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Analyse the trend in cocoa prices from 2010-2017 and discuss the demand and supply factors that have affected the cocoa price in the European market. You should also critically examine the consequences that a rise and a fall in the price of cocoa could have on cocoa producers and producers of chocolate products such as Cadbury's Dairy Milk bar and Nestle's Kit Kat bar.

You are required to research and write a report analysing and summarizing your findings.

Microeconomic Theory of Demand and Supply

Since 16th century, the chocolate industry of Europe is earning significant importance, as it produces largest amount of chocolate all over the world. As a result, demand for flavoured cocoa with higher quality has increased rapidly in the European market. Cocoa is considered as an important crop, which helps producing countries across the world to improve their economic conditions. Moreover, importing countries imports this cash crop by large extend to process and consume. Ghana and Ivory Coast supply huge amount of cocoa to Europe for meeting excessive demand (Amankwah-Amoah, Debrah and Nuertey 2018). However, their marketing share is decreasing continuously due to increasing share of Latin Americana suppliers (Sepúlveda, Ureta, Mendoza and Chekmam 2018). The entire process of cocoa production considers various economic factors like farmers, shipping organisations, processors, buyers along with chocolatiers and distributors. Sustainability has become an important issue, as European consumers want to know details about the cocoa production and the effect of their purchases. This increasing demand for cocoa along with its increasing supply determines the market price of this product in Europe (Fowler and Coutel 2017). Cultivation of cocoa depends on various conditions like pattern of weather, insects and diseases. The chief difference of cocoa with other cash crops is that maximum share of cocoa comes from small size farmers, who follow traditional process of cultivation with their limited organisational advantage. However, a steady demand for this crop in international market provides global efforts and funds to aid and develop the sustainability of cocoa farm. Cocoa is traded on two-world exchange, which are, London (LIFFE-Pound) and New York (ICE- USD). Basic microeconomic theory of demand and supply along with their factors can be described. This is also true for cocoa, as its price is determined with the help of market demand and market supply (Odijie 2018). This report considers statistical data for analysing the trend in cocoa prices between 2010 and 2017 and the factors that leads this trend to fluctuate. 

Figure 1: Cocoa price changes in European market

Source: (Gilbert 2016)

Figure 1 has represented the trend in cocoa prices from 2010 to 2017. According to this data, prices have remained almost stable in European market between 2 euro per kilogram (kg) and 2.5 euro per kg (Gilbert 2016). In 2010, average price of cocoa was 2.3 euro per kg while the average price in 2011 decreased slightly and became 2.14 euro per kg. In 2012, this average price reduced again to 1.86 euro per kg. The next year, this price became 1.84 euro per kg. However, this average price has increased in next two consecutive years to 2.31 euro per kg and 2.83 euro per kg respectively. After this year, average price of cocoa again has started to decline from 2.61 euro to 1.80 euro per kg in 2016 and 2017, respectively (Icco.org. 2018). This price has fluctuated due to changing market demand and supply of cocoa in this continent. According to the International Cocoa Organisation (ICCO), average price of this cash crop in the London market has remained $ 1917 in December 2017. This lowest level of cocoa price can be seen after 10 years. Hence, to understand the decreasing cocoa prices, it is essential to understand the demand for and supply of this product in European market over the year. Cocoa prices are influenced due to extreme weather and political conditions. Due to brexit, cocoa prices in London have increased to 1.5%.

Factors Influencing Cocoa Prices in the European Market

According to the demand law, price of a product has negative relationship with its quantity demanded while other demand influencing factors are considered as constant (Amir, Erickson and Jin 2017). These factors are income and preference of consumer along with future price expectation, price of substitute and complementary goods and technology. With the help of a downward slopping curve, this negative relationship can be analysed to represent the change in quantity demanded.

Figure 2: Change in quantity demanded

Source: (created by author)

In above figure, price is changed along the demand curve. Figure 2 is representing an increase in price from P0 to P1 while quantity demanded is decreased from Q0 to Q1. The opposite outcome can be occurred if price of the product decreases.

However, quantity demanded for a product can be changed at a particular price level if one of the demand influencing factor changes. For instance, the demand for a product or service can be changed at a fixed price if the income or preference of the consumer changes (Chan and Gillingham 2015). This change in demand can be described with the help of following diagram where aggregate demand curve shifts towards outward or inward.

Figure 3: Change in demand

Source: (created by author)

Figure 3 shows change in demand at a fixed price, which is, P0. In the above figure, initial demand curve is D0. As preference or income of the consumer increases, the demand curve for this product shifts outward and become D2.

