From Cacao Pod to Chocolate Bar: The Commodity Chain of Chocolate

In January, the National Confectioners Association reported that over “90 percent of Americans are likely to share chocolate or candy with friends, family or that special someone at Valentine’s Day.”

While consumers are often eager to purchase these sweet treats, Patrick Penfield, assistant professor of supply chain practice at Syracuse University’s Martin J. Whitman School of Management, cautions consumers looking to buy chocolate.

“Be aware of where your chocolate is coming from and its ingredients,” said Penfield.

According to Penfield, knowing the ingredients and the supply chain of the product will help consumers budget, avoid products with artificial chocolate flavors and encourage consumers to purchase ethically.

Although chocolate reaches grocery store shelves in an overwhelming variety of forms, most cocoa beans inside your favorite chocolate treats share a similar beginning.

“About 79 percent of the world’s cacao pods, the fruit which is processed to create cocoa, comes from small family farms in West Africa, Indonesia and Brazil,” explained Penfield.

Cacao comes from the tropical tree Theobroma cacao, whose name means “food of the gods” in Greek, in the form of extremely fragile, easily injured blossom clusters. While the production and harvesting of most other agricultural commodities has been significantly aided by machines, cacao is still harvested the way it has been for centuries – by hand.

Cacao trees produce ripe pods year-round, but are typically harvested during two concentrated periods each year, coinciding with the rainy season. Ripe pods are picked by hand or removed with sharp knives at the end of a pole and taken to a nearby processing location. At the processing location, pods are opened with a machete to reveal about 40 seeds, or beans, surrounded by white pulp.

Before the seeds can be roasted and processed into cocoa, the pulp must be fermented off to prevent unwanted germination. Seeds are placed in large trays and covered in banana leaves and left for two to seven days, during which the seeds start producing their distinctive chocolate flavor and aroma.

After fermentation has been completed, beans are spread out on platforms to dry in the sun for an additional three to five days. Workers turn the beans multiple times a day to ensure consistent drying. The drying process can be accelerated with wood burning driers, but it is largely agreed that sun drying produces superior flavor. Farmers then bag the dried beans and sell them to middle men, who transport the beans to major shipping centers.

Although the cocoa beans are grown in tropical climates, the majority of the world’s chocolate is produced in the United States, Germany, Switzerland, and Belgium. Middle men sell large quantities of beans to major international trading companies like Cargill and ADM, which ship the beans to port cities like Philadelphia and Rotterdam, according to Smithsonian.

When the beans arrive at manufacturing facilities, they are sorted, cleaned, and roasted in large rotating ovens. Roasting shrinks beans away from their hulls and brings out their chocolate flavor and aroma. Winnowing machines crack the roasted beans and blows the hulls away, leaving behind cocoa nibs. Finally, the nibs are ground into a thick paste, called cocoa liquor, by a series of rollers. Cocoa liquor can then be made into a finished product – either cocoa powder or chocolate.

“More cacao almost always means more expensive,” said Penfield.

Cocoa futures markets and commodity trading

The sale and trade of cocoa in abstract form dates back to the creation of the New York Cocoa Exchange in 1925. The most common way commodities traders participate in the cocoa market is with cocoa futures.

A futures contract allows a purchaser to secure a low price, with the idea being that the price will increase a year later and the trader will have a stash of discounted cocoa to resell for a profit. The risk on the trader’s end is that the price may decline during the year and they’ll be locked into purchasing cocoa at the previous year’s higher price.

“However, a drop in cocoa price does not always mean a loss for traders,” said Penfield. “Traders can still profit from short-selling their futures contracts.”

Compared to other agricultural commodities like wheat, soy, or corn, cocoa prices are more volatile.

“There’s definitely a supply and demand issue that’s happening,” said Penfield. “I think by 2020 or 2021 you’ll start seeing shortages and prices go up.”

Since the majority of the world’s cocoa production is concentrated in a small part of the world, local environmental forces can have a significant impact on production.

“Just like all other commodity trading, the best traders gain their edge by knowing more than the competition about the market and environmental trends which have an effect on pricing,” explained Penfield.

Cocoa futures earned an impressive 28 percent in 2018, a result of short supply from dry weather in top producing areas like Ghana and the Ivory Coast, according to a report by CNBC.

Not always sweet – child labor and sustainability issues in the cocoa market

Although the global demand for chocolate continues to increase, cocoa farmers in West African countries like the Ivory Coast and Ghana often receive very low pay for their product. The Smithsonian reports that farmers who harvest cocoa are extremely poor on average, with some earning as little as $1.25 per day.

The pressure to produce such large quantities of cocoa to meet the high demand from wealthy countries has led to the use of child labor. A 2015 report by Tulane University found that in the Ivory Coast and Ghana combined, over 2.12 million children were working in cocoa production.

Recent climate reports have made major chocolate manufacturers nervous about the future of cocoa production, and increasingly concerned about an impending cocoa shortage as demand continues to rise and supply continues to dwindle.

Rising temperatures resulting from climate change threaten to shrink the strip of rainforests around the equator where cacao trees have thrived and could produce a global shortage by 2050, the National Oceanic and Atmospheric Administration revealed in a 2016 study.

What’s being done, and what you can do

According to Penfield, chocolate lovers should consider buying fair trade chocolate.

One of the world’s largest chocolate suppliers, Mars Food, has pledged over $1 billion toward sustainability efforts aimed at saving the precious cacao tree. Mars’ initiatives focus on helping farmers increase their cocoa yields by providing improved planting materials, fertilizers, and training on farming best practices.

Nestlé has similarly introduced a program to improve the lives of farmers in their supply chain. The Nestlé Cocoa Plan seeks to address agricultural challenges, empower women, eliminate child labor, ensure certification, and tackle issues of deforestation in the cocoa supply chain.

Buying Fair Trade chocolate can have a significant impact on the lives of cocoa farmers and their families. Often times, an increase in cocoa prices on the end of major manufacturers does not make its way back to cocoa farmers. By guaranteeing minimum prices for cocoa and providing an additional premium to be invested in local communities, Fair Trade helps make cocoa farming in places like Ghana and the Ivory Coast more sustainable and improves the lives of farmers and their families.

More information about Fair Trade chocolate and where to buy it can be found here.

Alexander Straus