficient to make five billion chocolate bars!
High prices are the result of surging market demand and limits to available supply. Jürgen Steinemann, chief executive of Barry Callebaut, a chocolatier supplying many of the world’s top foods groups, is reported as saying that: “At this moment, cocoa is a scarce material: demand has been rising, supply has been stable, so prices have gone up.”
Market demand for cocoa is coming from the developed world and emerging markets - rising per capita incomes are fuelling higher demand for chocolate-based products. Chocolate consumption in India, China and demand has been increasing by 15-20% annually and this is expected to continue.
On the supply side there are signs that production is being hit by poor weather conditions, underinvestment in cocoa plantations and a shift of production away from cocoa towards lucrative products such as rubber. Destructive diseases, such as black pod disease have plagued cocoa yields in Africa for the past 15 years.
According to a report in the Scottish newspaper the Herald, “Ivorian cocoa trees, planted more than 25 years ago, have already passed their peak of productivity and, without new planting, production in the country is likely to drop every year, tightening the global market as demand rebounds.”
Cocoa is of course a basic ingredient in the multitude of chocolate bars and cakes that Britons consume on an enormous scale each day. According to a report in the Independent, under EU rules, a milk chocolate bar must consist of at minimum 25 per cent cocoa solids. Dark bars need at least 35 per cent.
Millions of people particularly small-scale farmers in developing countries rely on cocoa production as a direct source of income. And for countries such as the Ivory Coast, cocoa is a hugely important source of export earnings. The largest producing countries are Côte d’Ivoire, Ghana and Indonesia.
Drying cocoa beans in Ghana (Source: Flickr, creative commons licence)
Suggestions for further research
Justin Rowlatt from BBC Newsnight reports on developments in the cocoa market and the impact of speculation.
Trading economics: Cocoa Futures Trading Chart With Historical Prices
Global exchange: The Chocolate Industry: Poverty Behind the Sweetness
There is a huge amount of economics in this issue - here is a selection of issues and questins:
1/ The impact of weather patterns on the harvests of the world’s biggest producers such as the Ivory Coast
2/ The growing role of speculative trading in cocoa - with global interest rates low and fears of a return to higher inflation - are speculators using commodities as a hedge against future inflation?
3/ The effects of rising world prices on the variable costs of food manufacturers and - ultimately - to the prices that we pay as consumers
4/ The impact of higher prices on some of the world’s poorest economies and consumers - who actually profits from higher world cocoa prices? Campaigners for the West African cocoa farmers that provide most of the world’s supply say that they are the last to benefit from high prices and speculation.
5/ Are higher cocoa prices sustainable in the medium term? How might related markets for other soft commodities be affected by these sharp price movements?
6/ Which businesses will benefit from a period of high cocoa prices?
Add these revision guides and worked answers to your essential revision resources for AS & A2 Economics exams this summer. Our revision guides are brand new and bring your tired old...