Let's Know Things

This week we talk about cacao, plantations, and bean-to-bar chocolate.

We also discuss black pod disease, swollen shoot virus, and seed pod currency.

Recommended Book: The City & The City by China Miéville

Transcript

The cocoa bean, also called "cacao," is a seed derived from the cocoa tree, which is native to the Amazon Rainforest in South America.

More than 5,000 years ago, near present day Ecuador, the Mayo-Chinchipe culture domesticated and cultivated this tree, which then found its way north into Mesoamerica—so parts of Central America, and modern day Mexico—and that's where we actually thought it came from until a handful of years ago, when new research pushed the initial domestication date back by about 1,500 years, tracking its path down into Ecuador by identifying cocoa residue on pottery from that time period down in that region.

But way back then, it's thought that the pulp of this seed was used primarily to create an alcoholic beverage that was fermented to about the same alcohol percentage as a consumer-grade, modern day beer—just over 5%—and because of that utility in making this popular beverage, it was used as a currency in some parts of South and Central America.

It's worth noting, too, that this tree and its seed would have originally been called kakawa, which was then turned into an Aztec derivative word much later, cacauatl, which then became cacao, when the Spanish colonized the region, and cacao then became cocoa when introduced to English-speaking parts of the world—and that variation of the word took over in the age of post-WWII globalization, due in large part to the popularization of chocolate products from English-speaking countries like the US and the UK, cacao only recently being reintroduced on that scale to differentiate more expensive cocoa products from those that have become mainstream.

Also worth noting is that in addition to being used to produce a popular alcoholic beverage way back in the day, the cocoa bean was also turned into a kind of frothy spiced drink by Aztec royalty and other higher-ups in this part of the world, and that drink was enjoyed by high-born members of society for several thousand years, the beverage used in all sorts of rituals.

And to make it, cocoa was whipped together with vanilla and other spices and sweeteners to produce something akin to a sort of hot chocolate the modern person would recognize, though leaning a lot more into those spices than most modern chocolates, rather than sugars and fats.

This wasn't a widely available thing in most areas, and it probably wasn't the main end-product for most cocoa beans for most of history, as that alcoholic drink and its many derivatives were a lot more broadly available and widely disseminated.

That said, different groups, across this region and across time, including the Maya and the Olmecs, had their own variations of this hot cocoa-like drink, and there's even an Aztec story that Quetzalcoatl was outcast by the other gods in their pantheon for sharing chocolate with humans, and some regional experts have speculated that the ritual of extracting the hearts from human sacrifices in the Aztec empire might be connected to the process of extracting the cocoa pulp from the cocoa bean seed pod when producing this beverage; though that's pretty speculative.

The Aztecs came later than a lot of the other cultures in this region that partook in chocolate-related rituals and made cocoa-related goods, so that's likely part of why their rituals surrounding this drink were more elaborate than those of their neighbors, contemporary and forebear, but it's likely that the nature of the bean itself, which only grows in a finite region, about 20 degrees north and south of the equator, also had something to do with it.

Because of that limited range, the Aztecs couldn't grow cocoa in their territory, and that meant it was always a luxury import for them, which meant—like many luxuries, even today—only the richest members of society could afford it, and that helped them differentiate themselves from the chocolate-less plebeians.

This changed somewhat following the arrival of the Europeans in the Americas, when the Spaniards, who were maybe originally introduced to the drink by Montezuma or one of his underlings, brought the drink back home with them, eventually creating a new market for producers, though Europeans were not initially a fan of it, and mostly seemed to indulge because it seemed exotic, but early on they realized that because this bean already served as a unit of currency in many of the areas they were exploring and exploiting, it allowed them to deal with locals in a familiar way: this many cocoa beans for one thing, this many for another—it made negotiations and payment a lot cleaner and clearer, and cocoa beans could be easily transported for trade while also being useful, in a pinch, as a stable source of food while in transit, which compared favorably to other food goods they were bringing back home from their explorations and invasions, like bananas.

