The Economics of Chocolate (2022)

The Economics of Chocolate (1)

Look at a graph of cocoa prices since Valentine's Day 2014, and you'll see a jagged line as ragged as a broken heart.

The price line includes plenty of peaks and valleys, but the sharpest came last September. The line jerked suddenly upward, plateaued at cocoa's highest price in several years, and then plummeted to its original level. It left an ascending spike of almost perfect symmetry. That spike was Ebola, converted into cocoa prices. (And the most recent drop resulted from declining demand for chocolate.)

Cocoa makes a long and winding journey from bean to bar. The crop starts in the farms of tropical nations, especially in West Africa, and travels through ports, shipping containers and processing plants. But before they can reach your bag of M&M's, cocoa beans also travel through an intangible dimension—the financial world of price graphs, futures contracts and commodity ETFs. Ever since the New York Cocoa Exchange was founded in 1925, cocoa has been bought and sold in abstract form.

Before we can peek into the financial world of cocoa, a tour of a typical farm. Cocoa requires tropical climate and shady conditions, which means that cocoa farms don't look much like wheat fields or orange orchards. Trees are grown under a canopy of taller trees, so many farms look like cultivated rainforest. On average, cocoa farms are small operations, around 4 hectares—the size of just 8 football fields. (The average farm in the US, by contrast, is around 95 hectares.) Though cocoa farms can generate relatively big profits, the long-term survival of some farms in question: Recent climate change predictions have made producers nervous, and the world's largest chocolate manufacturers are at work breeding heat- and drought-resistant trees.

Farm workers who harvest cocoa are, on average, extremely poor, with some below the World Bank poverty line of $1.25 per day. A few years ago, a German photographer Jochen Weber traveled to a Brazilian cocoa farm to take some pictures. He bought some Nutella—the sweetened, hazelnut chocolate spread—as gifts to the farm workers who showed him around. All of them considered it a great luxury, and some had hardly ever encountered the product before. “You can't work on a cocoa farm not knowing Nutella!” he remembers thinking. One worker, a woman named Leni, found it so delicious that that very day, she finished the entire container. “She said she couldn't stand it—it was so good.”

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Almost all of the world's cocoa is grown in developing countries and consumed by industrialized countries. The top four producers—Ivory Coast, Nigeria, Ghana and Indonesia—are all in the bottom half of nations by per-capita GDP. More strikingly, the top ten countries ranked by chocolate consumed are all in the top 15 percent. Nine of those countries are in Europe. (In 2012, the United States was ranked 15th.)

It takes a long and complicated supply chain to manage a product that is consumed thousands of miles from where it's grown. “I always thought of it as this giant river trickling down to these ports,” says John Helferich, who directed research and development for the U.S. division of Mars, Inc. until 2005. In a country like Ivory Coast, small farmers first sell to middle men, who sort and transport big bags of beans to shipping centers like the port city of Abidjan.

From the port cities, global businesses start to dip their fingers in the cocoa jar. Middle men sell to international trading companies like Cargill and ADM, which ship the beans to port cities like Philadelphia and Rotterdam. The cocoa beans are still many steps away from becoming chocolate, but by this point, they've entered the financial world.

Commodities traders can participate in the cocoa market in a few ways, but the most common is with cocoa futures. A futures contract is sort of like a rain check: it allows the purchaser to secure a low price. If that price has increased one year later, the trader has a stash of discounted cocoa to resell for a profit. Unlike with a rain check, however, traders suffer the consequences if prices decline. If you buy 1 ton of cocoa futures and the price drops, you'll be stuck paying last year's higher price.

Commodities traders can work for food manufacturers, agricultural trading houses, and investment groups like hedge funds. Jonathan Parkman, who works at a trading house called Marex Spectron in London, says the cocoa world is a triangle of interested parties, all making different bets on the prices of cocoa. “Producers want stable high prices,” he explains. “Chocolate makers want stable low prices. The investor wants a trending market without really minding in which direction.”

In other words, farmers want to sell their crop at a premium, while chocolate companies want to get a good deal on their supply. Commodity traders don't care which side wins, as long as prices rise or fall. (They can make money from falling prices by short-selling futures contracts.)

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As with all commodity trading, traders gain an edge by knowing more about market trends than their competition. “A lot of companies will be pod counting, so they'll go around trees and actually count the number of cocoa pods,” said Emile Mehmet, who is head of bulk commodities at a London-based research agency called Informa. Decades ago, large chocolate producers like Mars would send representatives on pod counting expeditions, in order to spot oncoming low yields in advance. These days, it's a common enough tactic that it only provides a slight edge. Other sources of cocoa-related intelligence: El Niño predictions, processing figures from cocoa grinders, and the quarterly earnings from big chocolate makers.

