If you eat chocolate, this is why you should care about cacao prices and what they mean

Think about that last time you grabbed your favourite chocolate treat at the grocery store, whether it was that milk chocolate or dark chocolate bar, chocolate-covered raisins or almonds, or chocolate candies. Sure you may have glanced at the price quickly, but did you stop to think about where the ingredients come from, who made it, and how much they earned?

If you eat chocolate, there are a number of reasons why you should care about its source and its price, including sustainability reasons, farmer welfare and the simple existence of your favourite chocolate bar at the grocery store.

The majority of cacao is produced by smallholder farmers who own an average of 2 hectares of plantations. These farmers foster environmental sustainability by maintaining agroforestry systems in their plantations, which are better for the environment than industrial plantations that primarily have monoculture plantations, or one plant species. The price of your favourite chocolate bar matters because many farmers depend on it for their survival. With low prices that don’t reward farmers, many may decide not to grow cacao anymore. Numerous reports predict a worldwide shortage of the production of cacao by 2020, partially due to volatile prices. This means that you might be coughing up more cash for your favourite chocolate treats very soon.

Agricultural trade is difficult because there’s more than just farming involved — there’s quality control, trade finance for smallholder farmers, logistics, and unstable prices. These factors and the geographical distance between buyers and the farmers mean that there are many intermediary actors involved as well, some are necessary, others may not be. All in all, it is a costly business to deliver agricultural products from A to B, especially intercontinentally. As a chocolate industry professional mentioned to us recently, it is ultimately the consumer who controls the prices buyers can pay for their raw materials. When consumers continually demand more for less it is usually the farmers who suffer.

As a start-up attempting to develop a new method of agricultural trade that facilitates more direct trade and a system in which those producing our food are fairly rewarded, it is extremely challenging when market conditions work against you and those who you are trying to empower. Cacao prices have been falling for about a year now. In fact the price of cacao is now almost 37% lower than it was a year ago. At the time this article was written, the price was approximately US$1987 per metric tonne (and was at one point, only two weeks ago, at US$1815, meaning it fell 43%).

Sitting in the market attempting to reconcile the headwinds of falling prices, I decided to write this blog to shed some light on what prices actually mean for farmers in simple terms. There are many variables in place. However, with a price of US$1987 per metric tonne (noting that the Fair Trade price minimum is only US$2,000 per metric tonne), a farmer with 2 hectares of cacao producing 600kg per hectare each year (which is on the high end of global averages) receives approximately US$6.50 per day, which is what he has to cover all his farming expenses, sustain his family and buy food to eat. If the farmer has a family with one child, that translates to a daily budget of approximately US$2.20 per person. This farmer and his family need to survive on approximately US$2,400 for the entire year. This assumes that farmers receive the published market prices, when in reality farmers receive a farm-gate price, which is significantly lower than market prices. A recent study by Barry Callebaut and the French Development Agency found that many farmers in the Ivory Coast earn less than US$1.00 per day.

International Organization of Cocoa cash price (last five years) USD / tonne

I would like to recognise that there is a lot of good work being done in the world of cacao. Bean-to-bar makers, artisans who make chocolate directly from cacao beans as opposed to buying pre-made chocolate couverture, are an example. These makers try to source and buy as directly as possible from farmers. I mention as directly as possible, because more often than not, it is difficult to buy directly straight from farmers for a number of reasons. Many are too small, and buyers need quantity and also quality control during the process. The chocolate makers who can assure that the farmers are receiving a higher price can do a lot of good, albeit for a relatively small amount of farmers.

Moreover, it is common for bean-to-bar makers to buy already imported and bought cacao that is close and accessible to them. The bulk buyers sell cacao to these chocolate makers at a very high price, and it’s not clear how much the farmer actually received to begin with, or whether he received any premium. Overall, the fine-flavoured and special cacao that bean to bar makers buy account for between 1–5% of the cacao beans produced in the world.

