PART 1 – Case Study

War and weather driving up chocolate prices amid uncertainty of an El Niño threat.

By ABC national regional reporter Nathan Morris

Posted Tue 25 Jul 2023

If you think your favourite chocolate treat seems a bit more expensive than usual, you are not   wrong. Rabobank analyst Pia Piggott said soaring prices for cocoa and sugar, as well as other factors were to blame.

"Cocoa futures have actually been on an upward trajectory since last September," she said in the latest RaboResearch podcast.

"We've seen the price of cocoa on the ICE [Intercontinental Exchange] spot market has gone up 27 per cent [in the] year to date, and there is potential for that to rise."

War, weather, and fertiliser

The uncertainty created by the war in Ukraine has seen global energy prices jump, increasing the cost of fuel and fertiliser for everybody, including cocoa growers in places like West Africa. To maximise production, cocoa plants require added nutrients and fertilisers, both of which have been in short supply in recent years.

"Major production regions, particularly in Africa, like the Ivory Coast and Ghana, have had low production outlooks with low fertiliser availability and high fertiliser prices," Ms Piggott said.

The region has also had wetter-than-average weather due to the recent La Niña climate event. "That's really not good because it's causing rotting and diseases in the trees," Ms Piggott said.

The declaration of an El Niño across those same key cocoa-growing regions could bring hotter, drier conditions.

"With the additional risk of El Niño adding to production prospects, we're expecting that our price forecast really is that for cocoa to still rise into the next year," Ms Piggott said.

Soaring sugar prices

Sugar prices are the highest in more than a decade.

In Australia, raw sugar recently hit more than $800 a tonne for the first time since 1980. "Raw sugar is up 20 per cent year to date," Ms Piggott said.

"This is just raw sugar, so white sugar has increased as well."

Global production of sugar in recent years has fluctuated due to lower-than-expected production in countries such as India and Thailand.

Brazil, the world's biggest producer of sugarcane, has also been hampered by weather and logistical issues.

According to Rabobank, the global supply surplus of sugar for 2023–24 will be about 1.5 million metric tonnes.

"That's quite a small surplus and we're expecting that if there's any increase to the severeness of El Niño that could certainly mean downward revisions to output in various countries and possibly  tipping the scale back into a deficit," Ms Piggott said.

Milk prices normalise.

The only chocolate ingredient that is getting cheaper is milk.

After near-record high prices about a year ago, driven by demand in China, dairy products have returned to more affordable prices, according to Rabobank analyst Michael Harvey.

"Depending on the product you're talking about, you've got pricing back at or below five-year averages," he said.

"So that's certainly going to be something that we feed through the supply chain for food manufacturers."

But with food inflation in Australia still high, buying a block of chocolate might become a more considered choice.

"Snacking and confectionery have been one of those categories that have been really high in terms of pricing," Mr Harvey said.

"There is belt-tightening going on, and there's going to be reduced spending on discretionary products. "That might mean a little bit less chocolate."

https://www.abc.net.au/news/2023-07-25/chocolate-prices-to-keep-rising-el-nino-threat-replacing-la-nina/102639458

Question 1

IN YOUR OWN WORDS, explain the importance of understanding the concept of ceteris paribus assumption - as it applies to the global Supply of cocoa (as presented in the above case).

[Explain by addressing the independent variables that can directly affect the dependent variable]

[Quality of explana0on, about 250 words: 5 marks]

Question 2

Draw a Price-Quantity diagram showing the starting Demand Curve (D1) and Supply Curve (S1) of mass-produced chocolate.

A.  Identify and explain several major factors that have affected the global supply of chocolate as cited in the above case.

Explain the changes to Equilibrium Price, Quantity-supplied, and Quantity-demanded.

Explain the Elasticity of Demand and Supply for chocolate. Your argument for elastic or inelastic – depends on the characteristics you choose.

B.  Show the impact of these Supply factors on the same diagram. Assuming no change in the Demand Curve of chocolate (D1).

[Your diagram must be accurate, and completely & correctly labelled]

[Consider the slope/angle, movement or shiBs of the Demand & Supply Curves]

[2A: Quality of explana0on, about 400-500 words: 10 marks]

[2B: Accuracy of diagram: 5 marks]

PART 2 – Case Study

Nico is a fictitious island nation of 5 million. It has an agrarian economy where 50% of its population work on farms producing crops and livestock.

The mainly homogenous population lives on a diet of bread, rice, and potatoes – with the occasional meat and seafood. All these are supplied locally except for wheat (bread making) which is fully imported.

The island is blessed with pristine beaches, year-round blue skies with summer-like weather, and an abundance of wild-caught shellfish (lobsters, prawns, crabs, etc.) – but these natural assets     were never capitalised in the past.

An impoverish nation since independence in 1950, Nico’s socialist government embarked on an economic reform in 2003 with a move towards free-market capitalism in select industries & sectors.

Tourism/hospitality and fisheries industries were privatised, encouraging private investments from both local and foreign companies. Corporate tax on these private enterprises is 25%, and their employees are also subject to individual income tax.

Maintaining its socialist roots, education, health, energy, agriculture, banking, and infrastructure sectors all remained state-owned & controlled, i.e., government funded, including employees.

Fast forward 20 years, Nico now boasts of 100+ hotels & resorts and a thriving shellfish fishing industry with a modern fleet of fishing boats. And many direct flights from major Asian and

Australian cities.

Economic statistics:

.     Main export – inbound tourism (20% of GDP), remittance from Nico’s migrant labourers working overseas (10% of GDP) and seafood (5% of GDP).

.     Main imports – energy (fuels & oils), machinery & vehicles, electrical goods, medicine, and food staple especially wheat.

.    The value of the local currency, the Nico dollar (a soft currency), has fluctuated +/- 20% against the USD & other major trading currencies over the past 10 years.

.     Inflation has been volatile the past 10 year – ranging from 3% to 15%

.    GDP increased by average of 3% per year from 2010 – 2023