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Cocoa

cocoa analysisAmericans consume about 3 billion pounds of chocolate annually, but consume less per capita than Europeans. Sixteen out of twenty of the top chocolate consuming countries (per capita) are European. Chocolate consumption is seasonal. People tend to consume more chocolate during winter-time. Prices for chocolate have at times doubled, due to crop shortages, and increased consumption of chocolate (especially of dark chocolate, which requires more cocoa).

Chocolate must be processed from cocoa powder, cocoa butter, and sometimes other oil products. Companies like BT COCOA, Barry Callebaut, Cargill, and Archer-Daniels-Midland Company (ADM) buy cocoa in bulk from Cote d’Ivoire, Ghana, Indonesia and a few South American countries, then process and sell it to confectioners like Hershey Foods (HSY), Nestle (NSRGY), Mars, and Cadbury Schweppes (CSG), to melt, mold, and package. Demand for chocolate directly creates the demand for cocoa, while the supply of cocoa is contingent on the production of African and South American farms.

Currently, the world’s top five cocoa producing nations are the Ivory Coast, Ghana, Indonesia, Nigeria and Cameroon, which together account for 70% of global cocoa production each year.

In July 2008, demand for cocoa powder exceeded supply more than it has for 20 years as companies placed increasing numbers of orders for cocoa powder while suppliers were producing less. This situation meant that prices of cocoa would increase further until increasing chocolate prices decreased cocoa consumption and lowered demand. Supply and demand of cocoa are measured by the stocks to grinding ratio. A low ratio means that there is not a lot of cocoa powder to sell and grinders are working at capacity to meet demand. In June 2008, cocoa prices had risen 50%from the previous year, hitting a 28 year high.

Companies That Stand To Lose From Higher Cocoa Prices

  • The Archer-Daniels-Midland Company (ADM) company buys cocoa to process into chocolate. As it becomes more expensive, they incur more expense to create the same product.
  • Hershey Foods (HSY) and Cadbury Schweppes (CSG) buy chocolate from the Archer Daniel Midlands company, and other wholesalers. Another publicly traded confectioner which relies on cheap cocoa prices for good mark-ups is the Rocky Mountain Chocolate Factory (RMCF). One executive analysis notes that large confectioners can only pass about 80% of raw material costs to customers. They absorb the other 20% of the costs on their income statement.
  • American Dairy Incorporated (ADY), Dean Foods Company (DF), Lifeway Foods (LWAY) and other companies that create chocolate milk must pay more to do so with increased cocoa prices.

Five Factors That Increase The Price Of Cocoa

First, More Demand For Chocolate

More demand for chocolate increases the price of cocoa, which is chocolate’s primary ingredient. Demand for chocolate increased by 20% between 2002 and 2007, as measured by consumption. Increased standard of living in India and China are creating demand for chocolate bars, which used to be considered an elite luxury item. Because of their massive populations, these countries could drive up demand for chocolate and increase the price of cocoa. Chocolate consumption in India, China and demand has been increasing by 15-20% annually.

Second, Mandatory Improvement In African Labor Standards

If the the world’s governments act against child slavery and widespread human rights violation in Cote d’Ivoire and Sub-Saharan Africa, the price of cocoa will rise. As sick as it sounds, below poverty wages and the use of child labor keeps the price of harvesting cocoa down. Reports of up to 200,000 child slaves busy harvesting cocoa has raised humanitarian pleas, but very sadly, no significant action has yet been taken to improve working conditions in the Ivory Coast. Once the humanitarian crisis in Darfur is resolved, the UN will have more resources to deploy in Africa — so they say. Cote d’Ivoire would be a logical next step for intervention. When workers receive proper wages and working conditions, African production costs will increase, and raise cocoa prices. This is why it is good to buy “Fair Trade” chocolate.

Third, Repetitive Conflict In The Cocoa Rich Ivory Coast

Intervention in the Ivory Coast (and Africa in general) is made difficult by regional instability. Cote d’Ivoire almost had a civil war in 2002, and still goes in and out of a precarious political situation. The country also produces 46% of the world’s cocoa. If conflict breaks out, expect cocoa prices to go through the roof due to destroyed or unharvested crops and damaged shipping infrastructure in Africa.

Fourth, Soil Erosion, Drought & Disease

Small crops in cocoa producing countries lower the supply of chocolate. World chocolate consumption is increasing, so the price of cocoa increases. Destructive diseases, such as black pod disease, and adverse weather patterns have plagued cocoa yields in Africa for the past 15 years, losing growers $700 million annually. And more weather challenges and climate shifts will happen.

A few years ago, adverse weather and disease struck once again, and cocoa prices skyrocketed due to shortage. Due to an overabundance of rain, Cote D’Ivoire produced 1.1 million metric tons of cocoa for 2008/09, down 20% from the previous year’s 1.38 million metric tons. Indonesia produced less cocoa in 2008, at 490,000 metric tons (down 5,000 from the previous year). Production increases in Ghana and Cameroon can’t close the gap, and worldwide cocoa production dropped 7% to 3.456 million metric tons for the 2008/09 crop year.

The director of Ghana’s Nature Conservation Research Council, John Mason, believes that African cocoa may be extinct in 20 years due to irresponsible growing practices and resulting soil erosion in Africa!

Fifth, Increasing Focus on Antioxidants

Increased publicity of cocoa’s antioxidant content may entice people who value their health & wellness . Cocoa contains far more antioxidants (which can prevent stroke, cancer, and heart disease) than any other food! For a while, people were encouraged to drink red wine for the antioxidants. A cup of cocoa has twice as many antioxidants! Remember, it’s dark chocolate that you want: the more cacao the better for your health.

What Factors Decrease The Price Of Cocoa?

First, More Demand for Non-Chocolate Sweets

More demand for other sweets that could substitute for chocolate could lower cocoa prices. This demand for other sweets may arise precisely because of increased chocolate prices, though. These sweets could include cakes, hard candy, and non-chocolate cookies.

Genetic Research Boosting Cocoa Supplies

Not nearly as much genetic research has gone into cocoa as other foods. The Mars Company is spearheading research into the cocoa genome to make more pest, disease, and sun-resistant cocoa crops. Cocoa used to grow best in well shaded areas, until genetic research made cocoa plants considerably more sun-resistant. African farmers also need to implement better crop rotation, and farming techniques to improve their yields. As cocoa farming becomes more technologically advanced, there will be more cocoa on the market, driving prices down. But then again, more people may not want GM (genetically-modified) foods including GM cocoa.

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