Cocoa Industry in European Market
The report brings about the description of cocoa industry in European market, and analysing the trends in the prices of cocoa. Cocoa may refer to the chocolate or the cocoa bean or just cocoa, is the dried and fully fermented seed obtained from Theobroma Cacao from which the cocoa solids and the cocoa butter can be extracted. In other terms cocoa, includes the drink also known as hot chocolate, cocoa powder and others (Agiboo, 2018). There is a significant growth of the cocoa industry all over the world, as the consumption of chocolate is always increasing.
The production and growth of cocoa is best achieved in hot, tropical, climate near the equator. The cocoa production in Europe, offers good opportunities to the other developing countries. Europe accounts as a major force or hub for the cocoa production. In the cocoa industry, the cocoa beans served as a major product area, followed by the cocoa butter, cocoa beach, fat, oil, and the cocoa paste. Therefore, there is a significant growth and wide application of cocoa products in the European market. Thus, the demand and supply of cocoa and the trends in the prices are described in the later part of the report (Adegoke, 2018)..
Cocoa Industry in European market
Cocoa production in Europe reported major growth and changes past several years. The popularity of the chocolate is on rise in the European market. The world’s major producers of cocoa are found in West Africa, Southern Asia, and South America. The demand for the high-quality fine flavour cocoa is on rise. Cocoa is the raw material or input required in the production of chocolate. Chocolate is the key ingredient, in many foods such as milk shakes, candy bar, and the cookies. Fine flavour cocoa accounts for around the 5%, of the world’s cocoa production.
Along with the development in the cocoa production in the European market, follows the evolution of the Europe’s specialty coffee market, also but at a slower pace. However, the major development includes the increased demand or preference of the consumers in the single origin chocolate. Also, there is a direct trade carried out between the producers and the small, and medium size chocolate manufacturers in the fine flavour cocoa market. On one side, there is a growing demand for the chocolate is accompanied by the healthy living, because the consumers in the Europe are more concerned about the intake of the food, which affects their wellness and fitness.
Cocoa contains flavonoids, which are associated with several health benefits, such as lower blood pressure, improvement in cholesterol levels in the body. Among all the variants of chocolates the dark chocolate, is healthier for the human body, due to the higher presence of cocoa. According to the current statistics, the nation accounts for nearly 45% of the worldwide dark chocolate, which is expected to rise and grow at the rate of 8%, globally by the end of the year 2019 (LMC International, 2018).
Demand and Supply of Cocoa in European Market
Demand and Supply of Cocoa in European Market
In the economic theory, the law of demand and supply are considered as one of the basic principle governing the economy of a country. Demand refers to the quantity of a product or a service that consumers are willing to buy, at a particular price in a particular period. Supply of a product means the quantity of a product available for sale at a specified price at a given point of time in the market (Science direct, 2018).
There is a positive relationship between the supply and price of a product. On the contrary, demand of a product establishes negative relationship between the demand and price of a product. If the demand of a product or a service increases then there is a fall in the price. On the contrary, if the demand of a product decreases then there is an increase in the price of the product. The point at which the quantity supplied is equal to the quantity demanded is defined as the equilibrium price (Mind Meister, 2013).
As the cocoa, products are highly demanded and the cocoa industry is increasingly focusing towards the addition of the real fruits and nuts to their cocoa products to derive healthy nutrients. The cocoa sector is confronted with various opportunities and threats in the chocolate industry (Smithsonian, 2018).
However, the demand for these products is high, yet the food safety is the major concern for the consumers. Food safety has become the major issue due to the previous scandals related to the imported food. This has led to the increasing demand of transparency and traceability of the products in the European market including chocolate and coffee. The competition of the cocoa is intensified which represents high demand. Due to the easy manufacturing process, the industrial demand of the chocolates has increased. However, the demand trend of the cocoa products is expected to rise more and more but it is considered a difficult crop to grow organically (International Cocoa Organization, 2018).
Trends in Cocoa prices from the year 2010-2017
The cocoa beans is primarily utilised in the form of raw materials for the chocolate production and in a year, around 4 million metric tons of cocoa beans are produced. The prices of cocoa in the international market is volatile and changes according to the change in the demand and supply of cocoa. Due to the rapid growth of the chocolate confectionery, there is wide popularity of chocolates in the industry (Business wire, 2017). Especially in European market, the cocoa beans have captured the attention of consumers at large. The trend in cocoa prices has not been fixed over several years. With the passage of time prices of cocoa decreased in the year 2016 and 2017 (CBI, 2018).
