This Is How The Chocolate Market Actually Works

live hogs maybe, well that's probably one. Another one I would say is the marijuana industry still, you know, But now we're gonna be talking about another commodity about which I feel like people often like to make jokes or maybe don't realize is very serious business, and that is coco. Coco.

I love chocolate. Yeah, exactly. See, you've proved my point, which is that as soon as the conversation turns to cocoa or chocolate, usually people start getting into some sort of aesthetic discussion about how worse they love it, and you know which you never hear of, say, we're talking about copper or palladium. That's right. People don't start talking about their favorite like shades of metals when they're talking

about precious metals. That's very true. Whereas I feel a very very strong urge right now to talk about my favorite brands of chocolate, but I will resist. Well, it's not that it's uh irrelevant perhaps to our conversation, but it is good to remind people that there is a serious, traded commodity market that underlies the chocolate that they love and has some very interesting market dynamics in terms of

who supplies it, who grows it, who buys it. That makes it a perhaps more interesting story than just something very sweet and tasty to eat. Well, I'm intrigued. I think we should talk about the serious side of chocolate, and I will try very very hard not to make any jokes. Okay, Well, today we are going to be talking to Christy Leslie. She is a professor at the University of Washington bothel and she is also the author of a book all about the coco market called Coco.

I've spoken to her on TV on my TV show What You Missed that I co host about the incredible rally that we've seen this year in the price of coco, and I was so fascinated by the dynamics of the coco market that I wanted to learn more and really dive into how this commodity market really works. Christie, thank you very much. For joining us. Yeah, no, thanks for having me. It's great to talk again. And um, I really appreciate very much your comments about taking coco seriously.

When I did my PhD by studying cocoa and chocolate, it was it was actually pretty difficult to be taken seriously as a scholar, at least in the beginning, because people immediately wanted, just as you say, to start talking about their their favorite chocolate. No imagined like if you had written, say, a book about how the soybean market or the corn market worked, no one would really question

that it was serious scholarship and serious business. But of course, I guess if you write about chocolate, immediately people think maybe it's a bit more of a frivolity or something that is, uh yeah, not that serious. I really think so. And I think it's because people don't usually have the same kind of emotional relationship with soybeans or corn as they do with chocolate, and so it's much easier for people, I think, to make the transition to thinking about those

those things as serious traded goods. You know, But we have such a strong we're we're passionate, we're collectively passionate about chocolate. So you know, the first thing people think of is their own personal experience rather than maybe the larger economic context. Christie, I just realized something which I should have said in the beginning, Where where are we

talking to? Where are you based right now? So I am in Across which is the capital of Ghana and in West Africa, And Ghana is the second largest cocoa producing country in the world. The first largest is Ivory Coast, which is right next door. And there's there's no cocoa in Acrow itself. It's a very urban environment, so we don't see that many cocoa trees around um, but not too far outside there there's quite a bit of cocoa. So I mentioned in the beginning that there were some

interesting aspects with where coco has grown. You mentioned Ghana, you mentioned Ivory Coast. What does the global distribution overall look like, how significant are these particular markets, what are some of the other big ones, and just sort of let breakdown where our coco comes from overall. Yeah, that it's that's so important to to understanding this market. So just the coco is indigenous to the Amazon River basin,

so it was born in Central and South America. And it was first cultivated in Central and South America, and that's that's important to know because today countries in that region don't actually produce a lot of coco um Today West Africa is really the predominant producer region, but by

by a lot. So about three quarters of all the cocoa in the world now comes from Africa, and most of that is in West Africa and so Ghana every coast is number one, Ghana is number two, and then Nigeria and Cameroon also in the region produced quite a bit of cocoa as well. So really between these four countries we're looking at a vast amount of cocoa. The exception is Indonesia, which is the third largest producer in the world, about nine or ten percent of all cocoa.

And what you see in Indonesia though, is a bit different kind of coco processing, and so the beans that come from Indonesia are typically not fermented, and that means they can be used only in a in a different way in the chocolate making process. So so when you're looking at this foundation of the chocolate industry, we really have to look at Africa. So how did that happen? How did West Africa become the place for the majority of the world's coco production. It's an interesting story. You know.