What I'd like to talk about today is the modern chocolate market, and a dramatic price increase in cocoa beans that's raising eyebrows and concerns around the world.

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The modern chocolate market has expanded in the years since Montezuma and the Spanish conquistadors to cover the whole of the globe, with products based on the cocoa bean on shelves in every country—even shut-ins like North Korea.

In 2022, the global chocolate industry was worth something like $116 billion, which is more than double the $50 billion or so it was worth in 2009, and analysts expect this market's compound annual growth rate, which tallies the increase in the industry's return on investment each year, to remain steady at around 3.4%, which is solid, and predicated on the increase in the dark chocolate market, especially amongst health-conscious consumers, and the burgeoning plant-based and vegan chocolate markets, which further reinforce the perception of some chocolate as being a luxurious and healthful indulgence.

Such luxury upbranding is key to those CAGR assumptions, as positioning some of these products as more expensive, but better versions of what's long been available allows chocolate companies to sell relatively less product for relatively higher prices, and that means expanding their customer base while also increasing their profit-margins.

All of which would be vital for this sort of industry even during normal times, but it's even more important when things are going sideways with an industry's access to raw materials, which seems to be what's happening in the world of chocolate.

In the 20th century, especially the late-20th century, the brands that were selling the most chocolate to the most people, globally, started gobbling up their competition. This period of acquisition and consolidation left us with about a dozen big chocolate manufacturers, globally, including names you've almost certainly heard of, like Cadbury, which is the biggest such company in the world, but also Hershey, Mars, Neuhaus, Ferrero, and Milka.

Some of these companies, like Nestlé, are what's called bean-to-bar chocolate manufacturers, but most of the titans in this space melt chocolate from other manufacturers into their end-products, only using the bean-to-bar model for a few high-end offerings.

But there are a slew of bean-to-bar companies still in operation, today, they just tend to be a lot smaller, because this model requires that they process their own cocoa beans in-house, rather than outsourcing, which tends to be required to achieve the scale that companies like Hershey and Mars have reached; it's a lot more time-intensive and expensive to do it this way.

That said, the expansion of the chocolate market into a multi-billion, then more than $100 billion global industry necessitated expanding the footprint of its base-level production beyond its traditional South and Central American origins.

Several other locations within that 20 degrees north and south of the equator spectrum have thus seen cocoa trees introduced, but the biggest producer of cocoa, today, is Côte d'Ivoire, the Ivory Coast, in Western Africa, where about 45% of the world's cocoa was cultivated, as of 2022, which amounted to around 2.2 million tonnes that year, alone.

Neighboring Ghana comes in second, producing about half as much as Ivory Coast, with about 1.1 million tonnes produced that same year, and Indonesia is a distant third, producing about 667,000 tonnes in 2022.

Combined with Ivory Coast's output, Ghana's cocoa bean industry, plus the smaller outputs of nearby Nigeria and Cameroon, account for about 70% of all the cocoa produced anywhere in the world.

Ecuador, where the cocoa tree was seemingly first domesticated, is now all the way down in fourth place, producing about 337,000 tonnes of the bean for export in 2022.

Because of the nature of how cocoa beans are harvested, and where, chocolate companies have huge sway over local politics and economics, and the folks doing the harvesting have historically not been treated terribly well, and in some cases their ranks have been filled with children.

In some such areas, people are trafficked or enslaved and put to work harvesting cocoa beans, and even those who are there of their own behest are paid very little by international standards, not even a living wage (based on the cost of things like shelter and food in their regions), their incomes artificially capped by an agreement with the cocoa bean-buying industry, and though Fair Trade certification has become more common for many chocolate companies, demonstrating their commitment to paying better wages, and in turn allowing the folks producing the raw materials for their chocolates to actually be able to afford to buy chocolate products, which is not the case for those working in non-Fair Trade conditions, that's still not the norm, and in some areas the conditions faced by workers are pretty bleak, many of them children under the age of 15, many of them forced to work for various reasons, and all of them making just enough money to survive, but nothing beyond that, and in some cases, barely that.

