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Chocolate — Food of the GodsLesson 8 of 16

The Commodity Trap

Goal: After this lesson you can explain why cacao farmers stay poor even though chocolate is a huge and growing market. Subject: Economics | Run time: about 7 minutes

Quick recall

Last time we covered the children in the cacao. Two quick questions. One: about how many children work in cacao in Cote d'Ivoire and Ghana? About 1.56 million children (NORC at the University of Chicago, 2020). Two: are cacao-growing families poor or comfortable? Most live in poverty, which is exactly why the work falls to children (NORC at the University of Chicago, 2020).

Why this matters

Here is a puzzle worth sitting with. Chocolate is not a small business. The global chocolate market is about 161.5 billion dollars a year, and it keeps growing (International Cocoa Organization, 2023). So if the product is worth that much, why does the person who grows the bean earn 50 to 84 cents a day? The money is real. It just doesn't flow back to the farm. This lesson is about where it goes instead.

The idea

Follow a single 3 dollar chocolate bar from farm to checkout. Of that 3 dollars, the farmer who grew the cacao receives only about 3 to 6 percent (International Cocoa Organization, 2023). That is roughly 9 to 18 cents on a 3 dollar bar. Now look at the other end of the chain. Manufacturing, the step that turns beans into the bar, takes about 35 to 40 percent. Marketing and retail, the branding and the shelf, take another 30 to 35 percent (International Cocoa Organization, 2023). So two stages near the consumer capture most of the price, and the grower captures almost none of it.

Why can't the farmer just demand more? Because of how the market is shaped. Picture millions of small cacao farmers on one side, and on the other side only a handful of giant buyers. About 4 companies control roughly 60 percent of all cacao processing (Fountain and Huetz-Adams, 2023). When few buyers face many sellers, that is called a monopsony. Say it slowly: monopsony. In a normal market, many buyers compete and bid the price up. In a monopsony, the few buyers set the terms, and the many sellers take what they are offered.

Put those two facts together and you get a pattern with a name: the commodity trap. A commodity is a raw material, like raw cacao beans, sold mostly on price. Producers of raw commodities tend to stay poor, while the companies that process and brand those commodities capture most of the value (Fountain and Huetz-Adams, 2023). The farmer sells a sack of beans. Someone else sells a feeling, a brand, a moment. The feeling is where the money is.

The way out has a name too: value-added processing. Raw cacao is worth about 2,400 dollars a tonne (International Cocoa Organization, 2023). Turn that same cacao into finished chocolate products and the retail value climbs far higher. But notice where the turning happens. The processing, manufacturing, and branding mostly occur far from the farm, so the value gets added far from the grower. The country that grows the bean rarely captures the value of the bar.

Picture it

Picture the 3 dollar bar split into 100 pennies on a table. Slide just 3 to 6 of those pennies toward the farmer. Now slide a tall stack, about 35 to 40 pennies, toward the factory, and another tall stack, 30 to 35 pennies, toward marketing and the store. The farmer's little pile and those two towers came from the same bar. That gap is the commodity trap, standing right in front of you.

Remember this

The fact to carry out: chocolate is a 161.5 billion dollar market, but the farmer gets only 3 to 6 percent of a bar while manufacturing and marketing take most of it, because a few buyers control the market and the value gets added far from the farm (International Cocoa Organization, 2023; Fountain and Huetz-Adams, 2023). Growing the raw material and getting paid for it are two very different things.

Quick check

Quick check. Of a 3 dollar chocolate bar, about what share reaches the farmer? Only about 3 to 6 percent, while manufacturing takes about 35 to 40 percent and marketing and retail about 30 to 35 percent (International Cocoa Organization, 2023).

Key Takeaways

  • The global chocolate market is about 161.5 billion dollars a year and growing (International Cocoa Organization, 2023).
  • On a 3 dollar bar the farmer receives only about 3 to 6 percent, while manufacturing takes 35 to 40 percent and marketing and retail 30 to 35 percent (International Cocoa Organization, 2023).
  • A monopsony is a market with few buyers and many sellers; about 4 companies control roughly 60 percent of cacao processing (Fountain and Huetz-Adams, 2023).
  • The commodity trap keeps raw-material producers poor while processors capture most of the value; raw cacao is about 2,400 dollars a tonne before value-added processing lifts it far higher (International Cocoa Organization, 2023; Fountain and Huetz-Adams, 2023).

Sources

  • Fountain, A., & Huetz-Adams, F. (2023). Cocoa barometer 2023: Assessing sustainability in cocoa supply chains. VOICE Network. https://www.voicenetwork.cc
  • International Cocoa Organization. (2023). Quarterly bulletin of cocoa statistics (Vol. XLIX, No. 1). https://www.icco.org
  • NORC at the University of Chicago. (2020). NORC final report: Assessing progress in reducing child labor in cocoa production in cocoa growing areas of Cote d'Ivoire and Ghana. https://www.norc.org
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