Partly it is to do with colonialism, and so when Portugal and Spain decolonized the America's, when they when they relinquish their on ease there, it sort of coincided with a massive drop in production in the America's and that was for a number of reasons. So you had two things happening at the you know, around the same time was was Portuguese and Spanish colonization and then subsequent d

colonization loss of production in the Americas. And at the same around the same time were a little bit later Britain and France colonizing Africa. The thing that was happening not maybe in the background would not be the right way to describe it, but the thing that was happening in Europe at the time was that the chocolate industry

was born and it was growing. So you can imagine the new chocolate companies, Cadburry among them, you know, Hershey a little bit later, had just discovered that they could sell chocolate, you know, and that it was extremely popular with people. Um people started to develop a taste for it in Europe. I mean, we're looking at a situation where they US cann't get the beans from the Americas to the same volumes as as they produced previously, and turned to Africa where there was a lot of enthusiasm

for this new crop. Uh, coco was making people more money here than than other export crops they were growing at the time. The climate was really suitable for cocoa, and you know, between the two of them, France and Britain could exert a lot of colonial power. And so you see this massive global shift. I mean, I just described that to you in in a minute or two, but really it happened over over decades, if not a century or more. So it wasn't an overnight shift. But

that's the basics of it. So, Christie, the first time we talked, and we were talking about the incredible rally that we had seen in coco prices this year, how much of the pricing of coco is essentially just a function of the weather conditions at any given time in West Africa. Yeah, it would It would be impossible for me to quantify it, so I couldn't put in an exact figure on how much is the weather I tend to put more faith in the weather as the driver

than maybe some other analysts. I just don't see other factors contributing as much, unless unless it's politics. Really, so the other another big driver of price is the political situation in this part of the world. So, for example, during periods of conflict and Ivory Coast, even though Coco still moved out of the country, sometimes in very large quantities, the when there was conflict in the possibility that Coco might not be getting out of Ivory Coast, then we

saw that drive the price up as well. So you know, really it's any anything that that shortened supply, anything that supply potentially less, and really that's weather and and and politics for the most part. So if I had a really good weather forecasting machine, would I be able to almost perfectly predict the cocoa price. No, because we're at the end of the day, we're dealing with people and so people, you know, the price doesn't happen kind of magically.

It happens, but you know, because people, traders and companies are making decisions about whether to buy your sell coco right, and so you know, they take into account much more than the weather and um one of the other things that they take into account obviously is demand, and so we can we would also need to bring that input in as well, and demand can be of course another big price driver. The thing is about chocolate is that

demand doesn't tend to diminish that much. It's it's kind of steadily grows over time, and especially when when new markets and Asia started to develop, and there we really mean China and India, we had an even kind of bigger boost in demand. And so you know, demand influences price. If if the big companies say they're not processing as much coco one year or to the next, that can also make a difference on price. But overall, you know, it's a pretty people still like to eat chocolate and

that's not going away. Christie. Would we think of the price of a commodity? I think sometimes we think that that price arrives kind of by magic, or at least I do. I sit at my Bloomberg terminal, I start typing in coco. It brings up a cocoa future and I can look at it on a chart. But of course that price has to be derived from real people making real transactions on the ground, buyers and sellers walk

us through the market structure a little bit. So a farmer in Ghana grows coco, then what what is the sort of supply chain at which the clearing price of cocoa is set? Yeah, you know, and interestingly, you know, the prices set on the futurest market, which is not people operating on the ground. And so you know, the

people trading futures are not coco farmers. So there's two future markets for cocoa in New York and London, and the people making those decisions are definitely not the on the ground traders, their futures traders, and so they're sitting at desks in New York and London and making these decisions. Um, so the price is set in a bit more of a top down fashion. However, those traders rely on reports

from people who are on the ground. And so those reports, of course are you know, about everything we've been talking about, the weather, the productivity of trees, the farmer enthusiasm, the politics. Right, so the information from the ground feeds into those those traders sitting at their desk in London and New York. But then the price is really set at that level. I'll answer your question and talking through the the steps and just with the caveat that they're they're different in

Ghana to where they in other countries. And the reason is because Ghana has a very highly regulated market where the government controls many aspects of the trade of cocoa. And so the first thing that a farmer would do

is they sell to a buyer. In Ghana, there are licensed buying companies and so there's you know, maybe two dozen of them that operate in the country, maybe ten or twelve of them are significant in terms of market share, and those buyers tend to farmers organized in their villages and decide more or less together which of those buyers

they're going to sell to. In the case of Ghana, those buying companies then sell their cocoa to Ghana Cocoa Board, which is a government body, and then Coco Board exports that. So Ghana has a little bit of a different structure that some of the other places which are not as highly regulated. So is the majority of coco production in Africa? Then? Is that still mostly done on an independent basis? Do we not have big corporate plantations? And if not, why

hasn't that happened? Because you would assume that you know, companies that are demanding large amounts of cocoa would try to secure their supply. Yeah, that's a great question. There's very little plantation agriculture in cocoa, and so you tend not to see the big kind of corporate plantations that you that you're talking about. They they exist, they're they're around um and they might not even be owned by a big chocolate company. They might just be owned by