This microeconomic theory can analyse the price trend of cocoa in Europe. The demand for cocoa in this continent has increased due to growing consumption of chocolate in France, Germany, Belgium, Switzerland and the United Kingdom. This happens because per capita income in these European countries has remained high. This can be represented with the help of following diagram.

Figure 4: Per Capita GDP in European countries

Source: (Data.worldbank.org., 2018)

Moreover, consumers have become aware about the quality and the amount of cocoa in chocolates. This in turn has increased the demand for cocoa with higher quality in those countries. Fine flavour cocoa has captured 5% of the total production of cocoa across the world. The European cocoa market can be divided into two parts, which are, high-end and ultra beans, required for gourmet chocolate and low and regular fine beans required for premium market. The high-end market of cocoa beans has increased rapidly (Noble 2017). In addition to this, the demand for dark chocolate has increased due to healthy life style of people. Cocoa contains flavonoids that can help people to decrease blood pressure, improve cholesterol levels and develop blood vessels. This in turn influences European consumers to intake cocoa by large amount. Hence, preference of consumers for high quality cocoa has played a vital role to increase the demand for this product. As a result, demand for dark chocolates has increased as it contains cocoa by higher percentage. To produce chocolates or other products, where cocoa is used as an ingredient, processing of this bean is required. Those processors are located all over the world though the highest percentage is situated in Europe.

Demand for Cocoa in the European Market

Figure 5: Processing of cocoa beans across the world

Source: (www.iconinc.com.au, 2018)

This increasing demand for cocoa has led the price of this product to increase further during 2010 to 2015. Thus, increase in demand for cocoa has led the price of it to increase further and this further has shifted the demand curve towards left, which can be represented by following figure.

Figure 6: Change of demand

Source: (created by author)

At present, people of European countries have reduced their consumption of chocolates due to health issues. Moreover, economical condition of Europe has forced the demand for cocoa to decrease further. Due to recession, income of people across the euro zone has reduced and this in turn has influenced chocolate consumers to spend money on this product. This decrease in demand has forced cocoa suppliers to set lower price levels after 2015.

Supply function states that price of a product have positive relationship with its quantity supplied by the producers. To describe this relation, other supply influencing factors like production cost and technology are considered as constant. The following figure can describe the change in quantity supplied accurately.

Figure 7: Change in quantity supplied

Source: (created by author)

Figure 4 has represented an upward slopping supply curve, where increase in price from I0 to I1 has led the quantity supplied of a product from Q0 to Q1. Moreover, other factors can influence producers or suppliers to change their amount of supply, while price remains at a fixed level. For instance, decrease in cost of production or technological improvement can lead a producer to supply an output by larger amount compare to before while price remains at a fixed level. In this context, supply curve shifts leftward or rightward to represent the increasing or decreasing amount of quantity supplied. This change in supply can be discussed with the help of a diagram.

Figure 8: Change in supply

Source: (created by author)

In figure 5, S0 has represented the initial supply curve of a product. At P0 price, the producer of this product has supplied Q0 amount of output. However, the entire supply curve can shift to the right if one of the supply influencing factors changes.

The supply of cocoa in European market has influenced the price of this product significantly. Latin America has started to produce fine flavour cocoa by large amount compare to other countries, worldwide. The chief producer of cocoa is Ecuador, though other countries of Latin America plays significant role as well (Ithriah, Suryani and Muhandis 2017). During 2012 to 2016, Latin America has exported large amount of cocoa beans in Europe while supply of other countries like Papua New Guinea has decreased by 4.8% over the year. Cocoa production in Africa has decreased due to dry weather across the continent (see Appendix). In 2012, Ivory Coast has supplied 33% of total production across the world. In 2017, this region has produced cocoa beans by 1.8 million tonnes while other parts of Africa have produced around 1.55 million tonnes cocoa (Deans, Ros-Tonen and Derkyi 2018). However, these developing countries cannot adopt modern technology of production and completely depend upon weather (Amidou et al. 2018). This old-age farm of cocoa along with extensive cultivation practices has negatively affected the total cocoa production in Africa.

Processing of Cocoa Beans across the World

Increasing or stable price trend of cocoa has attracted many suppliers to supply this product by large amount in European market. Initially, price of cocoa remained low between 2010 and 2014 (Oluyole, Adeoye, Adeleke and Okunade 2017). However, this cannot adversely influence cocoa suppliers to supply more amount of this product in Europe.

