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The Economics of Chocolate Part 2: Supply, Demand and Cocoa Trading

Before I began working on part one of this two part series, I was simply reading up on chocolates because you know, why not?  Chocolates after all has been part of our lives whether it be during special occasions or just a regular daily treat.  Recently, the price increasing price of chocolate, specifically cacao beans have been gracing the headlines and as I delve deeper into the economics of chocolate, I find that it is more complex and interesting than just unwrapping a candy bar. 

Almost 75% of the world’s cocoa come from Africa specifically from Ghana and Côte d’Ivoire.  Cocoa trees thrive in humid and tropical environments typically under the shade of taller trees that serve as a canopy.  Cocoa farms are small operations are fairly small and their survival are currently threatened by the climate crisis.  Majority of farm workers are incredibly poor and quite ironically have never even tasted a chocolate bar.

Meanwhile, majority of the world’s consumers of chocolates are outside Africa and are mostly concentrated in Europe.

It’s a complex process from the cocoa pods of Africa to the candy bars of Europe and the United States.  Small farmers sell to middle men who will sort and package the beans to port cities and at this point international trading companies will ship the beans to Europe and the United States.  Then, cocoa beans enter the financial markets through commodities trading.  

Commodity Trading is the buying and selling of basic raw materials which usually happens through futures contracts.  Futures contracts is an agreement to buy or sell a commodity like in this case, cocoa, at a certain price at a specified future date.  

These contracts are like rain checks, which allow the purchaser to secure a low price for cocoa.  If the price of of cocoa increased say in a year or so, the trader can resell the commodity at a profit.  However if the the price of cocoa falls below the value it was purchased, the trader loses.  It’s similar to the stock market, but for commodity markets, the prices tend to be more volatile.  

Cocoa commodity traders need to arm themselves with supply trends and the factors that affect the market.  For instance, majority of the supply of cocoa is concentrated in Africa where political and civil unrest can significantly affect quantity and eventually price.  Information on local trends, weather, fair trade legislations, etc. are important when considering these futures contracts.

Commodities trading are important because they help stabilize supply of these much needed raw materials such as milk, sugar, etc. in light of the volatile prices and prevent a stockout.

Recently however, panic buying from chocolate manufacturers have ensued in light of the increasing prices of cocoa.  Increasing prices are due to supply factors such as heavy government regulation of setting price for farmers including cutting back on fertilizers that make the cacao trees more vulnerable to bad weather and disease.  But majority of the rising concern comes from climate change’s unpredictable patterns that wreaked havoc to crops.  

The bitter part of this chocolate equation is that other component of this delectable dessert, which is sugar is also experiencing its own supply problems due to climate change.

So if you’re starting to experience chocolate inflation or chocolate shrink-flation, then you know why.  And if you’re starting to feel the stress of these possibilities, it’s totally fine to go for your go-to stress reliever…chocolate. 

The Gist…

  • Cocoa is traded as a commodity, which means that it is usually traded through futures

  • Many factors, such as climate change and political unrest, influence the volatile prices of cocoa

  • Cocoa prices are rapidly increasing due to climate change’s unpredictable patterns wreaking havoc in West Africa.

  • Climate change is also creating sugar shortages, which raise the prices of chocolate as a whole

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