The Ebola premium added to cocoa prices ?

An article in the Wall Street Journal (September 19, 2014) titled “Cocoa Prices Surge on Ebola Fears” describes concerns about the cocoa growing regions in West Africa, including Ghana and the Ivory Coast who grow 60% of the world’s supply, as the Ebola virus rages in Liberia, Sierra Leone and Guinea. Cocoa is grown in small farms and picked up by distributors in motorcycles for exports. As transport links decrease due to Ebola fears and the region get isolated, cocoa prices are expected to surge beyond the current 20% price increases. Will increasing cocoa prices cause a shift in product composition of chocolate to alternate formulations that decrease market demand for the long run ? Should local governments, who have most to lose from exports of this crop, figure out a mechanism to ensure stability of the supply chain ? Should the US air bridge that is current set up to provide assistance with treatment of the Ebola virus also be used to ensure stability of the supply chain that provides revenue for local governments or should this be the responsibility of chocolate manufacturers ?

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16 Responses to The Ebola premium added to cocoa prices ?

  1. If the chocolate sellers are really creative, we will see a great test of the price elasticity for chocolate products. If regulation shuts down candy makers for gouging, then we will just have a shortage…

  2. deepakregu says:

    The onus of managing the risk of a supply chain disruption lies with the chocolate makers only as the profit expectation for this supply chain is to be estimated along with the associated risk only. Also it cannot be free-riding on the air bridge channel intended for healthcare. So to isolate the risk of cocoa supply disruption, alternate cocoa sources are to be developed as parallel source and also composition to be experimented with to mitigate the vulnerability of supply on the cocoa supply chain.

  3. Vivek Kaimal says:

    The air bridge setup for healthcare should be left alone and not be used for the chocolate supply chain. The responsibility to maintain the supply chain should lie with the chocolate manufacturers.

    Also, the problem of chocolate shortage is not just related to Ebola. I remember reading something about a chocolate extinction coming, as soon as 2020 according to some experts, as the consumption is much more than demand. Posting the link here.

    http://www.latintimes.com/world-running-out-chocolate-cocoa-might-be-extinct-2020-and-latin-america-may-be-276083

  4. Abhishek Lohiya says:

    The ebola has left a big void in the Cocoa supply. I sense an opportunity here for other continents to ramp up capacity in their nations and lure the suppliers towards them for the long term by doing more research to grow coffee having quality compared to African nations. The onus also lies with companies. They need to partner with multiple sources and develop them to their requirements. This will increase the overall producer surplus and be beneficial to the entire supply chain. Few examples that can be easily googled are what HUL is doing with tomato growers, P&G & HUL for sustainable palm oil and marico with coconut growers

  5. Rohit Singh says:

    Ebola virus and the dedicated air bridge is used for medical purposes and should not be used for cocoa transportation. Since, these players account for 60% of the production, they will have the requisite skill and network in this globalized business world to come up with an alternate distribution chain.

  6. Dheer Vora says:

    Though it is true that economies like Ghana and Ivory Coast are mainly dependent on cocoa production for their survival, the responsibility of dealing with any related risk (in this case SCM stability) primarily lies with the chocolate manufacturers. Using the US air bridge for commercial purpose is out of question and changing composition of chocolates is a very long term idea and actually irrelevant here.
    The exploitation of labor in these cocoa farms is an open secret. Now, if the global chocolate manufacturing companies cannot even siphon some of their profits to mitigate country risks and SCM risks, it indeed becomes a very sorry state of affairs – you cannot penalise/stop them as doing so directly affects these countries and you also cannot let them neglect such issues. The solution to this problem has to be ingeniously crafted by economists and governments. A no-brainer-long-term-solution is to generate alternate forms of employment for the local workers and alternate sources of income for these countries.

  7. Mehul Raina says:

    Since chocolate is not an essential commodity, so I believe USA government’s intervention in ensuring that cocoa supply chain doesn’t bleed seems unlikely. The onus definitely falls on the chocolate manufacturers to come up with ways to make sure the exports do not suffer and as a result the prices remain within control.

    At the same time, the companies can even look into developing alternate products to chocolate that help them maintain a share of their consumers’ wallet.