After discussing various factors, it can be beneficial to consider both demand and supply factors of cocoa for determining and discussing about the trend of price changes of cocoa in Europe (Safiullin and Safiullin 2018). For a particular product, demand and supply curve determines equilibrium level of market price through intersecting with each other.

Figure 9: Determining of market price

Source: (created by author)

According to above figure, market demand and market supply of cocoa have determined its market price and quantity, respectively (Kang et al. 2015). After 2015, cocoa prices have started to decline due to huge amount of supply and comparatively decreasing amount of demand. The chief reason behind this decreasing demand for chocolate is increasing consciousness about health among people (Oluyole, Adeoye, Adeleke and Okunade 2017). On the other side, supply curve shifts to the left from S0 to S1 and consequently market price decrease from P0 to P1. Thus, change in cocoa prices has occurred due to imbalances between supply and demand for this product. However, it is expected that future price of cocoa in European market can be increased further due to low production in Ghana and other countries of Africa (Icco.org. 2018).

As cocoa is the main ingredient of chocolate, increasing price of this product has influenced all chocolate producing companies like Cadbury or Nestle to increase their price of chocolates further (Noble 2017). The price of cadbury’s Frreddo chocolate bar has increased by 30 percent. This in turn has reduced the profit margin of these companies. Hence, to offset this huge loss, Cadbury and Nestle have decided to reduce the bar size at the same price level.

Demand for chocolate and cocoa certification has increased in both European market and international markets. Certification is an essential proof that helps a product to sustain within the market. In addition to this, certification provides a quality to exporters and producers for attracting more customers (Viotto, Sutil and Zanette 2018). However, this certification is not required for high quality or fine-favour cocoa, as this has organic certification. While certification has imposed excess costs on farmers, this fine flavour market for cocoa has increase the contact between producers and buyers due to its sustainable value chain (Mulangu, Miranda and Maïga 2017). However, certification is required for some retailers and buyers for integrating company’s product range within a special market. This can further increase the demand for high quality cocoa in European market as well as in international market.

Supply of Cocoa in the European Market

In addition to this, some requirements can be followed to increase the market of fine flavoured in Europe. Firstly, legal requirements of the EU are important follow to deal with food safety. Moreover, it is also essential to maintain the quality criteria of cocoa beans for producing premium chocolate in European market. This is because consumers at present have become aware about quality of this product. These can increase demand for cocoa in European market again to meet the increasing demand for chocolate. This increasing demand for cocoa can improve the price of this product further.

Conclusion:

In conclusion, it can be said that cocoa is an important factor, which is used by huge amount in chocolate producing industry. To produce premium chocolates, producers always demand cocoa beans with higher fine and higher quality. Moreover, consumers of European countries want to know about the percentage of cocoa containing in the chocolate. This is because those people want to consume more cocoa due to its positive impact on the human being by improving health condition like reduction of blood pressure and so on. In addition to this, income of some European countries has increased and this further leads the demand for cocoa to increase. However, this demand is decreasing due to health conscious. On the contrary, Latin America is supplying huge amount of fine cocoa while Ghana has reduced supply. This, increasing supply of cocoa and consequently decreasing demand or it, has forced the European market to charge higher price. However, after 2015, the trend of cocoa prices has decreased slightly as the demand for chocolate has decreased due to economic recession. This in turn has reduced income of consumers to purchase new products. To describe this situation, the report has discussed about the concept of demand and supply along with their various actors. Income of consumers along with their preference can develop the demand for a product. On the other side, excessive demand for cocoa and its increasing price has influenced suppliers to supply more amount of cocoa in world market. Through exporting this product, many developing countries have improved their economic condition. Moreover, some recommendations have been discussed to improve the cocoa market in Europe.

References:

Amankwah-Amoah, J., Debrah, Y.A. and Nuertey, D., 2018. Institutional Legitimacy, Cross-Border Trade and Institutional Voids: Insights from the Cocoa Industry in Ghana. Journal of Rural Studies, 58, pp.136-145.

Amidou, D., Denis, Y.K., Konan, K., Sansan, K.P. and Allico, D., 2018. Effects of genotype, soil and technological treatment on chemical composition and antioxidant activity of cocoa beans produced in Cote dIvoire. Indian Journal of Research in Pharmacy and Biotechnology, 6(1), pp.16-24.

Conclusion

Amir, R., Erickson, P. and Jin, J., 2017. On the microeconomic foundations of linear demand for differentiated products. Journal of Economic Theory, 169, pp.641-665.

