The causes of the supply disruption are analyzed, potential solutions are laid out, and the impact on the retail price structure is explained. The future outlook of the chocolate supply situation is reviewed as well as the top global consumers of confection products.
The news this week that the world is facing a chocolate shortage is representative of yet another commodity product in which the global consumption has drastically outpaced the supply. In the case of the chocolate market, a series of supply disruptions in the main ingredient of the product, cocoa, has created a supply side deficit that will lead to increased prices on the retail level.
These retail price increases will occur over the course of the next several months. However, they follow a price hike which began in 2012 by Hershey's and was followed by other major confectionary producing corporations. In fact, the retail price for chocolate has soared up by 60% since 2012.
Hershey's conducted what is known as a graduated price increase where they marked up the products' retail number incrementally by a certain percentage over a period of time. In this method, the consumer is less prone to "sticker shock" at a dramatic increase in the retail price and is more likely to still purchase the product rather than avoid that purchase entirely.
The cost of cocoa on the supplier side is the cause for the increase in retail pricing for products containing chocolate. The price of cocoa has gone up by 10 percent in 2014 but this follows a 20 percent increase in the price of this commodity in 2013. This type of supply side pricing volatility results in a major shift in retail pricing strategy.
In my own food industry experience, I remember the shortage on the supply of vanillin from Madagascar and other supplier nations, and the impact that disruption had on the pricing of any product containing vanilla was dramatic.
A Perfect Storm
The global cocoa supply is predominately sourced from West Africa which is responsible for 70 percent of the total supply worldwide. That region is suffering from drought conditions due to dry weather which has ravaged the crops of all sorts of products including cocoa.
The International Cocoa Organization reports that another contributing factor to the supply side shortage of cocoa is a fungal disease called frosty pod that has wiped out 30-40 percent of the global crops of this ingredient which is crucial to the production of chocolate.
These environmental factors coupled with a seemingly insatiable appetite for chocolate creates the perfect storm conditions responsible for the growing shortfall between supply and demand of chocolate.
The consumption patterns are trending increasingly upward for chocolate and chocolate related confections. In fact, global consumption outpaced production of chocolate by 70,000 metric tons internationally in 2013. That deficit is expected to rise, and analysts believe it could reach 1 million metric tons by 2020, which would represent a 14 fold increase in the gap between supply and consumption.
The wide disparity between the decreasingly lower levels of supply and the skyrocketing demand for chocolate is being driven by a few factors:
-- Increasing interest in chocolate from China -- a market that is enormously untapped for confection products is demanding more chocolate.
-- Western European consumption is the top market for chocolate ($12 billion market in 2012) and has increased in the past two years led by Switzerland (top consumer) United Kingdom, Ireland, and Belgium.
-- U.S. consumption has declined (12th in per capita consumption) but the trend is shifting toward premium chocolate products and dark chocolate products which both utilize more cocoa than lesser premium milk chocolate products (dark chocolate uses 70 percent cocoa while milk chocolate uses about 10 percent.)
-- Former Eastern Bloc countries are emerging chocolate consumers, especially Estonia and Lithuania. Russia has also seen an increase in consumption in recent years.
The mainstream media has reported that the potential solution to this worldwide chocolate shortage could come from agricultural experiments currently being conducted in Africa with new plants that have a higher yield of cocoa production. This new product does have a different flavor profile once it is converted and processed into the chocolate bars we know and enjoy.
In the coming months many methods will be tested in order to make chocolate more cost effective and abundant which will compromise the taste but make it affordable. The major confectionary manufacturers such as Mars, Nestle, and Hershey are hedging their future sales projections on the fact that the consumer will accept a change in the flavor profile in exchange for the affordability of the product at the retail level.
The biggest fear surrounding the chocolate industry right now is that the supply situation leads to further retail price increases which create conditions where chocolate is seen as a luxury item. The situation could devolve into one where the standard candy bar and chocolate snacks would be unaffordable to the average American family.
