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Who benefits from rising cocoa prices?

Who benefits from rising cocoa prices?

Who benefits from rising cocoa prices?

Although cocoa prices in the financial markets have increased, the increase benefits cocoa growers, bean processors, speculators and chocolate makers in unequal measure.

In March, prices rose to more than $10,000 a tonne in New York after a poor harvest in West Africa due to a combination of poor weather conditions and disease ravaging aging plantations.

They have since fallen back from their peak, but are still three times higher than last year.

– Large gaps between manufacturers –

In Ivory Coast and Ghana, the world’s largest cocoa producers, prices are set by authorities in October based on previous months.

But by then the harvests “were already largely pre-sold,” said Tancrede Voituriez of the French agricultural research and cooperation organization CIRAD.

This reduces the impact of cocoa price fluctuations, either up or down.

As a result, small producers, who generally only earn a living, did not immediately benefit from the increase.

That said, authorities raised the price of the intermediate crop in April by 50 percent to between $2,300 and $2,500 a tonne — a modest increase compared to what farmers could charge on international exchanges.

In countries with less regulated systems, such as Cameroon, Nigeria, Ecuador and Brazil, growers have been able to pocket more of the trend.

There, farmers were allowed to sell their beans to buyers willing to approach the prices paid in financial markets.

But this deregulated approach comes with its own risks.

“Rising prices have made production more attractive,” David Gonzales, coordinator of the Peruvian Coffee and Cocoa Chamber, told AFP.

The fear is that there will be a glut of cocoa in three to five years – the time it takes farmers hoping to cash in to grow new trees – causing prices to fall back on the land.

– Mijasi on the hunt –

The main processors that grind the beans into butter, liquor or powder – notably Barry Callebaut of Switzerland, Cargill of America, Olam of Singapore – generally negotiate much of their supply in advance.

But some contracts have not been honored, forcing them to search for urgently needed cocoa at high costs and, in some cases, to slow production.

Barry Callebaut reported in early April that it had drawn more than usual from its cash reserves to fund bean purchases, but had enough cocoa on hand to meet demand.

Other smaller intermediaries may have difficulty advancing the funds needed to accommodate the higher prices.

However, there is a group of middlemen who would have been pleased with the price increase.

“Contractors would have done very well there,” Steve Wateridge of commodities firm Tropical Research Services told AFP.

He said black marketers could have taken advantage of the system in Ivory Coast and Ghana by buying cocoa at prices slightly above the fixed prices and selling the beans on the open market in Togo, Guinea, Liberia or Sierra Leone.

– Mixed assets in the markets –

Cocoa prices rose as supply fell short of demand for the third consecutive year, according to the International Cocoa Organization.

Mutual funds that felt the wind of change bet on higher prices, making a profit in the process.

But since January, prices have become wildly erratic, even beyond the liking of funds with a taste for speculation.

Many investors pulled out of the market altogether: the number of contracts traded fell from 334,000 in mid-January to 146,000 in April, according to Saxo Bank’s Ole Hansen.

“You can’t blame speculators for artificially inflating prices,” added Wateridge.

On the other hand, trading houses and chocolate makers tend to hedge against price reversals by betting against the financial markets, in this case on falling prices.

After the markets proved fair and prices rose, many had to cash in more funds to cover their potential losses.

Others short of cash have been forced to abandon their bets, which technically forces them to buy back contracts from the market.

This in turn automatically increases the price of cocoa even more.

– Chocolatiers adapt –

Given the lag between the cocoa harvest and the production of a finished bar, the cost of chocolate on supermarket shelves should not, in theory, have skyrocketed for industry giants Mars, Mondelez, Nestle, Hershey’s and Ferrero.

“We are largely covered as part of our forward contracts for the rest of the year,” Nestle chief executive Ulf Schneider confirmed in April.

But as time goes on, rising raw cocoa prices will eventually hit the bottom line.

To avoid passing costs on to consumers already affected by rising inflation, manufacturers could tweak their recipes – increasing the proportion of hazelnuts in Nutella, for example – or reduce portion sizes.

Even for artisan chocolate makers, the cost of raw cocoa is only a small fraction of the finished product.

“There is a big margin” for chocolate bars, French Cocoa Company co-founder Sebastien Langlois told AFP, playing down the impact of rising bean costs.

His company, which sells organic and fair trade products, has yet to raise its prices, he added.

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