Commentary: Worst cocoa shortage for 40 years fuels chocolate price rise fears

December 4, 2009 · Filed under 2. Microeconomics · Tagged cocoa, price, rise, shortage

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This article reports a shortage of cocoa, the worst for 40 years. Ivory Coast, the major exporter of cocoa, has experience the worst harvest in years due to El Nino phenomenon. As a result, “the price of cocoa in London rose to 2,055 pounds a ton this week, the highest since 1985.” The major chocolate bar producers will have inevitable choice of raising the price of their product. In addition, the demand from a new market such as China and India has increased by 3 percent. Also putting the upward pressure or price, the price mechanism explains this.

The surge in price of cocoa is due to the theory of price mechanism. There are several factors that affect demand and supply. Natural disaster affects supply curve to shift leftward. As illustrated in the diagram, there has been a sharp decrease in the supply of cocoa (S1 to S2). The price of cocoa has surged significantly. To make matter worse, the demand has increased 3 percent (D1 to D2) due to China and India’s high demand. This increased price even higher (P1 to P2). China and India’s change in taste has affected the demand curve to shift rightward. The consumer’s change in preference also affects the demand curve. Also, the increase in demand by China and India could be said that the market size for cocoa has increased.

Notice the steepness of demand curves. They are steep compared to other demand curves such as those of luxury goods. As cocoa do not occupy a large portion in people’s income, this sudden surge in price do not affect people’s consumption of cocoa to decrease significantly. In other words, these demand curves have income inelastic quality. There is another factor making chocolate to have inelastic quality. It is its addictiveness. Many chocolate lovers will have difficult time cutting off their chocolate consumption just because of the increase in price. The elasticity theory states that higher the addictiveness of the product, there will be low elasticity of the product.

The supply will not be able to react fast as demand to sudden increase in price. The theory for supply states that when the price of a product goes up, the suppliers are willing to supply more of the product to make high profit. However, the supplier will not be able to increase the number of their product supplied in the market. There are several obstacles preventing suppliers to supply more in short period of time. As there has been a sharp decrease in cocoa produced, suppliers will have difficult time finding cocoa. Also, the suppliers might have storage of cocoa; however, the suppliers did not expect this sudden decrease in cocoa. So the supplier would not have a lot of cocoa in their storage to satisfy the shortage in the market.

As cocoa are considered inelastic, it is expected that there will not be a sharp decrease in demand. However, if the El Nino weather phenomenon continues to affect the supply of cocoa, it is inevitable that there will be a decrease in demand eventually. Then the suppliers will have to lower the price of cocoa, which will settle the new price or equilibrium point for cocoa.

To evaluate, there will be a slight impact on chocolate industry. If the El Nino phenomenon stops in near future, it will actually have positive impact on chocolate industries. As price increase, chocolate industries will see an increase in their revenue with same amount of demand. However, if the El Nino phenomenon does not stop affecting the supply of cocoa, then chocolate industries would experience a decrease in their revenue. The demand will decrease because the price of cocoa starts to become a large portion of people’s income.

In conclusion, the impact on chocolate industries depends on the duration of this surge in price. If this is just a temporary phenomenon, it will have positive impact on chocolate industries as cocoa are income inelastic. However, if this surge in price does not stop, the chocolate industries will have negative impact on their revenue. Also, the supply of cocoa will decrease, decreasing the availability of chocolate for many consumers.