Do you like chocolate? Over 60% of the world’s population buys chocolate and more than half eats chocolate every week.

But, did you notice how prices for candy have been creeping up? Yes, there is inflation everywhere. But, it is of particularly gargantuan proportions in the cocoa market. The price of cocoa spiked and stayed persistently high over the past year.

In this post, let’s delve into the delicious world of chocolate and understand how the cocoa market works. I will also cover why the high prices for chocolate are here to stay.

Short History of Chocolate and Cocoa

But, first, a little bit of history. Chocolate is derived from cocoa beans, which come from the Theobroma cacao tree. In ancient Greek, Theobroma means the “food of Gods”. The cacao tree probably originated from where the present-day Colombia and Venezuela are.

Archeological evidence from Southern Ecuador shows that people used cocoa 5,000 years ago. The Maya, Aztecs and Incas were known to use cocoa beans as food and even currency. In Aztec mythology, a trickster god “Quetzalcoatl” taught the Aztec people how to ferment, roast and grind cocoa beans before mixing them with water. This trickster god also gave instructions on how to mix ground cocoa with chili pepper to make a well-known spicy cocoa drink.

Christopher Columbus was one the first outsiders to try chocolate, but it took some time for cocoa to gain popularity in Europe. First, cocoa drinks were sweetened, which made them more palatable.

Later, a Dutch chemist, Coenraad Van Houten, came up with an alkalizing technology in 1828. This is also known as Dutch processesed cocoa. Alkalizing cocoa reduces its acidity, sourness and bitterness. Most of the Dutch process cocoa is used in baking, ice cream, pastry and hot chocolate. Conversely, the majority of chocolate at grocery stores use regular ground cocoa. Hence, they have that familiar bitter taste.

Cacao Trees Thrive in Specific Climates

The cacao tree is very capricious when it comes to climate for it to thrive. The best conditions are on a belt between 20° north and 20° south of the Equator. The ideal temperatures for the tree range between 65°F to 90°F.

As for the water, cacao trees must have enough rainfall of at least 400 inches, but no more than 1,100 inches. And, on top of all this, cacao need protection from direct sunlight and strong winds. So, as we see, cacao trees are very demanding and thrive in tropical rainforests.

In the 1700s and 1800s, Europeans introduced cocoa seeds to other regions outside of South America. Cacao trees sprang up in the Caribbean and later in Ghana, Nigeria and Cameroon. And, around 1905, cacao trees reached Côte d’Ivoire and the rest is history. West African countries are the largest producers of cocoa as it stands now.

Three Main Cocoa Varieties

There are three broad types of cocoa varieties. These are Forastero, Criollo, and Trinitario. Forastero is the most popular variety making up roughly 80% of all cocoa production. It originated in the Bahia region of Brazil. The Forastero variety is mostly found in Africa and South East Asia. The reasons behind Forastero’s popularity are simple. It resists diseases well and has high yields. But, Forastero cocoa can be very bitter and acidic.

Criollo accounts for roughly 10%-15% of cocoa production. It is common in Central and South America. Criollo cocoa tends to be expensive as it creates the finest quality of chocolate. Unfortunately, while it scores high on taste, Criollo is susceptible to diseases. On top of that, Criollo cacao trees have lower yields.

Finally, there is Trinitario. It is a hybrid of Criollo and Forastero cacao trees. The idea is to combine the disease resistance of Forastero with a great taste of Criollo. Trinitario accounts for 5% of all cocoa production. Farmers in Venezuela, Ecuador and some parts of South East Asia cultivate it.

Who Supplies Most Cocoa in the World?

When it comes to cocoa supply, here is what to know. There were roughly 5 million tonnes of cocoa beans produced in 2022-2023. Here is a list of the top countries by production.

We see that African countries lead the pack by producing around 74% of all cocoa worldwide. Countries from the Americas produce about 21%. At the same time, Asia and Oceania account for the remaining 5%.

From this chart, we may get a sense that the market is overly concentrated. But, in reality there are over 5 million cocoa farmers. Over 80% of them are smallholder-farms with less than 3 acres of farmland, especially in Africa. Many of them do not generate enough income from cocoa for reasons we will cover in a second.

Collecting cocoa pods is a grueling task, which gets done mostly by hand and machete. A typical cocoa farmer is poor and middle aged and must rely on other sources of income. And, what’s ironic is that they cannot even afford that bar of chocolate.