Cocoa prices are relatively volatile compared to commodities like corn or wheat. “A lot of the world's production is concentrated in a small part of the world,” says Mehmet. This means that local forces can have a global impact on prices. For example, the yearly Harmattan trade winds of West Africa can cause a dusty haze that hangs in the air for days, preventing cocoa pods from developing properly. According to cocoa producers in Ivory Coast, that's the case this year.

A trader who gets wind of news like that can buy cocoa futures, which will rise in value when smaller yields push up the price. In the past, cocoa prices have risen during fungal and insect disease outbreaks. In the future, cocoa prices could rise if climate change shrinks the area where cocoa can feasibly be grown. (On the other hand, climate change could also expand or simply shift cocoa-growing regions.) It's an awkward truth of commodities markets—and stock markets, too—that traders can make good money from bad news.

Which brings us back to Ebola. Last September, when the disease was spreading rapidly through Liberia and Sierra Leone, traders were closely following the news. If Ebola had spread to cocoa-producing regions, it might have decimated the labor force and interrupted the supply chain. As the graph of cocoa prices shows, investors—like grocery shoppers before a snowstorm—recognized the risk of Ebola and started buying cocoa. Prices spiked, and traders who were ahead of the game raked in some extra cash. When it became clear that Ebola wouldn't reach Ivory Coast, however, prices returned to their earlier levels.

So what are commodities markets good for, other than making money? Historically, they were created to allow producers to stabilize their supply. Let's say I sell milk, but my customers complain that milk prices spike every time a blizzard blows through Wisconsin. Futures help me secure a consistent price and sell a more dependable product. That's why big chocolate makers hire traders: They don't want their product's prices to spike and dive along with the price of cocoa. They are why chocolate bars don’t vary much in price – milk, sugar, and cocoa futures keep them consistent.

Over time, though, commodities have grown increasingly abstract, and speculators outside of the chocolate business have gotten in on the game. Some commodities traders might say this is a good thing, if it helps prices take into account real-world problems like weather and disease. John Helferich disagrees. “Commodity traders can sometimes tug around producers and farmers,” he said. A trader might buy cocoa because it's a relatively better deal than, say, gold. This would increase cocoa prices, whether or not cocoa crops are looking strong.

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What traders, producers, and growers would likely agree on is that these days, very few people have a part in every step from bean to bar. Poor farm workers who harvest pods from cocoa trees may never taste produced chocolate—while investors who trade thousands of tons of cocoa may never see a raw cocoa bean. The gift and the burden of globalization is that while all this happens, consumers still get their chocolate.

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FAQs

What are the economic impacts of chocolate? ›

Cocoa is of significant economic importance both for producing and consuming countries. It generates export revenues, income and employment. Cocoa is an important ingredient in the confectionery, and food and beverage industries, and, more recently, in the pharmaceutical and cosmetics industries.

Is chocolate good for the economy? ›

Approximately 68,450 jobs in the U.S. are directly involved in the manufacture of confectionery and chocolate products. When the distribution and sale of these products is taken into consideration, the employment effect triples.

What is the value of the chocolate industry? ›

The global chocolate industry is worth over US$150 billion. West Africa supplies 70% of the cocoa beans, but most of the value in a chocolate bar is generated in Europe and North America.

What is the demand of chocolate? ›

The global cocoa and chocolate market size was valued at USD 46.61 billion in 2021. The market is projected to grow from USD 48.29 billion in 2022 to USD 67.88 billion by 2029, exhibiting a CAGR of 4.98% during the forecast period.

How are the prices set for chocolate? ›

Limited Cocoa Supply Means Higher Chocolate Prices

The prices of these commodities are driven, for the most part, by the commodities market, which sets the price based on supply and demand levels and can result in varying levels of volatility on commodity prices. Overall, the greatest price factor is the cost of cocoa.

Is chocolate a sustainable crop? ›

Even the largest chocolate companies in the world can't say their cocoa is grown sustainably, because they have no idea. And much of it is not. More sustainable chocolate production starts with traceability, which means breaking the current supply chain structure in which the cacao passes through far too many hands.

Is the chocolate industry growing? ›

According to our primary respondents' research, the Chocolate market is predicted to grow at a CAGR of roughly 4.50% during the forecast period. The Chocolate market was estimated to be worth roughly USD 131.9 Million in 2021 and is expected to reach USD 171.7 Million by 2028; based on primary research.