  8. Allying with the air bridge supposedly used for the health may invite huge hue and cry from the human rights organisation and a regular air transportation will increase the cost, but that will be always remain as an option as long as the there is a deficit in supply. To minimize the supply side risk, considering the fact that we are amidst the largest streak of deficit cocoa production, chocolate makers need to develop newer ingredients to meet the demand. With the Asian market booming, there won’t be a slowdown in demand which makes it necessary to the makers to identify the potential region where cocoa can be grown and supplied at a sustainable basis. It is in the interest of the manufacturers to develop alternate source, since the supplier concentration is very high in a particular region which is prone to be affected by deadly diseases or political unrest. On a longer horizon, the local government may have to find ways to ensure the stability of supply chain.

  9. Christian Lehr says:

    In my opinion it is possible using the air bridge to a certain extend if there are positive aspects for both sides. As a lot of cargo aircrafts are potentially flying back empty after unloading relief goods, they could use free capacity to create earnings that could be reinvested in additional help for these regions. Besides the main source of earnings for the regions does not stop which is very important for the future of these countries.

    • Joseph Mista says:

      I agree with Christian, it seems on the surface that the U.S. Bridge may be a viable option if the U.S. transport planes are capable. The trick comes in the equity issue, is it their responsibility or the producers issue. As these producers have the most to lose with the disruption, they should also look for multiple shipping avenues to export their product. The backhaul option seems like a good bet, as they could utilize the already existing transport option.

  10. Trey Christner says:

    Increasing cocoa prices will shift chocolate to be made in alternate formulations in the short run. Eventually the cocoa prices will decrease after the Ebola scare is reduced. Until then, local governments should figure out a mechanism to ensure stability of this supply chain because they have the most to lose.

  11. Qidi Cao says:

    In my opinion, the increasing cocoa prices will cause a shift in product composition of chocolate to alternate formulations. In order to get profit, chocolate manufactures have to find alternate formulation to make chocolate instead of using cocoa. If this change still generate the same taste or even better, then it will decrease market demand for the long run of cocoa. Local government should figure out something to ensure stability of this supply chain. US air bridge that is current set up to provide assistance with treatment of the Ebola virus should be used to ensure stability of the supply chain.

  12. Greg Nichter says:

    Local governments should work with the U.S. air bridge to ensure the stability of the supply chain. If the U.S. plans to help with the ebola efforts, then we should also take steps to ensure that the local economies are supported during this outbreak. Chocolate manufacturers can help, too. By reworking their inventory to accept larger batches of cocoa, less runs will need to be made from supplier to manufacturer. In addition, manufacturers should increase the number of FTL shipments that they order. This will put less strain on the supply chain as a whole until the outbreak has passed.

  13. Rahul Srinivas Sucharitha says:

    Due to the increase in cocoa prices, there would definitely be research conducted to produce alternate compositions similar to cocoa to create chocolate for the increasing demands. Considering the complex situation which the local government in the ebola affected regions are facing, US should provide assistance to the situation considering that they do occupy a sizable percentage in the demand of Cocoa. there should be a proper risk agreement set up between these governments and the chocolate manufacturers.

  14. Yang Liu says:

    Though Ebola influences the supply of cocoa, there will not be supply shortage for chocolate manufactures with the buffering of previous inventory. If the supply of cocoa has been suspended for a long time an its price increases a lot, the price of chocolate would also increase; however, I don’t think it is a smart choice for chocolate manufacturer to change their formulations for such a temporary increase of material cost. With lose from exports of this crop, the local governments should take some measures to improve stability of the supply chain. And it should be considered to make full use of the spare capability of US air bridge when they come and leave this area with empty freight. In addition, if I were the chocolate manufacturers, I would offer some assistance to my cocoa supplier, help facilite the transportation and reduce my shortage of raw material. Though it would add my cost, it should be a chance to build up long cooperation friendship with suppliers and strengthen the robustness of supply chain.

  15. Kevin Morrisroe says:

    Although the decrease in cocoa will increase prices, I do not think it will affect the overall long term effect. Although some consumers will switch to chocolate or formulation as the price stays high, unless they are better/comparable to cocoa, they will switch back when the price lowers. (Also for the record, I do not believe anything is comparable to cocoa). As for the US air bridge, I do not believe it should be wasting its time to keep this supply chain going. It has a responsibiltity to help the ebola virus and with a “free market” the government should stay out of it.

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