(Source: Moneyweek, 2016)
There is a fluctuation in the prices of Cocoa, from the year 2010 to 2017. There is a subsequent, there has been a shift in the global market, as the cocoa prices has been showing variation in all the cocoa producing countries. The price trend of cocoa, from the year 2013 to 2017 has increased first then reduced. The prices were as follows, as before the year 2013, there has been a rising trend in cocoa prices.
|
Cocoa |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
2441.3 |
3064.8 |
3136.98 |
2893.27 |
2029.25 |
Trends in Cocoa Prices from 2010-2017
The above diagram represents the consumption of cocoa in the years 2010/11, in Asia, Latin American and the European countries. There has been a shoot of around 40%, in the cocoa prices, and expected to rise sharply at the start of the year 2018. There are some economic issues and challenges of the firms in the European market, and European firms and industries operate under the mixed economic system. According to the statistical data taken or observed from the past trends, it can be stated that if there is a 10% increase in the cocoa prices then it leads to the 2.2% decline in the consumption. There are few challenges in the cocoa sector in terms of the supply. These include poverty and low income, food security issues, low level of value addition and the consumption in the cocoa producing countries, effects of climate change (Spend matters, 2018).
Demand and Supply factors affecting Cocoa Prices
The demand and supply factors that affect the price of a commodity, these factors include the income levels, consumer preferences, and demand for the chocolate, related goods. Related goods affect the demand and price of the commodity, here referred to as Cocoa. If the demand for the related goods is higher than the cocoa, then the price of cocoa will decrease and vice-versa. The major factor affecting the price of the cocoa, is the ‘Climatic conditions’, i.e. the change in the climate affect the production of cocoa so as the demand; which ultimately affects the market price.
The right mix and quantity of rain and sunshine is required for the cocoa pods to mature properly. The change or any disturbance in climate can affect the crops by the yielding the shrunk or rotten cocoa pods. In other terms, the price drivers or factors affecting price of cocoa refers to the changes in the climate, geopolitical tensions in the European market, labour. Cocoa production is heavily dependent on the cheap labour; which can be affected by the new regulations in the labour market (World Cocoa Foundation, 2014).
Talking about the climatic conditions, it can be stated that the cocoa trees require to grow, it a shade-loving tree which can give best results in the regions which are 20 degree to the north or south of the equator. The term geopolitical is derived from the word ‘geopolitics’, which means the study of effect of geography (human and physical), on the international and political relations with other countries. Therefore, the term geopolitical tensions or conflicts can hamper the trade and production of the cocoa, in the country that can affect the pricing of the commodity. In terms of the price elasticity, the elasticity of the global supply and demand of cocoa is generally low (Lynch, 2015).
Price elasticity of demand of any commodity depends upon a number of factors such as substitutability, i.e. availability of the substitutes has effect on the price elasticity of the good and the proportion of the income spent on the good is other factor (Make chocolate fair, 2018).
Demand and Supply Factors Affecting Cocoa Prices
Price elasticity of demand = Percentage change in Quantity demanded/ Percentage change in Price. The above chart explains about the price elasticity of the demand of cocoa, in the chocolate industry. It is described as when the price was 50p, the quantity was 100, and when the price increased from 50 to 60, there is a decrement in the quantity demanded (Focus economics, 2018).
The below diagram, defines about the producer’s equilibrium situation in the MR, MC approach, in case of the monopolistic situation.
The farmer’s share in the value of chocolate bars, with the various heads depicting the margin percent of farmers, retail/supermarket, marketing, and the cost of manufacturing.
Effect of rise or fall in Cocoa prices on Cocoa producers or farmers
As the chocolate industry is an emerging sector of the European economy, therefore the cocoa prices play an important role in the smooth functioning of the chocolate production. In the chocolate production business, many firms are competing to earn sales and higher profits in the long-run. Therefore, millions of cocoa producers earn less share from the total revenues. The relationship between the change and fluctuations in cocoa prices and the famers or cocoa producers is volatile in nature. Another issue observed regarding the farmers is that they earn a small part of the world market price because of the local trading structures, taxes, and the quality of the cocoa beans. Moreover, the income security of the cocoa farmers is affected by the volatility in the cocoa prices (European cocoa association, 2018).
