At various points in history, the price of chocolate has fluctuated, but consumers were largely unaware. Most of us don’t notice if the price of our candy bar increases by a few cents since it is often an impulse buy to satisfy an immediate craving. However, supply and demand and how they affect this sweet treat deserve a closer look.
Investopedia / Hugo Lin
Limited Cocoa Supply Means Higher Chocolate Prices
The supply of chocolate drivers tends to be the stronger influencer of chocolate’s price volatility. Many commodities are used to manufacture chocolate, and the key ingredient is cocoa. Others such as sugar, dairy products, nuts, corn sweeteners and energy (natural gas and fuel oil) are also necessary to produce chocolate products. 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. Chocolate makers use two components of cocoa to produce chocolate: cocoa powder and cocoa butter. Cocoa butter is by far the more desirable of the two since it creates the richer chocolates and is used in thin chocolate confectionery treats, but it is also the harder and more expensive to produce so any disruption in cocoa supply will eventually trickle down and drive consumer prices higher.
Africa – primarily the Ivory Coast and Ghana – is the largest global producer of cocoa, supplying just north of 70% of the world’s cocoa. Supply fluctuations are a result of a number of factors, from political and civil unrest to labor issues and the effect of weather, diseases, and pests on crop yields. For example, long periods of dry weather are not conducive to cocoa bean growth, resulting in supply shortages.
Other issues like reduced labor can impact the ability of cocoa supplies to make it to the market. For example, Tulane University issued a report in 2015 revealing that over 2 million children were working in the cocoa industry. Movements to reduce the use of this illegal and immoral cheap labor can result in either a lower supply if the labor force is cut or higher cocoa prices because farmers have to pay higher wages to adult laborers.
Demand for Chocolate Continues to Increase
The global demand for chocolate has risen by double digits since the recession in 2008 and is forecasted to continue to grow, with a projected compound annual growth rate (CAGR) of 3% by 2021. A significant portion of this demand increase has to do with the developing taste of global consumers for dark chocolate, particularly in light of its potential positive health benefits. But the demand for dark chocolate has a dual impact: It increases the demand for chocolate products and for cocoa since dark chocolate requires more cocoa beans per ounce than milk chocolate.
While North America and Western Europe have always been big consumers of chocolate products, other regions, such as the Asian-Pacific region, are adding to the demand as their interest in chocolate increases.
The Bottom Line
Cocoa price volatility is not novel, as commodity prices are often fluid. However, the current rise in demand coupled with any disruption to or inadequate supply of cocoa could dramatically impact the price of chocolate. Large chocolate producers will try to hedge the price fluctuations related to commodity prices with forwarding contracts that establish a price they are willing to pay in the future, but in the long run, sustained commodity price increases will result in higher chocolate prices as companies pass along these higher supply costs to chocolate lovers everywhere.
Read the original article on Investopedia.