Cocoa beans: A major issue

Introduction

International trade theories establish that given free trade, countries have an interest in participating in international trade based on their comparative advantages. We can thus see that most African countries specialize in the production and export of primary products, including cocoa. However, since the 1950s and 1960s, economic development theories have recognized that developing countries do not derive the expected benefits from international trade by producing and exporting these products which prices are highly fluctuating.

Harvesting cocoa beans is a labor-intensive economic activity. Using machinery for harvesting and opening cocoa pods is possoble but smallholders cannot afford it. From an economic and social point of view, mechanizing these tasks is irrational given the growth of the working population in cocoa-producing countries. However, voices are raised against child labor in cocoa plantations in West African countries. More and more people and associations oppose child labour in cocoa plantations and demand fair income for cocoa farmers. The substitution of capital for labor requires significant financing which is only within the reach of large farmers. Fluctuations in this commodity prices are not exceptional and cause sometimes a decline in the terms of trade.

Supply of cocoa

The vagaries of the weather, the price to the producer and therefore the income play an important role in the supply of cocoa. See graph on the price of cocoa in French

Changes in prices

To measure changes in the prices of exports and imports of one commodoty or a group of commodities that are traded internationally, an exports price index and an imports index are used. When this index (*) is above 100, it means an improvement in the terms of trade and vice versa. A decline in the terms of trade means that imports are more expensive than exports.

(*) Index of terms of trade (ITOT)= Index of average export prices X 100 / Index of average import prices.

Fluctuations

The fluctuations and in particular the fall in the prices of raw materials have already been analyzed by Hans Singer and Raul Prebisch in 1950. The international cocoa supply is characterized by fluctuations while demand for cocoa is quite rigid. This results in problems of overproduction or shortage and cyclical variations in cocoa prices. So, imbalance between supply and demand cause price to fall. Until now, few producing countries have succeeded in controlling these developments because it is not easy to regulate this market. State measures such as the setting of a support price for cocoa have not yet brought the necessary support to small producers. Nor has it led to a significant reduction in poverty. This does not mean that state interventions are useless because the market needs to be regulated. And what’s more, using anything other than cocoa butter to make chocolate in major consuming countries negatively affects the demand for cocoa and ultimately the export earnings of producers. See, for instance, Directive 2000/36/EC of the European Parliament and of the Council of 23 June 2000.

Price stabilization

So many studies have been dedicated to cash crops in developing countries. We learn from these analyses how buffer stocks and exports quotas were used in the 1950’s and the 1960’s in order to stabilize cocoa producer countries’ export earnings. International commodity agreements (ICAs) played a significant role in this respect.

See a line chart on Fluctuations in the price of a ton of cocoa in US dollars.

Breakdown of a chocolate bar price of sale. Doc. D. Profit makes up about 6.7% of sale price of a bar chocolate.

With regard to the production of cocoa beans, in West Africa, the main producers are Ghana, Nigeria, Cameroon but Cote D’Ivoire is the world’s largest producer of cocoa. Brazil is the largest producer of cocoa beans in South America while Indonesia is the largest producer in Asia and Oceania. Consumption (*) is concentrated in developed countries.

(*) It’s about intermediate consumption. Cacao bean is used in the production process of chocolate, it is transformed. It is an input.

Cocoa exports from developing countries are mainly in the form of beans mostly to developed countries and their chocolate manufacturers. Minor changes has occured in the local processing activities of cocoa. This results in a loss of earnings to the producer countries.

https://www.sciencedirect.com/science/article/pii/S1573521415000160

Main producer cocoa : FAO

https://www.fao.org/3/y5143e/y5143e0x.htm

Decline of trade and its impact on developing countries :

https://www.economicshelp.org/blog/2908/economics/declining-terms-of-trade/

Index

: About support for cocoa producers in Ivory Coast and Ghana

https://www.publiceye.ch/fr/thematiques/archives/chocolat/le-marche-du-cacao