24 December 2008

Cocoa prices hit a 'record high' - or do they?

The Financial Times reports a sudden increase in the cocoa price, as bad weather and black pod disease lead to lower-than-expected deliveries to ports in Cote d'Ivoire. Good news for cocoa farmers, if the price spike is passed onto them. My concern is, it won't be - the traders will take a profit and the underlying conditions that led to the price spike will return. In the medium term, prices are likely to fall anyway, as global demand for chocolate (and especially high-quality chocolate, such as that coming from Latin America and Ghana) flattens after years of steady increases. (See this from the same paper).

Viewed over the last 15 years, the current price of £1,820 per tonne certainly looks impressive:

However, the current price may be less impressive than it looks, for two reasons. First, this chart reveals a similar spike in 2002 (presumably a result of the civil war in Côte d'Ivoire) that was followed by a 50% drop in prices and a 5-year slump. That would now equate to a price of around £900. Second, cocoa futures are priced in pounds, but the biggest cocoa producers and consumers use euros. Since the pound's value has declined from around €1.40 a year ago to €1.10 today, a cocoa price of £1,800 today is equivalent to around £1,400 a year ago - namely €2,000. The effective export price in Côte d'Ivoire, whose currency is tied to the euro, is some 10%-15% lower now than in July, when cocoa prices peaked at £1,700 (then €2,200 or $3,000).

In the meantime, what might be the effect of cocoa prices on the second round of Ghana's presidential elections, scheduled for 28 December? Probably very little, since the Cocobod fixed its annual price in August. But with only a percentage point between the two candidates, small psychological factors could make the difference. To all friends in Ghana and friends of Ghana, I wish you a peaceful Christmas and an even more peaceful election.

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