The other farmers must contend with a system where physical farm-gate prices are dictated by and large with reference to “the market” price. To have a social impact, we cannot ignore the other 95% of cacao farmers in the world, who by reasons mostly out of their control, do not have plantations that grow very fine and special flavoured cacao, but the conventional type used by larger companies.

The word “the market” is used very commonly in finance, economics, trade and capitalism to symbolise the price that any product or good deserves, because “the market” is this sentient all-knowing body that knows best and determines prices. In practical terms, this market consists of a number of men and women, either individuals or as representatives for companies or other organisations, some informed and some not, that participate in the buying and selling of whatever product that this particular market is offering. Sometimes it is many individuals, sometimes few. For cacao, the International Cocoa Organisation (ICCO) daily price is defined as “the average of the quotations of the nearest three active futures trading months on ICE Futures Europe (London) and ICE Futures US (New York) at the time of London close.” Without getting too technical, these futures are financial instruments that are used by cacao buyers and sophisticated sellers to “hedge” their purchases and to allow them to financially protect themselves from unfavourable movement in market prices.

This is a valid function. However, basing cacao prices on futures contracts encourages speculation on cacao prices (and other commodity prices) by investors who are far removed from the physical trading and those who use these market tools for financial reasons. While this helps certain parties protect their prices, how much of it really is necessary? In 2016, approximately 9.8 million contracts were traded on the ICE Futures Cocoa exchange, with each contract representing 10 metric tonnes. This means that financially, the equivalent of 98 million metric tonnes of futures contracts pricing cacao was traded. Put into context, in 2016, approximately 4 million metric tonnes of cacao were produced, but the number of financial contracts traded was 24 times the amount of actual cacao produced. There is an obvious disconnect. In fact, think tank the Cacao Barometer in its 2017 Consultation Paper put it more bluntly, labelling the market as a failed market.

When reporting on latest market movements of the cacao price, articles use technical financial trading terms to describe the futures market as “breaching technical lows” with a large amount of “short interest” building. For example, a financial trader of cacao will read a report about how much cacao is projected to be produced this year or next and compare that with the predictions released by the large companies who process cacao of how much they plan to produce. If reports forecast more production of cacao than what the large companies plan on processing, they will bet that the prices of cacao will fall and hence “short” the market. “Short interest” describes trading activity that gambles on the actual price falling.

Speculation can obviously work in favour of farmers when prices are pushed higher, which occurred between 2014 and 2016. However, this volatility leads to significant uncertainty for farmers. While many can enjoy higher prices, the majority of farmers are small holders who lack financial management education and therefore do not have the ability to use higher prices to their advantage. One might argue that since these farmers consciously chose to grow crops, they should understand that commodity price volatility is a risk they take in this occupation. The fact is that 80% of food is produced by small holder farmers in developing countries, many of whom do not have such choices. It is not a risk that we can presume that they chose, rather a risk that they are forced to bear.

To put it in an extreme light, imagine that your personal income decreased by 37% from one year ago. It wasn’t due to your actions. In fact, it was out of your control. Perhaps, you worked even harder than the previous year. However, some people had read into market conditions and thought that your work was now worth a significant amount less than the year before and decided your fate for you. It is important to remember that these are not corporate profit numbers that can be cushioned by profits from previous years. These numbers directly affect individual farmers in their daily lives, farmers who do not have much to begin with.

Where can we go from here? Is there a solution? The Cacao Barometer 2017 suggests the only solution is for chocolate makers to pay more and establish settled and more stable prices for farmers, with appropriate consideration given to geographical location and costs of living. This would need to be an industry wide move, but it’s one that consumers need to be active in as well. A more stable and settled price for farmers might raise the price of your favourite chocolate bar a little, but it would mean that the farmers putting in the hard work will be fairly rewarded and continue providing the cacao in your chocolate treat. We here at Ynasu hope to connect with those buyers willing to pay more for their raw materials by helping them buy from farmers directly. We hope to create a new system for more direct agricultural trade.

To learn more, feel free to e-mail as at info@ynasu.