The Bittersweet Truth About Cocoa Speculation

Since inflation started spiking in 2022, a rotating cast of food commodities have hogged the spotlight as the one that supposedly exemplifies and fuels the problem—not just lifting CPI, but stretching household budgets. For a while it was pork. Beef took a turn. Eggs had a pretty long, dramatic run. And now? Cocoa, which is taking a wild ride due to crop failures and speculation.

Lately, cocoa is getting a particularly bad rap, with several articles bemoaning Wall Streeters’ greed putting chocolate out of reach for normal folks. Yet the likelihood this has a meaningful impact on prices at the supermarket is quite low, which I think is a pity. If price signals were allowed to work as they do in other, freer commodity markets, they would probably bring more stable supply and prices in the long run.

Lest you think I am coming at this detached and disinterested, cocoa is a big part of my personal inflation basket. As a baker with a hint of madness, I need the highest-fat natural cacao powder for an all-American chocolate cake, one brand of Dutch-processed cocoa for a genoise and another for brownies. I need semi-sweet chocolate for ganache and bittersweet for chocolate buttercream and truffles. Oh, and please toss in some white chocolate for candy and fruity ganache. And 90% cacao wafers to snack on and fend off migraines. Ack, and throw in an extra bag of the natural cacao for my smoothies. Fine, and a tin of a third Dutch-processed cocoa because it makes the best hot chocolate. Like I said, mad. Baker.

So when cocoa spiked from a little over $4,000 per metric ton in January to around $12,000 in late April—a month when I had two big baking projects due—I was a bit concerned.^[i] I had already resigned myself to pasture-raised eggs and grass-fed whole milk not mirroring their mass-market counterparts’ decline. But cocoa more than quadrupling from 2023’s $2,500 per ton?^[ii] Yowza, that one was going to hit the budget.

Only, it didn’t. Prices at my local markets didn’t change much. Whatever speculators were doing, it wasn’t flowing through to consumer prices. Phew! But relief gave way to curiosity, which has now led me to a big sigh.

You see, I think commodity traders—speculators—are generally a force for good. I know, I know, but please hear me out.

Headlines portray speculators or futures traders as greedy wild-west outlaws who force all of us to pay higher prices for food and energy while they profit. They also get blamed for most currency crises, not to mention stock market volatility. Whenever the market falls fast, you can bank on someone, somewhere, throwing darts at a board with some famous short seller’s face on it.

I see things differently. In a world without speculators, we wouldn’t have many price points for basic foodstuffs. In the milk realm, farmers and bottlers would have to scrounge for data on the handful of recent sales that took place, factor in estimates of supply and demand, and take their best guess at what is fair. It would be even worse where crops are involved, with harvest coming only once a year. Farmers would have to guess at how much to plant and live off the uncertainty of not having the faintest clue of what they would get.

Onions illustrate this point well. Congress, in its infinite wisdom, banned futures trading on onions in 1958. Since then, their prices are extraordinarily volatile, much more so than, say, crude oil. This, despite the fact speculators and oil’s robust futures market are often blamed for “volatile” prices.

Futures markets grant clarity that otherwise doesn’t exist. They fill the gaps between real-world sales with financial transactions, adding price points galore. They also widen demand and better connect real-world buyers and sellers. Even for farmers who don’t sell into that industrial system—the local types selling at farmers’ markets and family-run shops—trends in futures markets give a reference rate to help them set prices.

Fundamentally, speculators add liquidity to highly illiquid markets, making things overall smoother and more predictable. Short sellers do the same in the stock market, even during bear markets, adding to the pool of both buyers and sellers.

But doesn’t that mean futures traders push commodity prices up sometimes? Yep. But the spikes rarely last, because they are signals. Higher egg prices told ranchers to raise more chicks. Higher bacon prices told them to increase their pig herds. Wheat rising while corn falls helps farmers make planting decisions. These supply increases help balance out high demand, helping prices stabilize and even fall. Look at food commodity charts from 2022, when supply concerns sent futures prices higher for a spell, and you will see what I mean. The shortages were real but, well, short—and prices went back down. And yes, I am oversimplifying here, but only a little.

