With the end of the year festivities over, Easter is now the focus point for industrialists and chocolate craftsmen. At the checkout, consumers might have the unpleasant surprise of having to pay a little extra for their chocolate eggs and rabbits than usual.
Since August, cocoa prices have risen by more than 20% to $2,570 per tonne. Even though prices have been declining after peaking at $2,681 in mid-November, the general upward trend could continue. The two largest producers in the world, Côte d’Ivoire and Ghana, which produce more than 60% of the world’s beans (ahead of Nigeria and Ecuador), want to join forces on the Opec model in order to control prices.
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A fund for lean times
Their plan is to impose a premium of $400 per tonne sold starting in October 2020. Beyond a price of $2,900, the money would be channeled into a fund to support the industry during lean periods. Through this premium, Côte d’Ivoire and Ghana want to better remunerate farmers who have been hit hard by the collapse of prices in 2017. Due to over-abundant harvests, the ton had fallen to $1,780.
A first steps towards the formation of a cartel was taken in October 2018 when Côte d’Ivoire and Ghana harmonized the prices paid to farmers, whose conditions are far from appealing. According to the World Bank, 80% of farmers in the cocoa sector live on less than $3 a day. They capture just 5.5% of this market valued at more than $100 billion a year, while the governments of consumer countries captures 15% of the market with VAT on chocolate bar sales alone.
Industrialists are not opposed, but skeptical
Industrialists and traders (Mars, Mondelez, Cargill, Nestlé, Barry Callebaut, Olam…) are not against the principle of a better remuneration for the farmers. Especially for products that benefit from fair or sustainable trade labeling. However, they are more skeptical about the modalities proposed by Côte d’Ivoire and Ghana.
JP Morgan’s analysts entered into discussions with Hershey’s executives in order to understand the situation. Hershey’s, which manufactures Smarties and KitKat for Nestlé explained that”is not convinced that the cartel is the ideal mechanism to achieve this goal; however, Hershey’s does not seem to be opposed to it, even if its implementation could lead to higher costs,”. Experts from the American bank pointed out in passing that Hershey’s has historically always maintained its margins by passing on the increased costs of its raw materials to consumers.
More generally, ING’s experts doubt the effectiveness of this measure over time. “It should support the market in the short term but, in the longer term, these higher prices are likely to increase production and therefore supply on the market.” Commerzbank analysts concede that they have difficulty measuring the impact on prices, especially since “some observers believe that the new rule may be abolished after the presidential and legislative elections in both countries at the end of 2020.”
Given the uncertainty surrounding the global economy artificial pricing mechanisms could lead to larger problems in the long term, especially as unlike oil cocoa is not a finite product. Despite these concerns it is evident that farmers require higher compensation and that consumers will likely need to get used to high prices.
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First published in LesEchos, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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