Chocolate lovers keep nervous eye on volatile cocoa prices
1. Free Slides from
Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
Chocolate Lovers Keep
Nervous Watch on Volatile
Cocoa Prices
Post prepared October 10, 2010
Terms of Use: These slides are made available under Creative Commons License Attribution—
Share Alike 3.0 . You are free to use these slides as a resource for your economics classes
together with whatever textbook you are using. If you like the slides, you may also want to take a
look at my textbook, Introduction to Economics, from BVT Publishers.
This slideshow was updated on Dec. 17, 2014. You
can find the revised version here:
http://www.slideshare.net/dolaneconslide/chocolate-
lovers-keep-a-nervous-eye-on-volatile-cocoa-prices
2. The Long Rise in Cocoa Prices
The world price of cocoa, the
chief ingredient in chocolate, has
been on a long upward trend
August 2010 data from the
International Cocoa Organization
showed prices down some 13%
from the peak reached in
December 2009, but prices
remained volatile
Chocolate lovers watched
nervously—will chocolate
become a luxury good?
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
3. Strong Income Elasticity
One factor driving chocolate prices
higher has been strong income
elasticity of demand
In the US, a 10% increase in income
has been estimated to raise per capita
chocolate consumption by 9.2%
In Europe income elasticity is about
half that, but chocolate is still a normal
good—higher income leads to greater
consumption
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
What could be more luxurious?
Photo by Simon James Kent,
http://commons.wikimedia.org/wiki/File:300x300_choc_rose_cake.jpg
The elasticity data in this post are based on a study by Henri Jason, “Trends in Cocoa and
Chocolate Consumption with Particular Reference to Developments in the Major Markets,”
Malaysian International Cocoa Conference, Kuala Lumpur, 20-21 October 1994 (ICCO, ED(MEM)
686). Data from the paper, but not the original paper itself, can be found on line at
http://www.cs.trinity.edu/~agros/factors_of_demand.htm
4. Question: How Does Positive Income Elasticity Affect Price?
If chocolate is a normal good, how will an
increase in consumer income affect its
market price?
Does the demand curve shift? If so, show
the new demand curve as D2
Does the supply curve shift? If so, show
the new supply curve as S2
Show the new equilibrium price as P2
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
5. Answer: How Positive Income Elasticity Affects Price
If chocolate is a normal good, an increase
in consumer income will shift the demand
curve to the right. The new demand curve
is shown here as D2
Other things being equal, an increase in
consumer income will not cause a shift in
the supply curve
The market moves long the supply curve
until a new equilibrium price is reached at
the level P2
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
6. Short-Run Supply Effects: Growing Conditions
Cocoa supply, like that of any farm product,
is subject to changes in growing conditions
For example, in 2010, a virus causing
stunted shoot disease threatened the crop in
the Ivory Coast, the world’s biggest producer
The virus causes the leaves to turn red and
fall off, and ruins the pods
At the same time, in neighboring Ghana, the
second largest producer, favorable weather
indicated good prospects for the harvest
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Healthy Cocoa Pods
Photo source:
http://commons.wikimedia.org/wiki/File:Cocoa_Pods.JPG
7. Question: How Do Poor Growing Conditions Affect Price?
Suppose bad weather or a virus damages the
cocoa crop. How will the market price be
affected?
Does the demand curve shift? If so, show
the new demand curve as D2
Does the supply curve shift? If so, show
the new supply curve as S2
Show the new equilibrium price as P2
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
8. Answer: How Growing Conditions Affect Price
Poor growing conditions will cause the
supply curve to shift to the left, for
example, from S1 to S2as shown here.
Other things being equal, growing
conditions will not affect the demand curve
The market moves long the demand curve
until a new equilibrium price is reached at
the level P2
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
9. Inelastic Demand and Short-Run Price Volatility
Another factor contributing to the
volatility of chocolate prices is very
inelastic demand
Short-run price elasticity of demand
in the US is estimated at -0.2, and
even less than that in big consumer
countries like France and Germany
When demand is inelastic, even a
small shift in the supply curve
causes a large change in the market
price
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Is there any limit to what you
would pay for these beauties?
Photo by Frank Wouters
http://commons.wikimedia.org/wiki/File:Belgian_chocolates.jpg
10. Example: Did Armajaro Try to Squeeze the Market?
After dropping from their December
high, cocoa prices spiked briefly in July
The spike coincided with an extremely
large delivery of cocoa to Armajaro, a
London-based commodity trader and
hedge fund
Competitors accused Armajaro of
attempting a squeeze by holding
supplies off the market—a charge
Armajaro denied
Squeeze or no, prices jumped, before
dropping again in August
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
For details of the Armajaro episode, see Javier Blas, The Financial Times, Jul 21, 2010
http://www.ft.com/cms/s/0/2955a560-94a1-11df-b90e-00144feab49a.html
11. The Bottom Line
The bottom line? You may have
to get ready to pay more for your
chocolate—or you may not
The complexities of supply and
demand are likely to keep
chocolate prices volatile
But look at the bright side—if the
thought of high chocolate prices
depresses you, just remember
that chocolate itself is a reliable
cure for depression!
Post P101010 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/