In addition, the given set of causes for the rapid rise or fall in prices is due to the changing supply volumes, which is often the result of crop diseases, extreme weather conditions, pest infestations, political instability, and turmoil in the country. A good season that produces good crops, leads to increment in the supply will result in the reduction of cocoa prices whereas the poor supply or the poor crop growth can increase the price. Cocoa traders or producers can control and mitigate the volatile prices by keeping the stocks of the cocoa beans and controlling the sales volume on the market (Money week, 2016).
Impact of fluctuations in Cocoa prices on Chocolate producers
Chocolate manufactures have significant pricing power and are likely to affect the buying behaviour of consumers. They can easily transfer the input prices on their consumers. A number of chocolate producers, that operates globally include Ferrero group (Luxemburg/Italy), Nestle SA. (Switzerland). When there is an increase in the prices of cocoa, at a global level, then the chocolate producers also increase the prices of chocolates, as their cost of production rises. Therefore, in order to meet or cover up their manufacturing costs, they raise the price of chocolates.
Discussing about the production strategies of Cadbury, they had downsized the bars of chocolate due to the increasing cost of cocoa. As per the statistical data Cadbury that is owned by the world’s biggest chocolate maker, Mondelez has changed the size of the family blocks for the third time during past 5 years because of rise in cocoa price. In addition, the company has now planned to cut a row from the family blocks thereby reducing the size from the 220 to 200 grams (Confectionery, 2014).
As in terms of the confectionary, the higher input prices impacts the trading operating profit margin. The reason for decrease in the sizes of the family blocks or chocolate bars, or the increment in their prices is due to the cocoa butter; and other is the intensive competition in the region of Western Europe. Hence, in this way the impact on the chocolate producers is observed.
Conclusion
To conclude the above analysis of the mechanism of the cocoa production and the application in the chocolate industry, it can be stated that the nature of chocolate industry is fluctuating and diverse, catering to the needs and requirements of the customers, farmers and the worldwide chocolate producers. In addition, the Europe has dominated the chocolate market, and it is not only the biggest consumer of sweet treats, but also the largest producer and exporter. Despite the fluctuations or the changes in the prices of cocoa, the industry has been growing constantly. In terms of price elasticity of demand firstly, the global cocoa demand is highly price inelastic, and the elasticity of the global cocoa supply is extremely low.
Moreover, there is a high influence in the trading or manufacturing of chocolates by the rise or fall in the prices of cocoa and cocoa products. The growth has been impacted by the sales volume and profit, of cocoa and the chocolate. With the sweet treat offered by the industry there is a great emphasis observed on establishing the sense of creating healthy choices. Majorly, the change in price trend has been analysed from the years 2010 to 2017, and it has been understood that there were many fluctuations in prices. Hence, the cocoa and the cocoa products play a major role in shaping the success of chocolate industry in European countries.
References
Adegoke, Y. (2018) Why Europe dominates the global chocolate market while Africa produces all the cocoa.
Business wire (2017) Global cocoa beans market- Growth trends and forecast 2017-2022-Research and markets.
CBI (2018) Which trends offer opportunities on the European cocoa market?
Confectionery (2014) Cocoa costs rip into Nestle confectionery operating profits.
European cocoa association (2018) The voice of the European cocoa Industry.
Focus economics (2018) Cocoa price Outlook.
International Cocoa Organization (2018) The chocolate Industry.
LMC International (2018) Cocoa: The Global market.
Lynch, J. (2015) Cadbury to downsize chocolate bars as cocoa costs rises.
Make chocolate fair (2018) Cocoa prices and income of farmers.
Mind Meister (2013) Economics.
Money week (2016) Chart of the week: “Shrinkflation” hits the chocolate market.
Nieburg, O. (2017) Cocoa prices to stay low even in short-term even as chocolate markets are strong.
Science direct (2018) Cocoa products.
Smithsonian (2018) The Economics of chocolate.
Spend matters (2018) Cocoa prices shoot up almost 40%.
Star bright (2014) Paying the price of chocolate: Breaking cocoa’s farming cycle of poverty.
The market mogul (2014) A profile of the cocoa sector.
World Cocoa Foundation (2014) Cocoa market update.
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