a wealthy individual or a private company. But the estimates vary. Of all cocoa is grown by smallholders, and so we're talking about individual farmers who may farm their on land or rent it out to someone else to farm, but very very very small amounts. And so, you know, to to get back to to Joe's question from earlier, there's there's five million estimated coca farmers in the world. Each one of them is selling to a buyer, and of course there are fewer numbers of buyers, but still a

lot um. And then from there on up we start to see the trading structure narrow really really quickly. So we're talking about millions of farmers at the base, probably millions of traders also who they're selling to and then when we start to see the number of actors involved kind of diminished pretty rapidly. I want to ask another question about the supply side of that is the degree of labor intensiveness of the crop. I know there's some crops like grains, where you don't need a lot of labor,

can be done with a lot of machinery. How how labor intensive is the actual planting and collecting of cocoa.

It's really it's it's really labor intensive. And and it's such a good question because I think, you know, if you think about the crops that we you know, grow in America, wheat and soy and even corn, they can be macoganized, mechanized so much more easily, you know, And so wheat is a really nice comparison because you know, wheat's been basically engineered to all grow at the same height and all ripen at the same time, so that a harvesting machine can just go through that field and

cut off all of the ripe, you know, wheat grains, you know, at the same time. The opposite is true for cocos. So you know, the trees do not the pods. The cocoa pods do not all ripen at the same time the tree. They ripen pretty much year round. There's no real way to mechanize the harvest. It's got to be done by hand. So each of those cocoa pods

is pretty big. Some of them can get almost as big as like an American football, and they're around the same they're about the same shape, and so they grow on the trunk, they grow on some of the larger branches, and and you can imagine you've got these big pods sticking out from all around the tree, including on the trunk. I mean, how could you mechanize that? And so so

really it's the labor of harvest. It's the labor of breaking open those pods and scooping the seeds out, you know, and of course all of the farm labor that goes into it. So imagine you're in a tropical rainforest. That's coco's home, that's where it's it's indigenous to rainforest. That's not easy environmental work, and everything wants to grow there, everything, and so you know, a lot of cocoa farm labor is just keeping the farm clean, you know, doing the weeding,

which is not like pulling out a dandelion flower. We're talking about some pretty hafty weeds that that need constant removal and and maintenance. So I think pretty labor intensive is the short answer to your question. So before we move on to the demand side, have one more question

on production related to your point about labor intensiveness. You mentioned that the price of cocoa, it's set on the futures market way out in the west, but the people setting that price rely on on the ground reports about production. I'm just wondering how much of the futures prices that are set actually trickled down to cash payments for the farmers. Is it possible that there's a big rise in the futures price for coco, but that doesn't necessarily entirely filter

down to the farmers. There is a relationship, and so you know, if we take on out of the equation, because here in Ghana, the government sets the producer price every year and so they say how much the farmers are going to get. And while that price does generally follow the futures price because they set the price per season, which is October through March, ish is the is the productive pie. You know, the futures price might change a lot during the season, but that price is fixed for

the duration. There's a similar situation Ivy Coast where they set a minimum price. It's not as enforced. It's not as enforced as well as it isn't gonna um. But in all of these cases you have the futurist price setting the that's the starting point, right, and over time, as the futurist price moves up and down, we see what we call farm gate prices, which is the price that the farmer actually receives, you know, when she or

she settles their coca. We see farm gate prices also move with the futurist price, but as you can imagine, it doesn't happen instantaneously. And it's also because we're dealing with five million cocoa farmers in the world and no real mandate to collect all the price information from them. It's a little bit challenging to say exactly how much farm gate price changes and when it changes when the futures price changes, but generally, over time we do see

the two following each other. All right, let's talk a little bit about who is buying the cocoa. So we've established that so much of the world's coco comes from a few specific locations, highly concentrated. The buying is also, I imagine pretty concentrated. I what percent of the world's coco is bought by a few big sweets companies like nest Lee and uh Cadbury. I imagine that that we're

all familiar with, oh, most of it. So, you know, if we look at the structure of the industry, I said, it narrows on the way up, and so you've got millions of cocoa farmers. But then at the other end, you just got a very few companies who predominate. And so of course there are lots of chocolate companies, there

are lots of coco processors. But when we look at the big ones, the ones with the really the signific get market share in anyway, what we call them mature chocolate markets, which are the kind of oldest industrial chocolate markets. In ub in North America, we're looking at five chocolate companies and three processors, you know, and so between these companies they are really doing most of the buying. That's not just they're not the only ones, obviously, but they're