If the cocoa market were free and efficient, this year’s price spike would trigger a production boom that would benefit the farmers and chocolate lovers alike. Farmers would get to sell more at a higher price point, and the added supply would stabilize prices. Unfortunately for pretty much everyone involved, the cocoa market is not free and efficient, and farmers aren’t benefiting from higher cocoa futures prices. Actually, it turns out futures are pretty irrelevant.

A piece in Friday’s New York Times sheds a lot of light on this. While starting out like a typical screed against speculators, it segued into an indictment of the market’s inefficiencies.

While estimates vary, West Africa produces 60% to 70% of global cocoa supply, much of it from Ghana and Ivory Coast.^[iii] As the Times notes, governments set the price in these countries from season to season “in an effort to protect them from volatility in global prices.”^[iv] These days, that amounts to “protecting” farmers from higher profits even after governments raised the rate in response to the global cocoa market’s spike. This obliterates the incentive to increase production.

Here, the Times suggests this isn’t such a big deal, given it takes years from a cocoa tree to grow from sapling to a full, fruit-bearing specimen. It argues high prices today create little incentive to expand orchards since farmers can’t know what prices will be years down the road and whether planting will be profitable. Fair enough. But also, too simplistic. I mentioned earlier that prices rose initially due to crop failure. Some of that came from flooding in the region, which caused black pod disease. But there is also another disease wreaking havoc, called swollen shoot disease. Controlling it requires removing the entire tree and planting a new one.

To Western ears, this may sound simple. But as World Wide Chocolate explains: “To rid a farm of this disease and prevent it from spreading to other trees, the tree must be completely removed and uprooted, which unfortunately is not a feasible course of action for the majority of these farms with limited excavation tools, not to mention the funding to remove these entirely is not readily available.”^[v] Huh. Sounds like letting farmers reap higher market prices might help with this, enabling them to invest in the equipment needed to better manage their crop.

The high expenses involved in managing a cocoa farm also create some perverse incentives that higher prices could solve. Some farmers have given up entirely, swapping cocoa for rubber trees to profit off the West’s desire for cheap, sustainable wooden furniture. Others have chosen a different alternative: illegal gold mining, which hit Ghanaian cocoa output hard and contributed to the 2022/2023 season ending a month early.^[vi] Here, too, if farmers could reap higher prices, it could be less of an issue.

Usually, a discussion like this would be theoretical. But in the cocoa world, we have that blessed thing known as a counterfactual—a control group showing what the market would look like without price distortions. This would be the world of artisanal fair-trade chocolatiers, who work directly with small-batch farmers and pay premium prices that account properly for the famers’ operating costs and promote ethical treatment of workers (and discourage forced labor). The Times talked to one such chocolatier, who reported still paying the same price, ranging from $9,000 to $12,000 per ton. He notes that the global bulk price simply caught up with the premium price.^[vii] The market, it seems, really wants to be ethical and fair-trade.

Even with some of that price spike reversing, which is the other thing about speculative swings: They tend not to last. Cocoa is now at $8,695 per ton, down about -30% from April 19’s high, as commodity traders got too far out over their skis.^[viii] Which tends to happen, especially during stretches of low liquidity—and as the Times pointed out, cocoa markets were actually pretty thinly traded during that wild run.^[ix] As liquidity and sanity return, prices should continue evening out.

Not that we will notice at the supermarket. Even Big Cocoa, which pays something closer to the global bulk rate, is scarcely raising prices. Same with Big Candy, whose dirty little secret is that there actually isn’t much chocolate in your favorite mass-market chocolate bar (spoiler alert: they use palm oil, not cocoa butter). And for those of us who have long opted for smaller-market labels? Business as usual.

So if you meet a commodity trader, thank them for greasing food markets’ wheels … and tell them you wish they had such power in the cocoa world. That market needs more influence from speculators with a sweet tooth.