1. AS Microeconomics: Market Failure in Agriculture
Cocoa Economics
The global cocoa market is a
focus of much attention at the
moment. Global cocoa prices are
close to record highs and are
likely to stay strong for some
time to come. In the summer of
2010 we learnt of the single
largest cocoa trade in 14 years
with a hedge fund manager
purchasing 240,000 tonnes of
cocoa beans (seven per cent of
the entire world’s supply) valued
at £650m ($992m) and sufficient
to make five billion chocolate
bars!
High prices are the result of
surging market demand and limits to available supply.Jürgen Steinemann, chief executive of Barry
Callebaut, a chocolatier supplying many of the world’s top foods groups,is reported as saying that: “At
this moment, cocoa is a scarce material: demand has been rising, supply has been stable, so prices have
gone up.”
Growing market demand for cocoa is coming from the developed world and emerging markets - rising
per capita incomes are fuelling higher demand for chocolate-based products.Chocolate consumption in
India, China and demand has been increasing by 15-20% annually and this is expected to continue. The
recession in many rich nations has caused higher demand for chocolate – widely regarded as an
affordable snack.
On the supply side there are signs that production is being hit by poor weather conditions,
underinvestment in cocoa plantations and a shift of production away from cocoa towards lucrative

2. products such as rubber and palm oil. A recent report found that the world could run out of affordable
chocolate within 20 years as farmers abandon their crops in the global cocoa basket of West Africa,
In the last two years, some cocoa producing countries in West Africa experienced a rising proliferation
of Black Pod and Cocoa Swollen Shoot Virus. The high price of chemical inputs (pesticides, fungicides
and fertilizers) was blamed for their lower use in several producing countries,thus diminishing cocoa
yields. Africa remains by far the largest cocoa producing region, accounting for 71% of world cocoa
output in 2008/09.
According to a report in the Scottish newspaper the Herald, “Ivorian cocoa trees,planted more than 25
years ago, have already passed theirpeak of productivity and, without new planting, production in the
country is likely to drop every year, tightening the global market as demand rebounds.”
Farmers in the countries that produce the bulk of cocoa bought by the multinationals who control the
market have found the crop a bitter harvest.Despite price rises on the trading floor, precious little
reaches the smallholders who make up 95 per cent of growers. The minimal rewards they have
historically received do not provide incentives for the time-consuming work of replanting as their
cocoa trees die off – a task that usually means moving to a new area of canopied forest and waiting
three to five years for a new crop to mature. Cocoa is competing for agricultural space with other
commodities like palm oil – which is increasingly in demand for bio-fuels. A volatile cocoa price
makes investment in new cocoa plantations too much of a risk. Many young people in the Ivory Coast
are moving away from cocoa into rubber, whose price is more stable.
Cocoa is a basic ingredient in the multitude of chocolate bars and cakes that Britons consume on an
enormous scale each day. According to a report in the Independent,underEU rules, a milk chocolate
bar must consist ofat minimum 25 per cent cocoa solids. Dark bars need at least 35 per cent. Some
chocolate manufacturers are reported to have reduced the cocoa content in their chocolate products in
order to ease the impact of the increasing costs ofraw cocoa material in their products and to be able to
offer chocolate products at an affordable price.
Millions of people particularly small-scale farmers in developing countries rely on cocoa production as
a direct source of income. And for countries such as the Ivory Coast, cocoa is a hugely important
source of export earnings. The largest producing countries are Côte d’Ivoire, Ghana and Indonesia.
Questions
(a) Describe two features of the data shown in Chart 1 (6 marks)
(b) With the help of a supply and demand diagram, and the information in the extract, explain the
reasons for the rising world price of cocoa in 2009 (8 marks)
(c) Analyse the businessesthat stand to gain and those who are adversely affected by a period of
high cocoa prices (consider in your answer the effect on related industries) (10 marks)
(d) To what extent is price volatility in the market for cocoa and other basic commodities an
economic problem for farmers/growers? What might be done to stabilise prices and farm
incomes over time? (16 marks)
Suggestions for further research
 Cocoa investor ‘buys £650m of beans’ (BBC)
 Justin Rowlatt from BBC Newsnight reports on developments in the cocoa market and the
impact of speculation.
 Will chocolate prices rocket at Christmas?
 Growing cocoa
 Hedge funds accused of gambling with lives of the poorest as food prices soar (Guardian)
 Ivory Coast to focus on cocoa quality rather than output (Reuters)
 Trading economics: Cocoa Futures Trading Chart With Historical Prices
 Global exchange: The Chocolate Industry:Poverty Behind the Sweetness