Chocolate Traders See Sweet Opportunities as Global Prices Rise

According to the Fairtrade Foundation, however, West African cocoa farmers have been getting the short end of the stick both when cocoa prices fall and when they rise. The farmers who produce 90% of the world’s cocoa crop are small family farmers—some 5 million of them. And, in the late 1980s, those farmers received 16% of the final value of a chocolate bar, depending on how much cocoa it contained. Now, however, that’s fallen to anywhere between 3.5%–6.4%, with manufacturers’ share during the same time period going from 56%–70% and retailers’ from 12% to 17%. That’s meant that many farmers have lacked the funds to invest in their operations.

The volatility of the cocoa market in years past, with booms succeeded by busts, have driven some cocoa farmers, many of whom are small producers, to seek other crops such as palm oil or rubber just to get by. Even this past year prices were low early on, when futures accounting were sold—farmers harvest two crops per year in Ivory Coast and Ghana—so farmers won’t reap the benefits of higher prices until this year.

Even then, though they’ll have more money available for larger purchases of fertilizers and pesticides, farmers will still have to do something about the cocoa trees themselves, which also need investment. As the trees age, their yield decreases, and new trees take from 3–5 years to become productive. So the problem can’t be solved overnight, although Nestlé has already sent millions of cocoa seedlings to Ivory Coast to try to speed up the process.

Add into those calculations the fact that the average chocolate bar is only 10% chocolate. Premium chocolates, however, carry a much higher percentage; the smaller boutique firms that specialize in such candies are doing very well, thank you, despite price increases. As the luxury chocolate market rises, so does the need for more cocoa to achieve that higher percentage.

According to John Blank, world equity strategist for Zacks, there’s prime opportunity in places like Ivory Coast and Ghana, despite their political problems. Although he says the situation is more suitable for multinational corporations big enough to sustain themselves during the time it takes to correct the situation, “there’s money to be made there.”

Blank said, “Goldman Sachs is warning against investing in emerging markets…and Ivory Coast is a frontier emerging market. The supply of cocoa [comes] from a frontier emerging market, the most risky country, which has not had enough investment to increase yields…. [But] the stock market goes up, discretionary spending goes up, chocolate goes up, and nobody’s investing in Ivory Coast.”

There are a few the difficulties inherent in such investment, Blank said. “[There's a lack of property rights and safeguards in Ivory Coast, [and they] haven’t turned things around enough to get people to invest there.” Also, a large company that could move into the country and “take the cost structure” of necessary improvements inside itself could reap the benefits of a steadily rising market for chocolate, he added. “But sooner or later that value trade is going to get wide enough, and they will figure it out.”

Meanwhile, at least some investment in the chocolate industry is proceeding. Two firms in Cameroon—the fifth largest producer of cocoa beans—Sic-Cacaos, a cocoa bean grinder that is a subsidiary of Swiss-based chocolate manufacturer Barry Callebaut, and Chocolaterie Confiserie du Cameroun (Chococam), an affiliate of South Africa’s Tiger Brand, are working to expand their own markets, with the former moving into West Africa and Nigeria in particular, and the latter planning a new plant in Ivory Coast.

Outside Africa, Hershey is building a new processing plant in Malaysia, and Cargill is doing the same in Indonesia, in addition to doubling capacity at its largest European processing facility to anticipate that rising demand. Traders, watching worldwide demand for both premium and average chocolate products continue to rise, also expect to see prices move on other ingredients, such as sugar.