Sunday, 23 November 2014

The chocolate deficit - will we run out of chocolate?

I'm back from conference leave in the U.S. and after a month off blogging finish exam marking and travel it's time to post some content relevant to my summer school ECON100 class. The market for chocolate has been in the news while I was away - Roberto Ferdman on Wonkblog has an interesting piece outlining the problem:
Chocolate deficits, whereby farmers produce less cocoa than the world eats, are becoming the norm. Already, we are in the midst of what could be the longest streak of consecutive chocolate deficits in more than 50 years. It also looks like deficits aren't just carrying over from year-to-year—the industry expects them to grow. Last year, the world ate roughly 70,000 metric tons more cocoa than it produced. By 2020, the two chocolate-makers warn that that number could swell to 1 million metric tons, a more than 14-fold increase; by 2030, they think the deficit could reach 2 million metric tons.
How can we (the world, I mean) be consuming more cocoa than we produce? By running down stockpiles of cocoa built up over past growing seasons. I'm not sure that I believe the projected deficits the chocolate-makers are suggesting above, because according to the latest data from the International Cocoa Organization, the total stock of cocoa in September 2013 was just over 1.6 million tonnes. That stock would run out long before the projected deficits arise.

The issue of the size-of-deficits vs. available-stock aside, cocoa and chocolate markets can be easily analysed using the simple supply and demand diagrams that we use in ECON100 and ECON110. Let's start with the market for chocolate where there has been an increase in demand, particularly from China. Ferdman writes:
China's growing love for the stuff is of particular concern. The Chinese are buying more and more chocolate each year. Still, they only consume per capita about 5 percent of what the average Western European eats. There's also the rising popularity of dark chocolate, which contains a good deal more cocoa by volume than traditional chocolate bars (the average chocolate bar contains about 10 percent, while dark chocolate often contains upwards of 70 percent).
Ceteris paribus (all else being equal), increased demand for chocolate (from D0 to D1 in the diagram of the market for chocolate below) increases the price of chocolate quantity of chocolate (from P0 to P1), and increases the quantity of chocolate traded (from Q0 to Q1).

Since more chocolate needs to be made to satisfy this (Q1 instead of Q0), and cocoa is an input into the production of chocolate, more cocoa will be needed. This means an increased demand for cocoa, as shown in the diagram below of the market for cocoa (increased demand from DA to DB). However, there's also been a reduction in the supply of cocoa (from SA to SB), because as Ferdman writes:
Dry weather in West Africa (specifically in the Ivory Coast and Ghana, where more than 70 percent of the world's cocoa is produced) has greatly decreased production in the region. A nasty fungal disease known as frosty pod hasn't helped either. The International Cocoa Organization estimates it has wiped out between 30 percent and 40 percent of global cocoa production. Because of all this, cocoa farming has proven a particularly tough business, and many farmers have shifted to more profitable crops, like corn, as a result.

So, the price of cocoa rises (from PA to PB) - Feldman notes that the price of cocoa has increased by more than 60 percent since 2012. The change in the quantity of cocoa is ambiguous - it depends on the relative size of the shifts in demand and supply. As drawn in the diagram above (a supply decrease that's smaller than the demand increase), the quantity traded increases from QA to QB. That seems consistent with recent production data from the International Cocoa Organization. However, it's also possible that the quantity traded decreases (if the supply decrease was larger than the demand increase) or stays the same (if the supply decrease exactly offsets the demand increase).

It's also worth noting that the supply curve for cocoa is upward sloping, even though supply is essentially fixed to the amount of cocoa produced in any given season. This is because higher prices will induce some of those who have stocks of cocoa to sell them on the market - so higher prices induce greater quantity of cocoa supplied to the market. Similarly, low prices induce some supplier to hold back the cocoa from the market and stockpile it to sell in the future.

Now, we can see that the price of cocoa has increased, and we know that cocoa is an input in the production of chocolate. So, we need to go back to the market for chocolate to see how this affects things. Higher input prices increase the costs of chocolate production, which reduces supply (from S0 to S1 in the diagram below). Combined with the demand increase we showed above, this leads to an increase in the price of chocolate (from P0 to P2; P1 would have been the price if there wasn't an increase in the cost of cocoa), and an ambiguous change in the quantity of chocolate traded (though the diagram below shows a small increase in quantity traded from Q0 to Q2; Q1 would have been the quantity if there wasn't an increase in the cost of cocoa).

Finally, it seems unlikely that we will run out of chocolate. Unless, by running out you are referring to being unable to meet demand at current prices. The market adjusts to ensure that demand and supply are brought into balance - so instead of running out of chocolate, we are likely to simply face higher prices to get a chocolate fix in the future.