How does the world market for cocoa work?

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You have always wondered which rules the world market for cocoa follows? How it develops and how the world market price is formed? Do you think that all this sounds pretty complicated and you do not feel like fighting your way through thick tomes? This blog post offers you a short and sweet explanation!

How is the world market price formed?

For your basic understanding: the world market price is formed on an optimally structured market by the interaction of supply and demand of cocoa beans. Cocoa is also listed on the London and New York stock market. As the supply and demand of cocoa is high, pre-sales are often made.

In Ghana, for example, approximately one year before the harvest, 70% of the cocoa beans are sold by the Ghanaian marketing platform COCOBOD. This pre-sale is independent from short-term price fluctuations and can guarantee - a minimum price for the following cocoa season. Moreover, price shocks can be avoided.

However, this price is not exactly the price that is paid for cocoa in Ghana, because there, the COCOBOD marketing platform sets the price for cocoa beans. You wonder who COCOBOD is and how the price is set which is paid to the cocoa farmers*? Don't worry, this will be explained in another blog post about the cocoa market in Ghana! Now it's all about the difficulties of the cocoa price.

 

How has the world market price for cocoa been developing and what are the difficulties?

For a long time, one could  observe a proportional correlation between the price of cocoa and inventories. When stocks increased, prices fell in the same proportion. But this clear correlation is no longer given today: Often, prices are rapidly falling, while the inventories have only increased marginally.

 

This phenomenon demonstrates two things. Firstly, the world market price for cocoa is subject to very large fluctuations. Secondly, the higher the inventory level, the lower the world market price as the bargaining power of the buyers* is increasing.

What does influence the supply? It is heavily 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 important factors.

 

Demand is also influenced by political and economic factors. The three multinationals Callebaut, Olam and Cargill, which account for two thirds of the world's grinding and processing, play a major role[1]. Through their market and bargaining power mentioned above, they have great influence on the price of cocoa.

 

Demand has been stagnating since 2012 and puts pressure on the price once again. Because if many cocoa beans are produced, but demand remains the same, the price drop. You can see the price development of cocoa beans over the last 70 years in the following graph.

Statistics 1: World market price of cocoa 1958-2017

 

Source: Tradingeconomics.com

 

In this graph, which only shows a period of 2 years, it becomes clear that the cocoa price can drop by 50% within 6 months. Imagine that would happen with your salary!

 

Statistics 2: Average price per ton of cocoa beans in world trade, 08/2016 to 08/2018

Source: ICCO 2018

 

After having examined both graphs, it is noticeable that the price is strongly fluctuating, but does not really rise in the long run. The price level of today has already been reached in the 1970s. The big problem is that cocoa farmers* were able to buy considerably more with 2000 dollars in the 1970s than they can today.

A small example for clarification: In 1974 a Volkswagen Golf could be bought for 8,000 DM (approx. 4000 Euro)[2]. Today it costs around 20,000 euros, five times as much. A John Deere tractor could also be purchased in 1972 for less than 10,000 euros, but today it costs more than 20 times[3].

So, while products that are produced in the global North and involve a lot of value creation will become significantly more expensive over decades, the prices for cocoa and other agricultural raw materials in the global South will stagnate. That's why it's so important to bring value to Africa’s producing countries.

To read about the situation and income of cocoa farmers* click here. Would you like to know how the price of chocolate is determined and what fluctuations in the world market price mean for cocoa farmers? Then keep on reading - our next blog post tackles exactly this topic. If you find all this information pretty hard to digest – don’t worry, our Made in Africa chocolate will calm you down. This is your shortcut to our online shop!

 

Sources:

[1] „Preisgestaltung in der Wertschöpfungskette Kakao –Ursachen und Auswirkungen“ (Hütz-Adams: 2018)

[2] https://www.focus.de/auto/ratgeber/kosten/tid-27994/autopreise-und-inflation-warum-der-golf-7-eigentlich-10-390-euro-kosten-muesste_aid_853467.html

[3] https://www.tractordata.com/farm-tractors/000/0/6/64-john-deere-4020.html