Chocolate lovers keep nervous eye on volatile cocoa prices

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Chocolate Lovers Keep Nervous Watch on Volatile

Cocoa PricesPost prepared October 10, 2010

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together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers.

This slideshow was updated on Dec. 17, 2014. You can find the revised version here: http://www.slideshare.net/dolaneconslide/chocolate-lovers-keep-a-nervous-eye-on-volatile-cocoa-prices

The Long Rise in Cocoa Prices

The world price of cocoa, the chief ingredient in chocolate, has been on a long upward trend

August 2010 data from the International Cocoa Organization showed prices down some 13% from the peak reached in December 2009, but prices remained volatile

Chocolate lovers watched nervously—will chocolate become a luxury good?

Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Strong Income Elasticity

One factor driving chocolate prices higher has been strong income elasticity of demand

In the US, a 10% increase in income has been estimated to raise per capita chocolate consumption by 9.2%

In Europe income elasticity is about half that, but chocolate is still a normal good—higher income leads to greater consumption


What could be more luxurious?

Photo by Simon James Kent, http://commons.wikimedia.org/wiki/File:300x300_choc_rose_cake.jpg

The elasticity data in this post are based on a study by Henri Jason, “Trends in Cocoa and Chocolate Consumption with Particular Reference to Developments in the Major Markets,” Malaysian International Cocoa Conference, Kuala Lumpur, 20-21 October 1994 (ICCO, ED(MEM) 686). Data from the paper, but not the original paper itself, can be found on line at http://www.cs.trinity.edu/~agros/factors_of_demand.htm

Question: How Does Positive Income Elasticity Affect Price?

If chocolate is a normal good, how will an increase in consumer income affect its market price?

Does the demand curve shift? If so, show the new demand curve as D2

Does the supply curve shift? If so, show the new supply curve as S2

Show the new equilibrium price as P2


Answer: How Positive Income Elasticity Affects Price

If chocolate is a normal good, an increase in consumer income will shift the demand curve to the right. The new demand curve is shown here as D2

Other things being equal, an increase in consumer income will not cause a shift in the supply curve

The market moves long the supply curve until a new equilibrium price is reached at the level P2


Short-Run Supply Effects: Growing Conditions

Cocoa supply, like that of any farm product, is subject to changes in growing conditions

For example, in 2010, a virus causing stunted shoot disease threatened the crop in the Ivory Coast, the world’s biggest producer

The virus causes the leaves to turn red and fall off, and ruins the pods

At the same time, in neighboring Ghana, the second largest producer, favorable weather indicated good prospects for the harvest


Healthy Cocoa PodsPhoto source:

http://commons.wikimedia.org/wiki/File:Cocoa_Pods.JPG

Question: How Do Poor Growing Conditions Affect Price?

Suppose bad weather or a virus damages the cocoa crop. How will the market price be affected?

Does the demand curve shift? If so, show the new demand curve as D2

Does the supply curve shift? If so, show the new supply curve as S2

Show the new equilibrium price as P2


Answer: How Growing Conditions Affect Price

Poor growing conditions will cause the supply curve to shift to the left, for example, from S1 to S2 as shown here.

Other things being equal, growing conditions will not affect the demand curve

The market moves long the demand curve until a new equilibrium price is reached at the level P2


Inelastic Demand and Short-Run Price Volatility

Another factor contributing to the volatility of chocolate prices is very inelastic demand

Short-run price elasticity of demand in the US is estimated at -0.2, and even less than that in big consumer countries like France and Germany

When demand is inelastic, even a small shift in the supply curve causes a large change in the market price


Is there any limit to what you would pay for these beauties?

Photo by Frank Wouters http://commons.wikimedia.org/wiki/File:Belgian_chocolates.jpg

Example: Did Armajaro Try to Squeeze the Market?

After dropping from their December high, cocoa prices spiked briefly in July

The spike coincided with an extremely large delivery of cocoa to Armajaro, a London-based commodity trader and hedge fund

Competitors accused Armajaro of attempting a squeeze by holding supplies off the market—a charge Armajaro denied

Squeeze or no, prices jumped, before dropping again in August


For details of the Armajaro episode, see Javier Blas, The Financial Times, Jul 21, 2010 http://www.ft.com/cms/s/0/2955a560-94a1-11df-b90e-00144feab49a.html

The Bottom Line

The bottom line? You may have to get ready to pay more for your chocolate—or you may not

The complexities of supply and demand are likely to keep chocolate prices volatile

But look at the bright side—if the thought of high chocolate prices depresses you, just remember that chocolate itself is a reliable cure for depression!


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Chocolate lovers keep nervous eye on volatile cocoa prices