Easter Special: The World’s cacao Logistics and Trade
The English word “Easter” and German word “Ostern” derive from the name of the goddess of spring worshipped by the Teutons. One item that is consumed the most on this holiday is none other than chocolate. They are consumed in the form of Easters Eggs or Easter bunnies, and it is said that 2/3 of annual chocolate production is consumed during Christmas, the New Year’s Day and Easter. That makes this time of the year is the golden hour for the chocolate manufacturers.
Today, we will examine the logistics and export status of cacao, which is the raw ingredient in the manufacture of chocolate.
1. The manufacture of cacao, the raw ingredient for chocolate
Cacao is a plant which becomes ripe for harvest five years after planting it. It can be harvested until the tree becomes 40 to 50 years old. The cacao trees in West Africa, which comprise 70% of the cacao production are mostly 40 to 50 years old. This means that the amount of cacao harvest will drop soon. So now it is time to plant new young trees. But these young trees are reportedly being planted in places other than Wes Africa. Why would they try to produce cacao in countries other than those in West Africa which are traditional growers of cacao, notwithstanding the risk factor of fluctuation in cacao price?
2. Decline in production due to changes in cacao harvest regions
The current world’s biggest producer of cacao is Ivory Coast located in West Africa. Although it produces about 70% of the world’s cacao production, cacao plants (farms where cacao are harvested large scale) are being built in other areas. In fact, large companies like Cargil are steadily relocating their plants from West Africa to Southeast Asia and other places.
One that should be noted here is the production yield. I will take a simple example. When cacao trees are planted in an area of one hectare in Malaysia, which is located in Southeast Asia, approximately 1,500kg of cacao can be produced. This means 1 hectare = 1.5 tons of cacao. But if this tree was planted in Africa, about 350,000~400,000 kg of cacao may be produced per one hectares. This means one hectare = 350 tons ~ 400 tons. The argument would be, why not eliminate the old trees in West Africa and plant new ones than relocate plants to places where the production yield would be lower?
3. Factor 1 contributing to changes in cacao harvest regions: political instability in West Africa
As I said, the world’s largest producer of cacao is the Ivory Coast. As we all know, the Ivory Coast is experiencing tremendous tribulations due to civil wars, etc. Since the civil war that broke out in 2002, investments in the cacao industry diminished, replanting declined and due to the high taxes imposed on the cacao farms to fund the civil war, the production is gradually falling. Because of this, large global food trading companies are therefore relocating to countries that are more stable than the Ivory Coast.
4. Factor 2 contributing to changes in cacao harvest regions: Climate change
In addition, climate in the southern region in the Sahara desert has experienced drastic changes for a long time and it is becoming impossible to harvest cacao, recording the lowest amount of rainfall in the 21st century. With the political instability from the aforementioned civil war on top of this, the cacao plants are moving to Southeast Asia.
5. Factor of instability in cacao supply: price restriction by large corporations
As mentioned already, the world’s largest producer of cacao is a West African country by the name of Ivory Coast marked in green in the map above. We need to pay attention to the fact that the national situation in the Ivory Coast is a mess. The people of the Ivory Coast have been consistently involved in disputes and small scale wars over the ownership of the cacao producing territories. The main production activity in this area is cacao harvesting for the global market, but when the hard earned cacao proceeds are spent on rice and cooking oil, there is not much left for the people. What is even more interesting is that, as presented in one documentary, the farmers in the Ivory Coast who harvest and sell cacao are oblivious of the fact that cacao is used to make chocolate or the taste of chocolate. The cacao farmers in the Ivory Coast find it hard to believe what a one dollar chocolate bar costs. Why? It’s because that kind of money in the Ivory Coast can buy a large chicken or a bag of rice easily. Also, it is more than what a child would earn for three days’ manual labor.
It is said that the reason for this is the price restriction by large food companies like Cargill, Archer Daniels Midland, Nestle and Barry Callebaut. In fact, at the end of the 20th century, despite producing almost half of the world’s cacao supply worth many billions of dollars the Ivory Coast became one of the most debt-ridden countries in the world. One thing led to another, and on July 14th, 2005, IFRF sued Cargill, Archer Daniels Midland and Nestle which all are headquartered in the US in a California federal court for alleged human trafficking, abuse and forced labor of children for harvesting cacao beans in Africa.
I think this should suffice by way of explanation about the supply side.
6. Cacao’s demand side
So then should we now turn to the demand side?
Europe and the US make up at least 50% of the world’s chocolate demand. One trait about chocolate demand is that while it is not affected by economic downturns, it is highly affected by seasons, for instance Christmas, Easter and Valentine’s Day. What’s interesting is that cacao chocolates are again affected during good economy. In 2013 when the European economy was rather on the rise, the amount of cacao consumption also increased.
So overall, we can see that this commodity called cacao is a product whose production is not very flexible. Although there are fluctuations in demand for cacao, i.e., chocolate, depending on seasons, it is steadily maintained centered around Europe. However, the fluctuations in the amount of supply of cacao are large regardless of the demand. One easy way to look at the inflexibility of production is that when cacao production ceases or export is prevented due to special circumstances in West Africa, the price of cacao spikes. To the contrary when there are too much production of cacao or if there’s an oversupply in the market, the price of cacao plummets.
Jim Rogers, who is a renowned raw material investor, once said in his book, “as soon as you take an interest in raw materials, you will see your world differently.” He also said, “If raw materials interests you, then study everything about the largest producer countries and largest consuming countries of the raw material, method of production and the climate.” These are the reasons we need to examine the supply and demand of cacao in order to understand the chocolate logistics.
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