In 2019, the World Bank described the cocoa sector as “not inclusive”. 54% of farmers live below the poverty line, earning less than $1.20 a day. Barely anything has changed since 2019. What’s more, child labor has been rampant in the cocoa industry. There was a 2020 report from the University of Chicago. They found that 1.56 million children work on cocoa farms.

Heavy Government Involvement in Africa

There is another thing that complicates the life of a cocoa farmer in Ghana and Côte d’Ivoire. And, that is the large and looming presence of governments. Ghana has the so-called Ghana Cocoa Board, also known as Cocobod. Côte d’Ivoire has Ivory Coast’s Coffee and Cocoa Council.

These government organizations set prices at which cocoa farmers must sell their crops. The idea is that each individual farmer is too small to negotiate a good price on the market. Instead, the government makes all the decisions for them. In return, the government can shield farmers from price fluctuations and pay a guaranteed price. Also, governments provide other aid to farmers. This includes education and fertilizer distribution.

But with that comes a myriad of problems. A phrase by Reagan “I am from the government and I am here to help” comes to mind. According to La Croix International, Ivorian farmers must sell their cocoa beans at $1.52/kilo in 2024. At the same time, farmers in Cameroon where there is no price fixing by the government sell their crops at $6.44/kilo.

That’s over 4x times more. There is little doubt why cocoa farmers have little interest in responding to higher prices in London or New York. They just don’t see those fortunes. Instead, they accumulate somewhere else in someone else’s pocket. Many farmers choose to smuggle cocoa or forego growing it altogether. Instead, they chose to sell their land for illegal gold mining, especially in the Congo.

We see that the market mechanism of higher prices leading to higher production breaks down in the cocoa market. And, governments’ involvement in Ghana and Ivory Coast plays a big role in this quandary.

Bad Weather in Africa

Of course, there were other factors that led to the recent price spike. Africa saw extreme rainfall conditions. In 2023, there was too much rain and wet conditions caused the outbreak of “Black pod disease”. It is a fungal disease that can decimate entire crops if left untreated with fungicides.

To make things worse, the extreme rain in 2023 was followed by extreme dry conditions. This led to the so-called “Swollen shoot virus”. This disease is mostly present in West Africa and can lower yields by 25% to 50% in years following the outbreak.

The typical treatment for the “Swollen shoot virus” is to cut down infected trees. The problem is that too many trees got infected. But, if you cut down trees, you must wait roughly five years for a new cacao tree to mature and start producing fruit. With this much lag, supply shocks are inevitable.

EU Law for Rainforest Protection Complicates Matters

There is another looming problem that may drive cocoa prices even higher. And, that is a new European Union law that aims to protect the world’s rainforests. Starting from 2025, chocolate producers must show that their cocoa was not sourced from land cleared from rainforests. There is an ongoing GPS mapping effort in Africa and other countries that cultivate cocoa and other foods such as coffee or palm oil.

Deforestation has been extreme, especially in Africa. Ivory Coast has lost 90% of its rainforests over the last 60 years. Similar trend is happening in other countries.

The reason is somewhat simple to understand. When soil is depleted or the entire plot of land becomes infected with disease, farmers cut the rainforest and make room for new farmland.

Low-Yielding Cacao Trees in Africa

Also, Ivory Coast and perhaps Ghana are known for their low-yielding crops. According to the United Nations, cocoa yields in Africa range from 200-700 kg/hectare. Compare this to South America’s yield of 2.5 tons/hectare and Asia with 2.0 tons/hectare.

Unsurprisingly, most of the production gains in Africa came from clearing the rainforest. There is little emphasis on improving yields. Low yields could be the result of cacao trees that are cultivated in Africa. They are mostly low-yielding varieties. Also, there could be other reasons. Among them are a lack of pruning, replacing aged trees and degrading soil.

Takeaways for Chocolate Prices

The demand for cocoa shows no signs of letting up. As many developing countries become richer, consumers there develop a taste for chocolate too. Global deficits of cocoa hit multi-year high as demand exceeded supply. Of course, there are stockpiles of cocoa, but they have been dwindling very fast in the last 2 years.

Related Content: Taste Test of Rare Chocolate Varieties (Criollo, Trinitario, Nacional)

Most of the cocoa prices are negotiated at least a year in advance. Because the recent price rise was sudden, store bought candy prices may rise more. Many industry experts do not expect the cocoa prices to go down anytime soon. They say that maybe, it is time to acknowledge that cocoa price must be higher for longer. That way it can benefit cocoa farmers without destroying the rainforest. Of course, this assumes that things will change in the Ivory Coast and Ghana for farmers to benefit from higher prices.