the biggest ones. So those are the fundamental sources of demand. Those big chocolate companies buying up coco. But are there speculative sources of demand or speculative entities that are also having an impact on price, Because when it comes to commodities, one of the conversations that we're always having is, you know, the paper versus physical price and the degree to which speculative traders are actually impacting prices away from actual on

the ground demand. The futures market for coco is definitely populated by by speculators as well as hedger you know, when we say hedgers on that market, we're talking about the big chocolate companies and the big processors who are hedging their bets against a future price rise by buying, you know, on the futures market. But absolutely speculators are active in Coco futures. And the reason for that is because, I mean, as we've been talking about this whole time,

coco is a commodity. It's price is volatile, and any time you have a volatile price for for a good, you've got the opportunity to place a bet on it and potentially have a pretty big payoff. And so for sure, I mean, Coco is very popular amongst speculators and in those cases, they rely on the same information coming from the ground. You know, they also need to be informed about about disease outbreaks amongst coco trees, which we haven't really talked about. They need to be informed about whether

they need to be informed about politics. They're using all that same information, but not because they want to make chocolate, but because they want to make a well educated guess on what's going to happen to that price. And so for sure, for sure, you know, with various commodities, of course, there are certain data points that people look at to

sort of establish the fundamentals of supply and demand. With corn and we we might look at acreage or or plantings, and with oil, people might look at the latest rig count data in the US. I know in the cocoa market because I see the headlines from time to time. Uh, there's something called the grindings data and what but I don't even know what that is. What is the grindings data? And what is that information telling us? What is grinding? So grindings happen after the farm, so on the farm,

Cocoa is still an agricultural commodity. Once it gets into a factory, it starts to change into a manufactured good, a manufactured item, just like a toy or electronics or manufactured chocolate is manufactured. And the first step is grinding the beans. And so cocoa beans are really the seeds of the fruit, and so that's what we make chocolate

out of, is the seed. They're pretty big seeds, they're like maybe a bit bigger than an almond usually, and those those seeds are fermented usually and then dry and then they're really really really hard, like a pebble, and you've got to grind them down, and so you that's the first step into making them usable. So you could eat one in it's just sort of whole state, but you wouldn't have a very maybe like emotional experience with that,

and you could meet a lot of them. So the way we get cocoa to be usable is we grind it and it grind down. It's so so so fine to such a small particle size that it turns into almost a liquid. It's like a paste. And then from that paste is where we can start to make all

chocolate and chocolate factionary kids. So grindings really refers to that that step of grinding, the being down like very literally and of course, like some symbolically, grindings is demand because you wouldn't be grinding beings down at all if people weren't demanding chocolate. Just clarifying, so what we would we see the grinding data flashing through the terminal that

is a proxy for demand? Basically absolutely yes, because how could you measure, right, You couldn't really measure everybody's demand for chocolate, you know, we we have a vague idea of it. But the way you measure it is by how much the big processors and chocolmakers, how many how much coco they're grinding, They're they're grinding based on their own assessments of how much chocolate people are going to

buy from them. It's very hard for me not to make a juvenile comment about grinding data flashing across the Bloomberg term. Um, but I'm going to try just to go back to the evolution of the market. Um, we're

talking about speculative forces. I seem to recall a trader, a big commodities trader called Anthony ward Um, better known as chalk Finger, and I think he said he was gonna stop trading chocolate because, um, there was too much algorithmic trading in the market, So commodities trading advisors for instance c t a s coming into the market and just changing the way it works. Is that something you've observed as well, Christie, the algorithmic trading, Yeah, in the

futures market. Yeah. And I mean so I won't pretend to be able to explain that aspect, but um there, you know, I was actually just reading about it this morning. I tried to read the Coco News every day, and they're just there's actually a few articles out about this algorithmic trading. Um. And yes it happens, and yes it is computer programming making predictions, you know, and and taking some of maybe the guessing away from human beings. Um. And I think a couple of things about that, you know.

One is it further divorces people from you know, on the trading side, the future trading side, from the experience

of cocal farming. I mean, they're already pretty far away from it, but that that algorithmic training, you know, makes it even that much more distant, and I think probably much easier for people to forget them that they're talking about real farmers, like real live human beings whose livelihood depends on, you know, in some ways now what an algorithm tells us um At the same time, those algorithms are using the same data that we've always used, and

maybe the data is becoming more abundant, maybe it's becoming more precise, you know, in terms of weather forecasting and things like that, but it's it's still going to I don't think there's been a fundamental change, you know, in in how we predict what the price of coco is going to do. I mean, there's lots of variables, but there's only so many that that are really meaningful. So Christie, before we wrap up here, what is the next big thing that people in the coco market are thinking about

and watching for these days? The big word that we hear about all the time in the cocoa industry and have been for some time now is this is sustainability and how sustainable is this crop? And there's lots of ways to measure sustainability, but what the big companies have chosen.

