Unit 1 Micro: Economics of Cocoa Prices

A revision blog on recent developments in the international cocoa market

Cocoa prices have recently fallen back from record highs but remain above the average level of the last ten years. Growing demand for cocoa has been coming from the developed world and from e developing countries where rising per capita incomes are fuelling higher demand for chocolate-based products. Chocolate consumption in India, China has been increasing by over 10% annually and this is expected to continue. The recession in many rich nations has caused higher demand for chocolate – widely regarded as an affordable snack.

Cocoa nears highest price in 30 years

On the supply side production is being hit by poor weather conditions, higher fertiliser prices, long-term under-investment in cocoa plantations and a shift of production towards lucrative products such as rubber and palm oil. A recent report found that the world could run out of affordable chocolate within 20 years as farmers abandon their crops in the global cocoa basket of West Africa. 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.”

Ivory Coast’s bittersweet cocoa industry

Hundreds of thousands of small-scale farmers in developing countries rely on cocoa production as their main source of income. And for countries such as the Ivory Coast, cocoa is a hugely important source of export earnings. Despite price rises on the trading floor, precious little reaches the smallholders who make up 95 per cent of growers. The minimal rewards they have historically received do not provide incentives for the time-consuming work of replanting as their cocoa trees die off – a task that usually means moving to a new area of canopied forest and waiting three to five years for a new crop to mature. Cocoa is competing for agricultural space with other commodities like palm oil – which is increasingly in demand for bio-fuels.

A volatile cocoa price makes investment in new cocoa plantations risky. Many young people in the Ivory Coast are moving away from cocoa into rubber.

Ivory Coast cocoa ban hits Belgian chocolate

Cocoa is 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. Some chocolate manufacturers are reported to have reduced the cocoa content in their chocolate products in order to ease the impact of the increasing costs of raw cocoa material in their products and to be able to offer chocolate products at an affordable price.

Update (October 2013)

Rising demand for chocolate sends cocoa prices higher