Why Are Cocoa Prices Rising

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1 UNIVERSITY OF HOUSTON – VICTORIA SCHOOL OF BUSINESS ADMINISTRATION

ECO 6351 ECONOMICS FOR MANAGERS / SECTION Cinco Ranch

INDIVIDUAL CASE ANALYSIS: WHY ARE COCOA PRICES RISING?

INSTRUCTOR: Dr. Vera Adamchik STUDENT: _____Hassan Cherradi______

I, ________Hassan Cherradi______________, hereby certify and warrant: (a) that this Individual Case Analysis is my original work; (b) that I have acknowledged all the sources used in this Case. I understand that copying of another’s work and representing it as my own work is a serious academic offense, and should be treated as such.

April 2009

2 Causes and Analysis of Rising Cocoa Beans Prices Prices for cocoa mainly respond to supply and demand factors. Ideally, one would think that during boom periods, there would be a supply surplus that would result prices to decline. Consequently, farmers would want to switch to grow other crops that may be more profitable, creating then a short in supply that would bring prices up again. However, they are other determinants that can impact the market supply or market demand of cocoa and move the equilibrium between demand and supply. Some of the main causes that result in a price increase of cocoa are explained as below. Diseases and Pests Crop-damaging or threatening pests and diseases can lead to a decline in cocoa supplies and, therefore, make cocoa price shoot up. As published by the on-line source of OARDC (The Ohio Agricultural Research & Development Center), there are different species of insect pests that can afflict cocoa crops. In the major cocoa-growing areas of the world, the most serious ones are known as capsids or mirids. However, a new insect pest known as the cocoa pod bearer has emerged recently in some of the countries of South Asia and proved to be tenacious. As far as diseases, the black pod disease remains to be the most popular. The following couple of real situations show how cocoa crop damage or threat by pests or diseases can impact its market price. In just the past few months, Cocoa prices soared on speculation that cocoa-ravaging armyworm caterpillars would spread from Liberia to Ivory Coast and Ghana (Ghana Business News, 2009). Ghana is being the world’s second leading producer of Cocoa beans after Ivory Coast. Ghana Business News (2009) also reported the following: Cocoa futures for March delivery rose $9, or 0.3 percent, to $2,801 a metric ton on ICE Futures U.S. in New York. Earlier, the price reached $2,837, the highest for a most-active contract since Aug. 29. The chocolate ingredient gained for the fifth straight day and the eighth time in nine sessions. The burst of the virulent fungus Black Pod can lead to a disease potentially destroying 30 to 90 percent of the cocoa bean. Persistent rain in some of the key cocoa areas of Ivory Coast would prompted the inception of the virulent fungus Black Pod. With 38 percent of the world supply of cocoa, Ivory Coast ranks as the largest global producer and supplier of cocoa (Partos, 2008). Partos (2008) also quoted Reuters reporting: In the southern region of Divo, the average cocoa price jumped to between 400 and 450 CFA francs (€0.714) per kg from 350 and 400 CFA (€0.609) two weeks ago. In the western region of Soubre, in the heart of the cocoa belt, the average price rose to about 450 CFA francs, up from around 400 CFA francs in the previous week. A spread of such a disease will have an upward reaction of cocoa pricing.

3

It is clear that cocoa diseases and pests are underlying determinants of cocoa’s market supply. Their occurrence and to what degree will decrease cocoa crops and then their production, reduce the available supply of cocoa in the market and cause the entire supply curve to shift leftward, resulting in a spike in cocoa prices at smaller quantities in the market. Weather Whenever unfavourable weather hits the cocoa producing regions, cocoa bean supply may face a shortfall which would unavoidably cause cocoa price to go on the...
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