Who Ate All the Chocolate?

Nothing deserves the word “irresistible” more than chocolate. Once you start, you just want more. It is true for kids, adults (including FAM employees) and even multinational cocoa traders. This week, Ivory Coast announced that the country will be limiting 20 major cocoa traders, including Barry Callebaut and Cargill, the two traders with the largest market shares, to buy more cocoa than the amount of the contracts already stipulated. The move of the Ivorian cocoa governing board, the “Conseil du Café-Cacao”, known as CCC, aims to prevent cocoa hoarding from the dominant market participants and to allow other traders to secure enough cacao beans to meet their sales commitments.

Such move might remind us of the purchase limits put in place in presence of product shortages, but even if that word has been used more than we would have liked recently this should not be the case this time. The CCC admits some bottlenecks in the delivery of cacao beans but reassured that there is enough cocoa for all contracts to be honored. The latest Cocoa Market Report from the International Cocoa Organization highlights a small (-0.5%) contraction in the Ivorian cocoa production versus last year. This year has been particularly dry in Ivory Coast and production has suffered. However, such small contraction would not be described as a full-on shortage and cannot rationally justify the price of cocoa futures hitting a 6-year high.

If the cacao beans are enough, why is the CCC concerned about cocoa hoarding? The answer might lie in a phenomenon well-known in commodity markets: the captive supply.

Cargill and Barry Callebaut are not only traders but are also active in the cacao processing industry. In order to be profitable, the processing industry has to operate at near full capacity to maintain its operating costs to a minimum. To operate at near full capacity utilization, companies procure raw materials in the spot market and maintain those “captive supplies” to keep the production at its maximum capacity. This system benefits not only the processing company, but also the producers, who can rely on a guaranteed stream of revenues in the spot market.

Not everyone benefits from this market though. An obvious loser is a company without captive supply, which has to bid more aggressively for the remaining units of the raw material, thereby pushing the price upwards. Moreover, captive suppliers create a dominant position in the downstream market, which translates into a higher price for the final consumer. Be prepared for some expensive Chocolate Bunnies this Easter.

We thank you for your continued support.

The FAM team


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