Cooperative Partnerships Rule Over the Market
Photo left, Equal Exchange’s Dary Goodrich with Agripina Teodora Campos Mercado, cacao farmer and the current president of APROSAROCH co-op in Peru; photo right, cacao farmer Indalecio Ceaico Vilca proudly shows off his farm on the Peruvian hillside of APROSAROCH co-op.
By Laura Bechard, Equal Exchange Chocolate Supply Chain Coordinator
You have probably seen recent news articles about the unprecedented situation currently happening in the cocoa market. Honestly, this is a situation where no one really knows how or when it will ultimately resolve but we thought we would share some of our thoughts about what is happening and what this means for our farmer partners and chocolate lovers like you.
Equal Exchange is built on long-lasting partnerships. We have been working with some of the cacao cooperatives in our chocolate supply chains since we first launched our hot cocoa over 20 years ago. Given this is the highest the commodity market has ever been for cocoa, we have never experienced such a situation, nor have our partners. In April, the commodity cocoa futures prices reached nearly $12,000/MT (Metric Ton), up around 4 times what they were last year at this time. It has since come down to the $7,000-$8,000 range, which is still significantly higher than it had ever been prior to March of this year.
What is causing these historic and astronomical prices?
Just like corn, wheat, and soy, cocoa beans are bought and sold on the commodity market. It is subject to the free market swings of supply and demand. So typically, when the supply of cocoa beans goes down, the price goes up, and when supply goes up, the price goes down. Over 70% of the world's cocoa beans come from West Africa, mainly the Ivory Coast and Ghana, and their most recent main harvest was down significantly due to varying factors including disease and abnormal weather patterns exacerbated by climate change. This has meant three back-to-back deficit years for the global cocoa market, which has strained supply and raised fears of continued supply problems. While this feels like an acutely current problem, one can argue the problem really stems from historically entrenched challenges in the conventional system such as low market prices and low farmgate prices paid to farmers, leading to a lack of resources and capacity to invest properly in farm maintenance and upkeep. The impact of this lack of investment is heightened when combined with the impact of changing weather patterns and climate change.
1 Year Cocoa Futures in US Dollars per Metric Ton, showing the unprecedented surge in prices.
Yet even with the low supply coming out of West Africa, the trading prices should not be as high as we’re seeing today. Like a chocolate lava cake, when we cut into the center of the issue, the situation gets messy. In addition to supply and demand, the commodity market also operates on speculation in the form of futures contracts. Based on the low supply, the futures market went into hyperdrive with speculators coming in and predicting that this year’s supply out of West Africa and other major producing regions will continue to be low. Hedging, competition, and greed continue to perpetuate these hikes.
But doesn’t Equal Exchange trade outside the market?
Yes and no. Because cacao is a commodity crop, Equal Exchange and our partners are still affected by market swings. Our cacao cooperative partners are always guaranteed a fair trade minimum price with additional premiums which add up to a minimum of $2,940/MT. In many cases, our partners earn well above that price. In 2023, for example, the average price paid to our cooperative partners for our cocoa beans was over $4,000/MT. While higher than the historical commodity prices, today’s market prices are 2 to 3 times higher than what we have paid in the past. On top of this, our farmer partners continue to receive premiums on top of these market prices, meaning our cocoa beans continue to cost even more than these incredibly high market prices.
What does this mean for farmers?
The governments in Ivory Coast and Ghana set annual farmgate prices. Unfortunately, those prices were set before the commodity price skyrocketed, so higher prices in those countries do not necessarily mean more money in farmer’s pockets. The governments in both of these countries have raised prices more recently in response to this unprecedented market, but these prices are still far less than the market price and far less than what farmers are getting in other countries. At the same time, the reason for the high market was a bad harvest meaning many farmers faced yields 20-30% below the year before.
Farmers outside of these countries are making more money for their cacao if they are currently in a harvest period. This hopefully offsets lower production volumes due to events outside their control like climate change and disease.
Dary Goodrich, our Chocolate Products Manager, was recently in Peru, where the harvest was just beginning, meeting with several of our farmer partners. People shared that farmers were aware of the higher-than-normal prices at the end of last year and invested more in their farms to make sure they would have a great harvest. All signs in Peru are that the harvest will be good and the farmgate price was said to be over $9.00 per kilogram (or around $9,000/MT) for some farmers. The farmgate price will now be lower as the market has declined some, but farmers Dary met with in Peru were happy and said it will be a very favorable year for them.
Photos above from Dary’s visit to APROSAROCH co-op in Peru.
While great for the farmers, this situation is incredibly challenging for the farmer cooperatives who collect and sell the beans to the buyers. It can take months to get paid for their contracted beans while a farmer needs to be paid immediately upon selling their cocoa beans to their cooperative. Having money for payment to farmers was not as much of an issue when market prices were lower, but now those cooperatives are having a harder time coming up with the large amounts of cash needed up-front to pay farmers for their beans. It’s also a huge risk for cooperatives with the high prices combined with market volatility and the potential to be stocked with very high-priced beans when the market drops. On top of all of this is an added layer of security risk, since, as Dary heard from Peruvian partners, “cacao is now like gold” and people are stealing from farms and collection centers to get their hands on this high-value product.
Farmers selling to their cooperatives are able to gain fair trade and organic premiums, but with the rising cacao prices, these premiums are proportionally no longer as significant. However, when the supply of beans is so low, there is increased competition among buyers who want to purchase beans from cooperative members. Due to the high market price, all buyers are paying very high prices. There is a concern that farmers may sell to a middleman on the street who can pay them faster, conveniently pick up beans, and may not care about quality. The cooperatives are working hard to be able to pay as quickly as they can and reinforce the value the cooperatives provide beyond price, such as post-harvest processing, bean transportation, and community services like reinvestment in infrastructure, schools, and healthcare.
What does this mean for chocolate?
Because high bean prices affect all players in the global market, from aggregators, to exporters, manufacturers, and confectioners, costs are rising for everyone. Consumers will expect to pay more on the shelf for their favorite chocolates or cocoa products. Some companies may be out of chocolate. Others may change recipes to reduce how much cocoa is actually in the product. While a challenging situation, Equal Exchange remains well positioned due to our long-standing relationships with farmer partners and our manufacturing partners. Despite this, in this current situation, we will need to pass along higher prices to make sure we can continue to provide high-quality chocolate in a way that supports small-scale farmers and cooperatives facing unprecedented times.
Learn more
Read more about these market trends from guest contributor Dana Geffner in Chocolate: A Bittersweet Luxury.
Photo left, case of Equal Exchange chocolate bars ready to be sold; photo right, Indalecio Ceaico Vilca giving a tour of his farm.