Causes and Analysis of Rising Cocoa Beans Prices

UNIVERSITY OF HOUSTON - VICTORIA

SCHOOL OF BUSINESS ADMINISTRATION

ECO 6351 ECONOMICS FOR MANAGERS / SECTION Cinco Ranch

INDIVIDUAL CASE ANALYSIS:

WHY ARE COCOA PRICES RISING?

STUDENT: _____Hassan Cherradi______

I, ________Hassan Cherradi______________, hereby certify and warrant:

(a) that this Individual Case Analysis is my original work;

(b) that I have acknowledged all the sources used in this Case. I understand that copying of another's work and representing it as my own work is a serious academic offense, and should be treated as such.

April 2009

Causes and Analysis of Rising Cocoa Beans Prices

Prices for cocoa mainly respond to supply and demand factors. Ideally, one would think that during boom periods, there would be a supply surplus that would result prices to decline. Consequently, farmers would want to switch to grow other crops that may be more profitable, creating then a short in supply that would bring prices up again. However, they are other determinants that can impact the market supply or market demand of cocoa and move the equilibrium between demand and supply. Some of the main causes that result in a price increase of cocoa are explained as below.

Diseases and Pests

Crop-damaging or threatening pests and diseases can lead to a decline in cocoa supplies and, therefore, make cocoa price shoot up. As published by the on-line source of OARDC (The Ohio Agricultural Research & Development Center), there are different species of insect pests that can afflict cocoa crops. In the major cocoa-growing areas of the world, the most serious ones are known as capsids or mirids. However, a new insect pest known as the cocoa pod bearer has emerged recently in some of the countries of South Asia and proved to be tenacious. As far as diseases, the black pod disease remains to be the most popular. The following couple of real situations show how cocoa crop damage or threat by pests or diseases can impact its market price.

In just the past few months, Cocoa prices soared on speculation that cocoa-ravaging armyworm caterpillars would spread from Liberia to Ivory Coast and Ghana (Ghana Business News, 2009). Ghana is being the world's second leading producer of Cocoa beans after Ivory Coast. Ghana Business News (2009) also reported the following:

Cocoa futures for March delivery rose $9, or 0.3 percent, to $2,801 a metric ton on ICE Futures U.S. in New York. Earlier, the price reached $2,837, the highest for a most-active contract since Aug. 29. The chocolate ingredient gained for the fifth straight day and the eighth time in nine sessions.

The burst of the virulent fungus Black Pod can lead to a disease potentially destroying 30 to 90 percent of the cocoa bean. Persistent rain in some of the key cocoa areas of Ivory Coast would prompted the inception of the virulent fungus Black Pod. With 38 percent of the world supply of cocoa, Ivory Coast ranks as the largest global producer and supplier of cocoa (Partos, 2008). Partos (2008) also quoted Reuters reporting:

In the southern region of Divo, the average cocoa price jumped to between 400 and 450 CFA francs (€0.714) per kg from 350 and 400 CFA (€0.609) two weeks ago. In the western region of Soubre, in the heart of the cocoa belt, the average price rose to about 450 CFA francs, up from around 400 CFA francs in the previous week.

A spread of such a disease will have an upward reaction of cocoa pricing.

It is clear that cocoa diseases and pests are underlying determinants of cocoa's market supply. Their occurrence and to what degree will decrease cocoa crops and then their production, reduce the available supply of cocoa in the market and cause the entire supply curve to shift leftward, resulting in a spike in cocoa prices at smaller quantities in the market.

Weather

Whenever unfavourable weather hits the cocoa producing regions, cocoa bean supply may face a shortfall which would unavoidably cause cocoa price to go on the high side. Holly (2008) asserted that unfavourable weather in Ivory Coast lead to late development of cocoa beans and then to a shortfall in exports between October and December at 45% less than the same period of the previous year 2007. Furthermore, forecasts of unreasonable weather can raise fears that crops would be damaged and that production would fall. Such forecasts can also result in pushing cocoa prices to go up. For instance, it is not uncommon that because of the frequent dry weather that hit West Africa in past years, speculations of re-occurrence of another weather dry seasons would persist. Rossingh (2007) reported the following:

Drier than usual winds this year in West Africa, where 70 percent of all cocoa beans are grown, prompted the International Cocoa Organization in London last month to increase its forecast for a global supply shortfall this year. Global production will drop 7.5 percent to 3.44 million tons while demand will rise 1.7 percent to 3.55 million tons, the group said May 31. (p.15)

Similarly, unfavourable weather is an underlying determinant of cocoa's market supply. Unfavourable weather will cause a slow and cut down of production of cocoa crops, reduce the available supply of cocoa in the market and cause the entire supply curve to shift leftward, resulting in a spike in cocoa prices at smaller quantities in the market.

Political Instability, Civil Unrest or Strikes

Political unrest also contributes to the cocoa price equation. Ivory Coast, the global leading supplier of cocoa beans, can be drawn as a good example of how political instability and civil unrest could drive cocoa price upward.

Ivory Coast has been the stage of political unrest and internal tensions since the civil war that broke in 2002. Since then, French and UN troops have been in the country to help the striving parties unite and to support the peace process. In November 2004 and following France's retaliation to the killing of nine of its peacekeepers by disabling the Ivory Coasts' air force, violence and riots erupted in the country. The unstable situation created fears that supplies of Cocoa