Although cocoa prices in financial markets have soared, the rise has disproportionately benefited cocoa farmers, bean processors, speculators and chocolatiers.
In March, prices soared to more than $10,000 a tonne in New York after a poor harvest in West Africa due to a combination of bad weather and disease-ravaged old plantations.
They have since fallen off the top, but are still three times higher than last year.
Big gap between producers
In Ivory Coast and Ghana, the world’s largest cocoa producers, prices are set from early October based on previous months.
But by that point the crops were “already largely pre-sold,” said Tancrede Voituriez of the French agricultural research and cooperation agency CIRAD.
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This reduces the impact of cocoa price fluctuations — either up or down.
As a result, small-scale producers, who generally earn little to live on, did not immediately benefit from the wave.
That said, authorities raised the price of the intermediate crop in April by 50 percent to between $2,300 and $2,500 a tonne — a modest increase compared to what farmers could charge on international exchanges.
In countries with less regulated systems, such as Cameroon, Nigeria, Ecuador and Brazil, growers have been able to gain more from the trend.
There, farmers were allowed to sell their beans to buyers willing to approach the prices paid in financial markets.
But this unregulated approach comes with its own risks.
“The rise in prices has made production more attractive,” David Gonzalez, coordinator of the Peruvian Chamber of Coffee and Cocoa, told AFP.
The fear is that there will be a surplus of cocoa in three to five years – the time needed for farmers hoping to earn money to grow new trees – causing prices to fall back on the land.
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Intermediaries in the hunt
The major processors that grind the beans into butter, liquor or powder — notably Switzerland’s Barry Callebaut, America’s Cargill, Singapore’s Olam — generally negotiate much of their supply in advance.
However, some contracts were not honored, forcing them to search for urgently needed cocoa at high cost and in some cases to slow down production.
Barry Callebaut reported in early April that it had drawn more than usual from its cash reserves to finance grain purchases, but had enough cocoa on hand to meet demand.
Other smaller intermediaries may struggle to advance the funds needed to adjust to the higher prices.
However, there is a group of middlemen who would be happy with the price increases.
“Smugglers would do very well there,” Steve Waterridge of commodities firm Tropical Research Services told AFP.
He said black market traders could have benefited from the system in Ivory Coast and Ghana by buying cocoa at slightly higher prices and selling the beans on the open market in Togo, Guinea, Liberia or Sierra Leone.
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Mixed fortunes in the markets
Cocoa prices rose as supply fell short of demand for a third consecutive year, according to the International Cocoa Organization.
Investment funds that caught wind’s changing bet on higher prices, reaping profits in the process.
But from January onwards, prices became very volatile, even beyond the preference of funds with a penchant for speculation.
Many investors pulled out of the market altogether: the number of contracts traded fell from 334,000 in mid-January to 146,000 in April, according to Saxo Bank’s Ole Hansen.
“You can’t blame speculators for artificially inflating prices,” added Wateridge.
On the other hand, trading houses and chocolatiers tend to hedge against price reversals by betting against financial markets, in this case on falling prices.
After the markets were proven correct and prices soared, many had to deposit more capital to cover their potential losses.
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Others short of cash were forced to abandon their bets, which technically forces them to buy contracts into the market.
This, in turn, automatically pushes up the price of cocoa even more.
Chocolates are customizable
Given the time lag between harvesting the cocoa and producing a final bar, the cost of chocolate on supermarket shelves should not, in theory, have skyrocketed for industry giants Mars, Mondelez, Nestle, Hershey’s and Ferrero.
“We are largely covered as part of our forward contracts for the rest of the year,” Nestle chief executive Ulf Schneider confirmed in April.
But as time goes on, rising raw cocoa prices will eventually hit their bottom line.
To avoid passing costs on to consumers already hurt by rising inflation, manufacturers could change their recipes — increasing the percentage of hazelnuts in Nutella, for example — or reduce the portion size.
Even for artisan chocolatiers, the cost of raw cacao represents only a small part of the finished product.
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“There is a lot of margin” in chocolate bars, Sebastien Langlois, co-founder of the French Cocoa Company, told AFP, mitigating the impact of rising bean costs.
His company, which sells organic and fair trade products, has yet to raise its prices, he added.
Source: AFP