How does chocolate affect the world? ›

Using chocolate to satisfy a sweet tooth never gets old. But gobbling up all those candy bars and bonbons is seriously impacting the environment. The commercial chocolate industry is shrinking rainforests, emitting significant levels of carbon dioxide into our atmosphere, and contributing to climate change.

Why Is chocolate an important product? ›

Chocolate is believed to contain high levels of antioxidants. Some studies have suggested chocolate could lower cholesterol levels and prevent memory decline. Chocolate contains a large number of calories.

Why are cocoa farmers so poor? ›

Deforestation is also linked to higher poverty rates among the cocoa farming community, as people desperate for more income increase their farmland in a bid to sell more produce.

What country buys the most chocolate? ›

The largest chocolate consumers in the world are the Germans with a per capita consumption of 11 kilogrammes per year. Switzerland is ranked as the second-largest with 9.7 kilogrammes per capita, followed by Estonia with 8.8 kilogrammes.

What gender eats the most chocolate? ›

Women prefer to eat chocolate more than men. While preference among women stands at 91%, for men it is 87%.

What makes chocolate more expensive? ›

Expensive chocolates has more Cacao content

On average, all chocolates have at least 50% Cacao solids. Anything below this is termed as bad quality. Dark chocolates have a minimum of 75% of Cacao solids. This is the reason why they are generally more expensive than the others and also taste finer.

Why is chocolate in short supply? ›

Chocolate supply is expected to be thin through the middle of the year, as production plants have been faced with the same labor and shipping issues affecting many other foods.

Why is chocolate becoming more expensive? ›

Like many other foods, the price of chocolate is about to go up. While inflation and on-going issues with the supply chain have caused chocolate prices to increase 2022, the reason behind this spike is actually much larger and could be long-term (via CBS News).

What is the average cost of chocolate? ›

Candy and chocolate average unit price in the U.S. 2019, by segment. The price for chocolate candy outpaced non-chocolate in 2019, averaging 2.27 U.S. dollars per unit compared to 1.88 for non-chocolate.

How much does it cost to produce chocolate? ›

The full-cost of farmer operations is $25 per kilogram of cacao. High-quality cacao from other regions, Klassen tells me, goes for $7 to $9 per kilogram, and commodity cacao—what you're getting in a Hershey's bar—is $3.50 per kilogram.

Why is chocolate price elastic? ›

The demand for chocolates is not much elastic because chocolates do not have many substitutes. But if we define a commodity narrowly we find close substitutes and demand is fairly elastic. For example, there are many varieties of chocolates.

What is wrong with the chocolate industry? ›

In addition, the cocoa industry has been blamed for destroying tropical rainforests. In their native habitat, cocoa trees grow under the protective forest canopy. Farmers can coax fast growth and higher yields through intensive use of herbicides and pesticides on cleared land.

Why is chocolate so bad for the environment? ›

Cocoa farmers usually clear tropical forests to plant new cocoa trees rather than reusing the same land. That practice has spurred massive deforestation in West Africa, particularly in Ivory Coast. Experts estimate that 70% of the country's illegal deforestation is related to cocoa farming.

Why is the chocolate industry bad? ›

The demand for cacao has meant mass deforestation across the globe. The consequent effects of this are diminished biodiversity in the most naturally rich forest habitats in the world the consequences of overused soil and decimation of natural habitats from a multitude of organisms.

Who is the target market for chocolate? ›

When it comes to age, chocolate is popular among everyone. However, the biggest consumers are aged between 18-35 years old.

Who dominates the chocolate industry? ›

The Hershey Company was the leading chocolate manufacturer in the United States in 2018 in terms of market share. The company held over 43 percent of the total market, with only Mars as a significant competitor.

What are the trends in the chocolate market? ›

Key trends impacting the market include growing demand for organic, vegan, sugar-free, and gluten-free chocolates. With growing awareness about the negative effects of synthetic products on health and the environment, most health-conscious and informed consumers have started using organic products.

What is the environmental cost of chocolate? ›

It found around 21 terajoules (TJ) of primary energy is consumed and 2.1 metric tons of carbon dioxide equivalent (MTCO2​ Eq.) are emitted annually to produce and supply 635.6 kilotons of chocolate products to UK consumers.

How is chocolate fair trade? ›

When you choose Fairtrade chocolate, you know that the farmers and workers who produced the cocoa in it, received an additional Fairtrade Premium on top of the price of their crop which they can invest in their communities and use to fight the effects of climate change.