These big companies that I was talking about, you know, the five chocolate manufacturers and the three processors and other large players, they're basing sustainability on on coco yields and by yields, I mean how much fruit is any coco tree growing, right, And so if your yields are increasing, that means more pods on those trees and maybe more beans inside those pods. Um and that is what the

big companies want. And so what we've seen recently, you know, really recently in the last couple of weeks, but also based on you know, conversations over the last few years, is that for the big company's sustainability and cocoa really means increasing yields. And that is hugely problematic from a number of perspectives, but mainly from the perspective of a cocoa farmer. And I'll just just really briefly describe what

that scenario would look like. And so there was a big World Coco conference in Berlin a couple of weeks ago, and one of the goals that came out of it was to double yields. What that would if we doubled the amount of cocoa being grown in the world, there is only one price outcome, and that is a fall. You know, there's no possible scenario where demand for chocolate rises so much that it counteracts the um you know,

the price all that would come from doubling yields. And so my question, really, you know, as we move forward into this in in this conversation in the industry, is how does doubling cocoa yields help a farmer if they even if they grew twice as much cocoa, they would be looking at a price that was a fraction of the value of what it is now. And I just

don't think the math works. I don't think the math of doubling how much cocoa you're growing works out to a better income for a farmer if the price has been utterly devastated by a superabundant supply. And so you know, right now, I think we're in a moment in the cocoa and chocolate industries really where people are just struggling to come up with a solid, practical, you know, usable definition of sustainability UM and so far, I don't think

increasing yields is our answer. So lots of work remaining to be done on that question, for sure. Christie. One question before you go, We've been building up to this moment your favorite chocolate. I knew it was coming. I will give you the real, honest answer, and so I whatever chalcolout I'm eating in that moment. I love chocolate so much. It has been my favorite food from my whole entire life. And I don't even really care if it's dark or mike or white, like I just I

eat it every day. And so I'll tell you what I ate today. There's a new company and gone It's called Niche, and I ate some of their thirty percent milk chocolate. And that was my favorite today because I eat it today, so tomorrow it might be a different one. Christie, this is a fascinating conversation and I already can't wait to have you back again on the podcast, maybe in a couple of years as we see the evolution of uh these yields. Thank you so much for joining. Oh

it was a lot of fun to talk. Thank you so much, Tracy. What is your favorite kind of chocolate? Oh? Do you really want to know, Joe, because I'm going to give you like a massive list. No, I do, I did? Ready? Yeah. I like green and blacks, I like milka. I like anything from Jack Torres in New York. There's one close to the Bloomberg office, so you know, if you're looking for a present for me, you can go there. I like toisture in Switzerland. I like Mozart

coogl in Austria. I can keep going, by the way, but I better stop. This is amazing. I had no I mean, I I guess I think I knew that you like chocolate. I didn't realize you liked it with this degree of specificity and granularity. I think about it a lot. M As for my own personal chase, I don't really eat chocolate that much, but for me, the darker is better. At see, I was gonna ask, but I knew you would say that. Wait, so what do you think The darker the better? Darker the better. Okay,

I'll remember that. I'll bring you some from the next chocolate friendly destination I go. Please do. But seriously, I found that conversation fascinating. And you're right. The chocolate market is defined by some very very specific factors like the weather and a few big buyers in the form of the chocolate companies. But it's also a really interesting structure with this network of mostly independent farmers and the way that interacts with the futures market. Yeah. Absolutely, that's what.

Uh you know, It's as I was kind of getting at the beginning to some extent, all commodities to get reduced to some price that we could chart on his screen. But the origin of those prices is different for all of them. So you might have very industrialized commodities, but then other ones where you have someone on a phone calling up local sources asking them what their latest price was, or in this case, a network of five million cocoa farmers around the world with the prices said at local

gates or local markets. So I love learning about the actual derivation of these, uh, these prices that we take for granted. Yes, and I have a newfound appreciation for the grinding reports can't say with a straight pain. Sorry, let's leave it there. This has been another edition of the ad Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why

Isn't All? You can follow me on Twitter at the Stalwart, and you could follow Christie on Twitter at doc of Chalk really Enough, And you should follow our producer tofur Foreheads at foreheads t, as well as the Bloomberg head of podcast, Francesca Levy at Francesca Today. Thanks for listening. O