Bradley, J., Postel-Vinay, F. and Turon, H., 2017. Public sector wage policy and labor market equilibrium: a structural model. Journal of the European Economic Association, 15(6), pp.1214-1257.

Chan, N.W. and Gillingham, K., 2015. The microeconomic theory of the rebound effect and its welfare implications. Journal of the Association of Environmental and Resource Economists, 2(1), pp.133-159.

Data.worldbank.org. (2018). GDP per capita (current US$) | Data. [online] Available at: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=BE [Accessed 7 Aug. 2018].

Deans, H., Ros-Tonen, M.A. and Derkyi, M., 2018. Advanced Value Chain Collaboration in Ghana’s Cocoa Sector: An Entry Point for Integrated Landscape Approaches?. Environmental management, 62(1), pp.143-156.

Fowler, M.S. and Coutel, F., 2017. Cocoa beans: from tree to factory. Beckett's Industrial Chocolate Manufacture and Use, pp.9-49.

Gilbert, C.L., 2016. The Dynamics of the World Cocoa Price. The Economics of Chocolate, p.307.

Icco.org. 2018. Downloads | Monthly Review of the Market 2018 | Monthly Reviews of the Market. [online] Available at: https://www.icco.org/about-us/international-cocoa-agreements/cat_view/89-monthly-reviews/390-monthly-review-of-the-market-2018.html [Accessed 9 Aug. 2018].

Ithriah, S.A., Suryani, E. and Muhandis, I., 2017. Analysis of Cocoa Production in Smallholder Plantations to Increase Productivity Using System Dynamics Approach. Advanced Science Letters, 23(12), pp.12313-12317.

Jambor, A., Toth, A.T. and Koroshegyi, D., 2017. The Export Competitiveness of Global Cocoa Traders. AGRIS On-line Papers in Economics and Informatics, 9(3), pp.27-37.

Kang, L., Li, J., Li, X., Wang, W., Zhang, Y. and Poslad, S., 2015. A traffic-aware resource allocation scheme for internet of vehicles: A supply and demand function approach. J. Computational Information Systems, 11(3), pp.987-994.

Mulangu, F.M., Miranda, M.J. and Maïga, E.W., 2017. Cocoa pricing options and their implications for poverty and industrialization in Ghana. Agricultural Economics, 48(4), pp.481-490.

Noble, M.D., 2017. Chocolate and The Consumption of Forests: A Cross-National Examination of Ecologically Unequal Exchange in Cocoa Exports. Journal of World-Systems Research, 23(2), pp.236-268.

Noble, M.D., 2017. Chocolate and The Consumption of Forests: A Cross-National Examination of Ecologically Unequal Exchange in Cocoa Exports. Journal of World-Systems Research, 23(2), pp.236-268.

Odijie, M.E., 2018. Sustainability winners and losers in business-biased cocoa sustainability programmes in West Africa. International Journal of Agricultural Sustainability, 16(2), pp.214-227.

Oluyole, K.A., Adeoye, I.B., Adeleke, S.A. and Okunade, A.F., 2017. The effect of price distortion on cocoa farmers’ welfare: A partial equilibrium model approach. Journal of Innovative Agriculture, 4(4), pp.21-28.

Oluyole, K.A., Adeoye, I.B., Adeleke, S.A. and Okunade, A.F., 2017. The effect of price distortion on cocoa farmers’ welfare: A partial equilibrium model approach. Journal of Innovative Agriculture, 4(4), pp.21-28.

Safiullin, N.Z. and Safiullin, B.L., 2018, May. Static and dynamic models in economics. In Journal of Physics: Conference Series (Vol. 1015, No. 3, p. 032117). IOP Publishing.

Sepúlveda, W.S., Ureta, I., Mendoza, C. and Chekmam, L., 2018. Ecuadorian Farmers Facing Coffee and Cocoa Production Quality Labels. Journal of International Food & Agribusiness Marketing, 30(3), pp.276-290.

Viotto, M.H., Sutil, B. and Zanette, M.C., 2018. LEGITIMACY AS A BARRIER: AN ANALYSIS OF BRAZILIAN PREMIUM COCOA AND CHOCOLATE LEGITIMATION PROCESS. Revista de Administração de Empresas, 58(3), pp.267-278.

www.iconinc.com.au, I. (2018). Harvesting and Processing Cocoa Beans . [online] Cadbury.com.au. Available at: https://www.cadbury.com.au/about-chocolate/harvesting-and-processing-cocoa-beans.aspx [Accessed 7 Aug. 2018].

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