How is the world market price formed?
For basic understanding: the world market price is formed on an optimally structured market by the coincidence of supply and demand of cocoa beans. In addition, cocoa is listed on the London and New York Stock Exchanges. As cocoa supply and demand are high, advance sales are often made.
In Ghana, for example, 70% of cocoa beans are sold approximately 1 year before harvest by the Ghanaian marketing platform COCOBOD. In this way, a minimum price can be guaranteed for the following cocoa season, even independent of short-term price fluctuations, and price shocks can be cushioned.
However, this price is not 1:1 the price paid for cocoa in Ghana, because the COCOBOD marketing platform sets the price for cocoa beans. Are you wondering who COCOBOD is and how the price that ultimately goes to the cocoa farmers comes about? Don't worry, that will be explained in the blog post about the cocoa market in Ghana! For now, let's talk about the difficulties of cocoa pricing.
How does the world market price for cocoa develop and what are the difficulties?
For a long time, a proportional relationship between cocoa price and stocks could be observed. When inventories rose, prices fell in the same proportion. But this certainty no longer exists today. This is evidenced by high price crashes with only small increases in inventories.
This phenomenon makes two things clear. First, that the world market price for cocoa is subject to very large fluctuations, and second, that the higher the inventory, the lower the world market price. This is because the higher the supply, the greater the bargaining power of the buyers.
The supply of cocoa beans is highly dependent on the harvest, which in turn depends on certain weather conditions such as rainfall. Political and economic reasons such as wars, trade barriers and economic crises in the growing country can also be significant factors in supply.
Demand is also influenced by political and economic factors. Here, the three multinationals Callebaut, Olam and Cargill, which operate 2/3 of the world's milling and processing, play a major role. Through their market power and the above-mentioned bargaining power, they have a great influence on the cocoa price.
This demand has been stagnating since 2012 and thus further depressing the price. Because if many cocoa beans are produced, but the demand remains the same, the price falls again. The price development of cocoa beans over the last 70 years can be seen in the following graph.
Statistic 1: World market price of cocoa 1958-2017
In this graph, which represents only a 2-year period, it is clear that the price of cocoa can fall by 50% in 6 months. Imagine if that happened to your salary!
Statistic 2: Average price per ton of cocoa beans in global trade, 08/2016 to 08/2018.
What is noticeable after looking at both graphs is that the price is highly fluctuating, but not really increasing over the long term. So the price level of today has already been reached even in the 70s. The big problem is that cocoa farmers could buy much more from 2000 dollars in the 70s than today.
A small example for clarification: In 1974 a Volkswagen Golf could be bought for 8.000 DM (approx. 4000 Euros). Today, it costs five times as much at around 20,000 euros. Also, a John Deere tractor that could be acquired in 1972 for under 10,000 euros costs more than 20-fold today!
So while products that involve a lot of value creation and are produced in the global North have become significantly more expensive over the decades, the prices for cocoa and other agricultural commodities of the global South have stagnated. That is why it is so important that we bring value creation to the countries of origin in Africa.
You can find out more about the situation of cocoa farmers here. Do you still want to know how the price of chocolate is determined and what fluctuations in the world market price mean for cocoa farmers? Then read on in our next blog post ! Our Made in Africa chocolate is ideal for reading. You can find them in our online store!