What does chocolate do to females? ›

Eating chocolate leads to higher levels of desire, arousal, and sexual satisfaction, according to a study from an Italian university reported in The Journal of Sexual Medicine. Female participants who consumed at least one cube of chocolate a day experienced more active libidos and better overall sexual function than ...

Can dogs eat chocolate? ›

Chocolate is poisonous to dogs mostly because of its theobromine content, which dogs are unable to metabolize effectively. If your dog eats chocolate, you should monitor them closely and seek veterinary attention if they show any symptoms, or if they are very young, pregnant or have other health concerns.

How much do cocoa farmers earn a day? ›

The average cocoa farmer's income is significantly below the World Bank's extreme poverty line of USD 1. 90/day. Such low income makes it impossible for farmers to invest in their farms, or to hire staff to work the fields.

Is growing cocoa profitable? ›

"A farmer growing cocoa with coconut can earn a profit of Rs 60,000 per acre every year. This is in addition to the Rs 30,000 he can make from coconut," says Boyapati, who also grows cocoa on leased land.

What problems do cocoa farmers face? ›

Deforestation and loss of biodiversity

In many countries, cocoa production is threatened by aging plantations, poor farm management, soil degradation and increasing pest and disease pressure. To increase production and meet demand, cocoa producers often rely on the clearing of additional forest land.

Who is the richest chocolate company? ›

Nestlé SA (Switzerland) The Swiss food and beverage giant Nestlé is not only one of the world's largest sugar confectionery manufacturers, but it is also the world's largest food & beverage company with over $8 billion annual sales.

Who has the best chocolate in the world? ›

The 10 Best Chocolatiers in the World
  • Jacques Torres Chocolate (New York, New York, USA) ...
  • Norman Love Confections (Ft. ...
  • Valrhona (France) ...
  • Godiva Chocolatier (Brussels, Belgium and worldwide) ...
  • Richard Donnelly Fine Chocolates (Santa Cruz, California, USA) ...
  • Richart (Paris, France) ...
  • Puccini Bomboni (Amsterdam, Netherlands)
Dec 28, 2012

Where is chocolate most popular? ›

Switzerland was the leading country in chocolate consumption per capita in 2017, with citizens eating nearly nine kilos of the sweet stuff in that year. World renowned for the chocolate they produce, it seems the Swiss themselves can't get enough of the candy.

Why do females like chocolate so much? ›

Magnetic resonance (MR) images of brains showed that the hypothalamus was less active in women after they consumed large amounts of chocolate. Since the hypothalamus helps regulate food intake, this could explain why chocolate is more likely to reduce a woman's hunger, or at least her motivation to eat more chocolate.

What age group buys the most chocolate? ›

Chocolate consumption is particularly high among the supposedly more health-conscious generation: the 25 to 34-year-olds. In this age group, a whopping 34% say they eat chocolate every day.

Why do I love chocolate so much? ›

Because dopamine is released into your brain when you eat chocolate, it can actually lower your levels of stress. This is why people often crave chocolate in stressful situations, or crave it when they are in need of comfort or reassurance.

Why is chocolate so expensive 2022? ›

(CNN) - Hershey is the next to join the list of companies raising prices this year. According to the company's 2022 financial forecast, it is increasing prices to offset higher ingredient and labor costs. The chocolate company hopes the hike won't hurt sales.

What is the most expensive chocolate? ›

Recognized by Forbes as the most expensive chocolate in the world, La Madeline au Truffe is unique compared to other chocolates. It starts with a 70% Valrhona dark chocolate and is mixed with a variety of ingredients including truffle oil and vanilla.

How does chocolate affect the world? ›

Using chocolate to satisfy a sweet tooth never gets old. But gobbling up all those candy bars and bonbons is seriously impacting the environment. The commercial chocolate industry is shrinking rainforests, emitting significant levels of carbon dioxide into our atmosphere, and contributing to climate change.

How does chocolate production affect the environment? ›

Cocoa farmers usually clear tropical forests to plant new cocoa trees rather than reusing the same land. That practice has spurred massive deforestation in West Africa, particularly in Ivory Coast. Experts estimate that 70% of the country's illegal deforestation is related to cocoa farming.

How does Globalisation affect the production of chocolate? ›

Globalization and mass production of chocolate products led to the spread of chocolate's popularity; from being only available for society's elites to becoming an affordable good accessible to members of all social classes. From its beginnings to the recent centuries, chocolate was reserved for each community's elites.

Why Is chocolate an important product? ›

Chocolate is believed to contain high levels of antioxidants. Some studies have suggested chocolate could lower cholesterol levels and prevent memory decline. Chocolate contains a large number of calories.

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