Most of these beans, the ones that end up in chocolate produced by those bigwig entities that dominate the global chocolate trade, are mixed together with beans from other locations on commodity markets, these companies buying them by the metric ton, similar to other food commodities that are traded in this way, like soybeans, milk, and palm oil.

Distinct from most other commodities right now, though, is the increase in price cocoa beans are seeing on these markets.

In 2022, the average price for a metric tonne of cocoa beans was somewhere between $2,200 and $2,500.

That's of a kind with the typical pricing for the past decade or so, and though there was a massive spike in 1977, which was only about $5,700 per tonne in unconverted money, but that's about $28,000 per tonne if we account for inflation—so that was a pretty bad year for chocolate lovers and companies—but other than that and a few other aberrations through the decades, cocoa beans have been a pretty stable commodity, at least compared to other commodities that are thus traded.

In February of 2024, though, cocoa bean prices shot up from those $2,500-ish per tonne prices all the way to around $6,000 per tonne, and then in March cocoa futures hit a record (unconverted for inflation) price of about $10,000 per tonne, which is a staggering leap of something like 4 to 5 times the usual cost.

This price jump is being attributed to a confluence of variables, most of them contributing to a series of poor harvests in Ghana and the Ivory Coast, which again, together, account for most of the world's cocoa bean output.

The El Niño phenomenon that's been messing with the global water cycle and increasing average global temperatures since July of 2023 is partly the blame here, as are the creeping effects of climate change, which have, in practice, moved the ideal growing areas for all sorts of plants, because of a tweak to the average global temperature knobs that have nudged things higher in most parts of the world, while also making weather patterns more irregular, compared to what we've become used to.

Those climate nudges have also allowed diseases to spread faster and to new regions, including those that impact plants.

Extreme and unusual rainfall in Western Africa sparked outbreaks of black pod disease, which usually hits after wet season, and all that rain was followed by a period of extreme dryness and drought, which stoked the spread of swollen shoot virus, which reduces output by up to 25% in the first year of infection, up to 50% in the second, and which ultimately kills its hosts, the cocoa trees, and once it spreads to a plantation, the whole plantation, all the trees, usually have to be uprooted and burned, new trees planted in their stead, before things can get up and running again—all of which takes a lot of time and resources.

Cocoa manufacturers have been underinvesting in their plantations and smaller cocoa producers for years; so it's not just their workers that they're under-investing in, it's the infrastructure surrounding those workers, which is often decrepit and unsafe, and which has left them prone to these newly aggressive diseases and unusual climate happenings.

And a lot of the cocoa produced in these top-producing countries are run by small-holders, not by large-scale plantations. And because these small-holders are often almost as impoverished as the people working on the plantations, they don't have the money to invest in treating disease or uprooting and replacing all their trees, and that's led to a surge in illegal mining operations in cocoa growing areas, because illegal miners come in and say they'll pay the owners of the land where they want to dig a reliable, if still small income, and those landowners don't really have a choice—cocoa doesn't provide them enough money to do more than sustain themselves, so they take what they can get, and every time this happens, that's less prime cocoa-growing land that's being used to grow cocoa.

Because of all this, the mid-season crop coming out of Ivory Coast, the biggest producer in the world, is expected to be about a third lower than usual this year, and Ghana's production is expected to hit a 22-year low; hence, those dramatically hiked prices, which have been further inflamed by market maneuvers meant to protect investors from irregularities, but which have the practical effect of raising prices in the short-term, creating more volatility, not less.

This price-surge and negative overall outlook for the industry is causing a fair bit of concern for the global chocolate market, which has some stockpiled supply of beans, but which is struggling to account for this increase in overall cost, and is thus attempting to prepare their customers for price hikes and fresh instances of shrinkflation: which basically means selling the same product for the same price, but with less of the product in the package; so maybe a candy bar selling for the same price as before, but the bar is 2/3 its former size.