In the immediate short term the chocolate manufacturing industry will take steps to stretch the current supply of cocoa by using more fillers in their respective products by incorporating nougat, caramel, and nuts into the formulations.
The chocolate shortage that is the trending topic in the food industry is yet another commodity which will undergo a transition phase until it stabilizes once again. The various methods used to flatten the demand curve will be aimed at increasing supply and lowering costs for both the manufacturer and the retail consumer.
Unfortunately these same methods will alter the flavor profile of chocolate but this same scenario has occurred with chicken, vanilla, and a variety of other commodity products. The industry wanted to make those products more affordable and plentiful with the unintended consequence of altering the taste. The chocolate industry is banking on the fact that the consumer will make that compromise again in order to be able to drown their respective sorrows in Milky Way bars.
I certainly hope that their assessment is correct.
Frank J. Maduri is a freelance writer and journalist with numerous publishing credits for a variety of websites and news organizations. He has food industry experience on the supplier side, which involved setting prices on product utilizing commodity products sourced from across the globe.
Here are four examples:
When the president shaped the Affordable Care Act, the country needed to provide healthcare coverage for millions of uninsured and bring down costs, which are 50 percent higher than in Europe.
Economics tells us achieving those goals -- dramatically increasing demand by extending coverage and lowering costs -- conflict, unless the supply side is dramatically altered by radically changing delivery systems and how prices are set.
The Germans, Dutch and others with insurance based payment systems have taken such radical approaches to drug and medical appliance pricing, while still rewarding innovation, but the Affordable Care Act does not.
A principal architect of the law, economist Jonathan Gruber, has admitted the ACA paid scant attention to cost controls, even as the Administration touted it would indeed lower costs. And the White House recruited the Congressional Budget Office to put over the ruse.
Now Medicare's actuaries project the nation's total health care costs will rocket the balance of this decade -- witness the big insurance premium increases for 2015.
2. Minimum Wages
Obama wants to raise the federal minimum wage to $10.10 an hour but the CBO -- whose words Democrats admonished were sacrosanct during the health care debate -- has concluded that would kill about 500,000 jobs.
White House and liberal think tanks have countered raising the wages of hamburger flippers would miraculously increase demand for their services and GDP, because those who remain employed would have more money to spend -- forget the fact that Americans would pay more for fast food and have less to spend on everything else.
McDonald's would invest in computers to replace order takers and cashiers -- sustaining some of the value of those displaced -- but more folks would bring lunch from home, shrinking the fast food industry and GDP.
Cutting 500,000 people from the workforce, even with more machines, must reduce goods and services produced and slow future jobs creation.
3. Keystone Pipeline
The president's words would indicate the Keystone pipeline is bad for the environment, won't do the economy much good and would only move Canadian oil to ports.
The fact is the pipeline would also carry North Dakota oil currently moved by rail. That would reduce risks of accidents and ecological disasters, lower oil transport costs, reduce domestic gasoline and heating oil prices, and boost efficiency and growth.
Millions of immigrants are in America illegally, and ever conscious that Hispanic and Asian voters are critical for Democrats to keep the White House, the president is crafting an executive order to legalize and grant work permits to more than 3 million immigrants who have children with legal status here.
The Administration argues the federal government lacks the resources to identify and deport all or even most undocumented immigrants but has failed to effectively partner with local law enforcement by requiring the states to demand proof of citizenship to hold driver's licenses, enroll children in school and access other services.
An executive order would be an incredibly broad application of prosecutorial discretion, raising serious constitutional questions. Not a lawyer, I consulted the words of the most accomplished constitutional law professors available -- the President of the United States.
Last fall when asked if he had the authority to end deportations of illegal aliens, he said "Actually, I don't" and that he could not appease immigrants' advocates by violating the law.
What has changed about the law since then he is yet to explain.
The president simply needs to cultivate more disciplined thinking and watch what he says -- lest the facts, faulty reasoning and his own words come back to embarrass.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1