World cocoa bean prices have risen by more than 25% since the beginning of 2007, reaching more than £1,000 per tonne on the London Stock Exchange. This price increase is due to a combination of three factors which have limited the supply of cocoa beans, at a time when world consumption is continually rising.
First, for the three major world producers, world harvests have been affected by adverse climatic conditions. There have been droughts on the Ivory Coast and in Ghana, and these countries are forecasting a reduction in their harvest of respectively 100,000 tonnes and 80,000 tonnes. The El Nino hurricane caused a major loss of harvests in Indonesia.
Experts therefore predict a shortage in world supplies of between 250,000 and 300,000 tonnes in 2007!
But, although climate hazards have been the cause of the decrease in world supplies of cocoa beans, the resulting surge in prices and their increased volatility is the result of malfunctioning in the cocoa bean market itself.
The cocoa bean market is in fact highly concentrated, dominated by the Ivory Coast, Ghana and Indonesia, which represent more than 70% of world production. This world oligopolistic market structure is one of the specificities of agricultural markets, which explains the price increases.
Speculative funds also play a major role in the cocoa bean market. Therefore, the announcement, by the three main producing countries, that harvests will produce far less than the quantities necessary to satisfy demand, has caused numerous speculative movements, which have increased the high volatility of world prices even more.
The example of the cocoa bean market illustrates one of the specificities of the agricultural markets: the importance of climate risk as a cause of imbalance between supply and demand, but above all the existence of endogenous risks, linked to internal malfunctioning in agricultural markets, exacerbating market instability.
It is for this reason that the liberalization of markets must be regulated, and that world organization for agricultural must be implemented.
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