This has been a big discussion topic recently in part because of the recent Easter holiday, which is a big day for chocolate sales in many parts of the Western world in particular, so this situation is topical news, but also because it's representative of what's happening in other commodity and non-commodity markets, as well, as a result of many of the same factors.

The global supply of coffee beans has been shrinking since 2021, labor and other systemic issues contributing to that, but the climate also changing where coffee grows best, and thus making life hard on the folks who currently grow most of it, in what were previously the optimal regions for doing so, but which aren't any longer, and may no longer be capable of growing these beans at all in a few decades, the way things are going.

Olive oil is likewise seeing record-high prices in 2024, the price of extra virgin olive oil up 70% from a year previous, and 260% from two years ago, due to widespread drought across the Mediterranean, where most olives are grown, and because of a bacteria that's infecting olive trees more enthusiastically than ever before because of all that heat and drought.

The banana industry is also raising alarms, too, as the change in global temperatures and the water cycle are combining with a collection of increasingly aggressive diseases and infections that are impacting banana growing regions in Australia, Asia, Africa, and South America, necessitating a clean-sweep approach similar to those used to get a cocoa bean plantation ready to grow, again, post-infection, requiring a lot of additional investment and leading to a lot of waste and diminished expectations.

Most of these industries have enough of a backlog and stockpile to keep prices on shelves constant for a while after this sort of hit, but for all of these industries, prices are expected to go up, possibly permanently, because of this seeming new reality, and because of the nature of the entities operating in these spaces, and the systems they've deployed to keep their goods flowing to the entities that turn them into products that end up in stores around the world.

So while chocolate is the first to really hit the public consciousness in terms of the companies that own this space trying to prepare their customer base for what's about to happen by making it known that their core prices have grown shockingly high, it's likely we'll continue to see this sort of base-level inflationary impact on all sorts of goods in the coming years, unless something fundamental changes about the variables impacting supply, or the business model they use to sustain their industries.

Show Notes

https://finance.yahoo.com/news/chocolate-market-size-worth-usd-191300029.html

https://www.theguardian.com/environment/2024/mar/29/easter-eggs-chocolate-cacao-harvests-cocoa-prices-aoe

https://www.cnbc.com/2024/03/26/cocoa-prices-are-soaring-to-record-levels-what-it-means-for-consumers.html

https://archive.ph/YnZH7

https://apnews.com/article/easter-chocolate-africa-farmers-cocoa-ghana-4a4d58a4e6076c8d46258c1b4dc414c4

https://archive.ph/SbWVF

https://archive.ph/wPhkk

https://www.visualcapitalist.com/worlds-top-cocoa-producing-countries/

https://www.statista.com/statistics/263855/cocoa-bean-production-worldwide-by-region/

https://www.confectioneryproduction.com/news/47651/cocoa-sector-reaches-crisis-point-as-crop-prices-hit-10000-a-tonne/

https://ycharts.com/indicators/cocoa_bean_price

https://www.aljazeera.com/gallery/2024/3/30/chocolate-prices-to-keep-rising-as-west-africas-cocoa-crisis-deepens

https://investorplace.com/2024/03/olive-oil-coffee-and-cocoa-prices-oh-my-3-grocery-store-items-to-watch/

https://www.bbc.com/news/science-environment-68534309

https://www.ucl.ac.uk/news/2024/mar/analysis-cocoa-beans-short-supply-what-means-farmers-businesses-chocolate-lovers

https://www.france24.com/en/live-news/20231220-illegal-mining-smuggling-threaten-ghana-s-cocoa-industry

https://www.sciencedirect.com/science/article/pii/S0022316622143798?via%3Dihub

https://www.sciencedaily.com/releases/2018/10/181029130945.htm

https://en.wikipedia.org/wiki/Chocolate

https://en.wikipedia.org/wiki/Cocoa_bean

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