Cocoa in crisis

Cocoa production has increased by over 6% since 1998, reflecting global increases in the consumption of chocolate as well as associated products such as ice cream, hot drinks, desserts and coated biscuits. Chocolate confectionery consumption accounts for the bulk of demand, for which, according to Euromonitor, volume sales increased by 7% between 1998 and 2002.

Despite increasing cocoa production, however, a supply deficit, worsened by civil unrest on the Ivory Coast, is pushing up prices as a result of speculation on a panicky futures market. As a result manufacturers are faced with rising prices in a climate where consumers are becoming more vocal about labour conditions in, and trade issues with, developing countries, as well as increasing health concerns. The combination could have a negative impact on chocolate confectionery sales for manufacturers who fail to address these issues.

Problems in cocoa supply

The Ivory Coast is the world’s key producer of cocoa beans, amounting to 42% in the 2001/2 cocoa year. However, recent turmoil in the country, which has caused international concern and led to the evacuation of hundreds of foreign nationals, could severely disrupt this year’s crop, due to enter world markets mid-October.

Government legislation in 1998 on indigenous land rights in the cocoa-belt has fuelled continued unrest, because many plantation owners and workers come from neighbouring Burkina Faso. Relations between the two countries have become even more strained as the result of the current mutiny by sections of the Ivorian armed forces, in which Burkina Faso has been accused of having a hand. As a direct result there is likely to be a smaller than usual, and/or delayed Ivorian crop.

The crisis could even destabilise the entire region, responsible for about 65% of world production, leaving Indonesia and Brazil, which combined supply 20% of the global cocoa market, to pick up the pieces. Both, however, suffer from their own economic and political instabilities, as well as producing an inferior crop as a result of cocoa pests.

Dramatic escalation in cocoa prices

Cocoa prices have rocketed following international concern over an increasing cocoa deficit, coupled with panic-buying and speculation in crops following the escalation of unrest in the Ivory Coast. For the first time in history, cocoa beans cost well over US$2,000 per tonne on the New York futures in September, an increase of 5% on August, and 115% since September 2001. However, while the situation in the Ivory Coast is concerning for chocolate manufacturers, these figures show that there were pre-existing problems in cocoa.

Concerns over a cocoa deficit fuelled price increases following declining production in the 2000/1 and 2001/2 seasons compared to the 1999/2000 bumper crop. An increasingly worried market began to speculate on the assumption of a similarly poor performance in the coming season. Then in August 2002, the market was in uproar following the purchase of 5% of the existing crop by a mystery buyer. Such a bullish move by, as it turned out, London trading company Armajaro, catapulted the market into a speculation frenzy, compounded in September by Ivorian events.

The beneficiaries of these price increases are typically processors, traders and speculators, leaving farmers frustrated and manufacturers having to pass the cost onto consumers. Cocoa farmers typically only reap the benefits of their produce in the harvest season, between October and February. In Ghana, the second largest producer of beans, the Cocoa Board has a policy of fixed prices and is sticking to those agreed in March, prior to some of the largest increases. As a result some producers are trying to smuggle beans for sale through the Ivory Coast, to take advantage of the higher prices there. However, given the current tension on the cocoa plantations, smuggling is likely to further destabilise the market.

Appealing to consumer ethics

On the consumer side, media allegations mid-2001 over child slavery on West African cocoa plantations, in addition to reports of the low prices paid to cocoa farmers, have raised public concerns over the ethics of chocolate consumption. Unfairly, the media has not been as vociferous in reporting recent research which indicates that forced labour is largely uncommon and exonerates the involvement of manufacturers.

Similarly, US lawsuits in 2002 alleging the presence of hazardous and undeclared toxic metals in chocolate products proved spurious, but further worried consumers and many groups have been calling for manufacturers to be more open about production methods and to buy only certified Fair Trade cocoa.

Increasing consumer awareness of trade and labour issues with developing countries does have an impact on purchasing habits. While consumers won’t stop eating chocolate because of ethical concerns, multinational chocolate manufacturers could find that the first to obtain Fair Trade certification would be embraced by consumers, resulting in a significant boost to sales and repeating the success of Fair Trade certified coffee. With a 13% increase in chocolate confectionery volume sales predicted by 2007, manufacturers should be looking at how best to capture the highest share of this growth, and appealing to ethical concerns could be one way to do this.

Health concerns also an issue

To date major producers and manufacturers have taken a number of steps to address consumer concerns, including a four-year plan to address plantation labour issues. However, some, such as Mars, have taken a different tack by focusing on the health benefits of chocolate, as health is also an increasingly important issue for consumers.

The company has been heavily involved with research into the health benefits of cocoa demonstrating that it contains certain flavonoids which help promote a healthy heart and even help prevent cardiovascular disease. Mars claims to use special processes to retain these flavonoids, which can be destroyed by the process of turning the cocoa bean into chocolate, as the ‘goodness’ is contained mainly within the bitter flavour of the cocoa bean, and the company labels all its chocolate products accordingly.

Related research claims include the prevention of LDL cholesterol, and the presence of beneficial antioxidants similar to those found in fruit and vegetables. As a result of such research, an increasingly health conscious society can gratefully turn a blind eye to the high fat and sugar content of chocolate products, and indulge themselves with a guilt-free conscience.

The retail impact

So should chocolate lovers be concerned over increases in cocoa prices and the conflict in the Ivory Coast? Some industry commentators believe demand for cocoa and chocolate products is set to decline, however, it is more likely that a slowdown in mature markets is more than matched by a sharp increase in developing regions as they become more westernised, following trends in snacking and convenience. Many of these regions also have growing levels of disposable income, leading to increased sales of non-essential products, and benefit from improvements in delivery and storage. For example by 2007 volume sales of chocolate confectionery will have increased 30% in Eastern Europe, and a huge 40% in Asia Pacific.

While a small supply deficit, and even conflict in the world’s largest producer of cocoa, does not mean empty shelves anytime soon, it has a definite effect on prices. Even though the vast majority of the retail price has little to do with the raw material costs, prices in supermarkets are already starting to increase.

At the beginning of August, Nestlé Switzerland put up prices by an average of 4.5%, but in some cases as high as 8% depending on the quality and positioning of the brand, following a move already undertaken across Europe by many manufacturers. Even though the visible impact on supermarket shelves is so far only a matter of pennies, sustained price increases and further negative press could affect consumption trends over the longer term. Smart manufacturers should be looking at ways to justify price increases to consumers as well as addressing their ethical and health concerns.