Proclaiming your love was not a cheap affair this year, especially if your better half is crazy about chocolates. Those nuggets of sin burnt a neat hole in your pockets. This year the price tag may have put a dent in your plans for your sweetheart. But if you think that the confectionaries are making a killing on Valentine’s Day when lovers and wanna-be lovers splurge ridiculous amounts on heart shaped chunks of chocolate, you are wrong. The companies sure would like to pocket the neat sum but the cocoa industry is playing a spoilsport.
Factoring Asia in
Although demand was pretty strong in North America and Europe, it is the rising interest, especially of the dark variety which has more cocoa, among Asians that has sent the cost sky-rocketing. Take for instance Japanese women who go out of their way to buy these sweet nothings for their men. In Japan, where it’s become almost a ritual that can make or break a woman’s love life, ladies splurge on men – Â as well as friends, colleagues and bosses. A bag of Belgian cocoa truffles can come for a cool 8,000 yen ($66). And a total of Valentine's bill can come up to 10,000 yen. Unlike the west, men here sit tight and enjoy the fruits of love. It is on White Day next month when men reciprocate with a white gift -- from cakes to lingerie. Not only a box full of candies, couples are going extravagant by opting for a chocolate hot spring bath on this special day. And this is just one nation.
Local problems with global effects
This skewed supply and demand has led to the shooting price graph. When the entire world is going nuts, literally, over chocolate and its derivatives, it is only a handful of underdeveloped countries which grow the most essential component, cocoa. The top four producers are Ivory Coast, Nigeria, Ghana and Indonesia. It is a complicated network of farming, producing, packaging and selling before the beans reach the factories and are turned into those delicious treats. Since the entire production of the beans are dependent on these small regions, local episodes tend to hurt or boost production directly, which in turn affects the pricing.
Last year, when there was an outbreak of Ebola in Africa, fears of it affecting the supply chain of cocoa beans sent the average price soaring to $3,270.27 in August. This was an all-time high for the cocoa market. Since then the prices did come down but only for a short while. According to the International Cocoa Organization, the average price for a ton of cocoa was $2,921.05 last month, slightly higher than a year earlier. Last year, in response to rising cocoa prices, Hershey (HSY, Financial), Mondelez International (MDLZ, Financial) and Lindt & Sprüngli (LDSVF, Financial), all raised prices by almost 8%. According to data by Nielson (NLSN, Financial) research, while the amount of chocolate Americans bought last year increased by 1.2% to 2.2 billion pounds, the amount they paid for it rose by 2.6% to $13.6 billion.
Another factor that may affect the industry is the harmattan, a dry, dusty wind that hit the major cocoa producing countries in West Africa at the beginning of the harvesting season in December. However, the harmattan has been worse than usual this year, which means the cocoa pods may not develop properly. This would create a further shortage in supply and another round of hike in affordability. Bert Alfonso, chief financial officer at Hershey, said at a meeting with analysts that the company was increasing prices 5 to 6%, which may reduce sales by 2%.
In need of some regulations
However, what is hurting the industry most is that it is unregulated. There is no uniform practise and very often the farmers are severely short changed, and hence they are shifting from cocoa to rubber cultivation. The profit has not been reaching down to the bottom of the supply chain and farmers see no profit in cocoa cultivation. Moreover, labour conditions in cocoa production hit the news for all the wrong reasons and big names like Mars and Hershey have committed to ensuring fair and regulated practices. Last week, Hershey said that one-third of its cocoa is now procured from “certified and sustainable” farms and by 2020, it would be 100%.
