Wednesday, November 10, 2010

Basic Economics: We're Runnng Out of Chocolate

I don't know how I got to this article at Gizmodo but the author writes:
At the rate we're going, chocolate is going to be a rare—and extremely pricey—commodity within the next twenty years. Somebody needs to light a fire under those Oompa-Loompas, stat.

The problem's easy to explain, and much harder to fix. According to the Cocoa Research Association, we're consuming more chocolate than we're producing cocoa. Which means, eventually, we're going to run out. ...

What will the shortage mean? $11 Snickers bars, sooner than you think.

and quotes John Mason from the Nature Conservation Research Council who says:

"In 20 years chocolate will be like caviar. It will become so rare and so expensive that the average Joe just won't be able to afford it."

I don't expect quality business and economic analysis from Gizmodo but it is representative of much of the thinking that's out there.

Where to begin to unpack all these economic fallacies? Oh yeah, let's start with markets. If demand continues to rise what will farmers do? They will grow more cocoa. Duh! Unless there is cocoa weevil, which destroys the plant world-wide, why would cocoa become rare? As the cost of cocoa increases relative to other crops farmers would rush to cultivate it. Farmers with a choice of growing corn to eat, or cocoa to make a huge return, would grow cocoa and buy corn from someone else.

Let's assume the writer and the quoted expert believe their story. They should then buy cocoa futures and become wealthy. Assuming the price of cocoa is 10% of a dollar chocolate bar (I would guess that it's less than that) then the price of cocoa would have to rise about 100x (10,000%) for the cost of a chocolate bar to be eleven dollars in twenty years.

The current price of cocoa is roughly 2,900 dollars per metric ton, so if they are correct we should see the price of cocoa to rise to 290,000 dollars per metric ton. I'm willing to bet my house to a cup of coffee that cocoa will not be anywhere near 100,000, let alone 300,000 dollars a metric ton - in constant dollars of course.

Yes, the world is much more complicated than I made it out in the above example. If commodity prices rise, especially soft commodities, it won't be simply cocoa. Sugar would rise, as would milk, both components of chocolate bars. IF the US doesn't end its flirtation with socialism commodity prices will soar relative to the dollar.

Still, relating to the thinking behind the statements in the article, how are we to deal with silliness such as the following:

"we're consuming more chocolate than we're producing ... eventually, we're going to run out."

And how do we deal with writers and "experts" making predictions that they obviously don't believe. (Oh they'll scream at that statement.) Examples include the above cocoa expert predicting $11 chocolate bars and those experts and pundits saying that Big Pharma, and Big Oil, and Big Banks are making obscene amounts of money. If they truly believed that they would invest all they have in these markets, become "filthy rich" and redistribute part of their obscene profits to those in need.

EDIT 11/15/2010

Re-reading this I see that I forgot to mention a very important point (price elasticity). There will come a point, long before $12 chocolate bars, where people will refuse to buy chocolate, or will drastically reduce their consumption. At that point demand drops with supply rising (as farmers are planting more and more cocoa). Soon thereafter what do you think will happen to the price of chocolate?

If you have any question look at the price variation of hops over the last few years. First there was a shortage and price rise, then there were increased plantings followed by a price drop. Now there is a glut and it looks as if farmers will plant less hops.


Anonymous said...

It looks as if prices will rise. Its all over the web. Looks like your wrong. Free markets don't work. Monopolists are cornering the market and will raise the price.

"A British financier is behind a £658 million cocoa trade which single-handedly moved the global cocoa market. Anthony Ward, 50, bought 241,000 tons of cocoa beans and now owns enough to manufacture 5.3 billion quarter-pound chocolate bars.

Mr Ward, who is worth around £36 million, holds so much of the market he could force manufacturers to raise the price of Britain’s favourite chocolate bars. The transaction, the largest single cocoa trade in 14 years, was carried out last Friday by Armajaro Holdings, a hedge fund co-founded by Mr Ward."

The Classical Liberal said...

I don't think chocolate prices are as elastic as oil. Long before the prices reach $12 consumers will pull back their consumption.

Anonymous said...

You sure took long enought to respond. Your point is more of the same old free-market crap. If a monopolist corners the market he will set the price. If he want to sell chocolate at 12 dollars he will and there will be nothing you could do about it.

The Classical Liberal said...

There's a lot I can do about it. I can choose to eat less chocolate. And I would, long before it hit $12 a bar. My guess is that the overwhelming majority of chocolate eaters would as well.

A seller can set the price where ever he wants, but a buyer may chose not to buy it at that price. ASSUMING the monopolist wants to make money he needs to sell his product. The longer he holds his product the more he loses money through interest and shrinkage.

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