Trick or Treat: The End of Chocolate

If you have a sweet tooth for chocolate, you may want to start stockpiling your favorite goodies. According to a recent NBC news article, raw material costs for a 3.5 ounce chocolate bar have risen 28% this year alone. This is partly due to adverse weather and agricultural regulations in West African countries where cocoa beans are produced, but also because of increases in the price for other ingredients such as milk powder. The theory of supply suggests the changes in these non-price determinants will cause an inward (left) shift in the supply curve, raising the price and possibly creating a shortage of the beloved confection.

Adding more concern to the pending worldwide chocolate crisis is the increase in demand from emerging markets. Forecasts predict a 21% increase in demand for chocolate in India by 2018, and an astonishing 45% increase in Russia by 2016. As the article states, "People are prepared to pay 70 pounds ($113) per kilogram (2.2 pounds) for chocolate." In order for consumers to continue indulging in their favorite sweet, producers may have to increase fillers and use imitation flavoring to contain costs. For those of us who will eat nothing but the best, we may find real chocolate becomes a luxury item, and a scarce one at that.  


Dave Tufte said...

Aicha435: 100/100

There's a much broader socio-macroeconomic issue here. Aicha435's analysis of the microeconomics is just fine. But the points in the second paragraph apply to a much wider variety of goods, and in an unexpected way.

Everyone agrees that improvement in living standards is important and beneficial, but that there are (both internalized and external) costs. The thing is, we often have fads that draw our focus to less important externalities. Cars are a good example: most peoples' perceptions overestimate the external costs of using gas, and underestimates the external costs of using batteries. Whatever ... these are both overrated issues that "miss the forest for the trees".

What is important is that we want poor people to be richer. Most people who are poor in absolute terms live in less-developed countries. So, economic growth that improves standards of living in less-developed countries is very desirable. The world has done good on this count: something like 2 billion people have been lifted out of poverty in the last generation.

Here's the thing: all those newly non-poor people want to buy the same stuff that you do. This is reflected in huge rightward shifts in the demand for just about everything. When balanced with supply shifts from growth, this process isn't very noticeable. But some of those demand shifts — like the described one for chocolate — aren't balanced by supply shifts. The result is price increases.

To you and me, living in rural Utah, and perhaps not thinking globally, those price increases are a reduction in our real income. In short, we feel poorer because Russians have started buying chocolate. And yet, Russians being able to buy chocolate that they couldn't afford before is ... something strongly desired by anyone with empathy and a reasonable moral compass.

There are two tradeoffs that are important to consider. First, it may be harder for regions to improve their standard of living than it was for us to improve ours. The tradeoff is that while wider growth is beneficial, it can make improvements in living standards harder to come by. The second tradeoff is that someone else's improving standard of living can make it harder for you to improve your own. The tradeoff here is between the primary concern of lifting people out of poverty, and the secondary concern of being able to improve your own lifestyle.

nickwb said...

In light of this article, I want to explore for a minute the principle of substitutes. Essentially, a substitute good is a good which, when conditions change, may replace another good in use or consumption. Pepsi and Coke are classic examples. If the price of a Pepsi were to climb too high (the conditions changed) consumers would eventually find a substitute to replace their drink (Coke). We see this concept in virtually every market and product type.

If we now apply this principle to chocolate, as supply costs increase (thus raising the price of chocolate), and demand continues to increase as well (driving the price even higher) customers will ultimately get to where they will find substitutes to chocolate.

Many might argue there are no real substitutes for chocolate but at the right price, I believe everyone would successfully find a substitute for their beloved chocolate squares. Ironically, there is a formidable chance that the substitutes identified might actually be a very different type of product. In predicting potential substitutes we need to ask ourselves "what job does chocolate do for us?". For many, it's more than a yummy treat, and instead acts as a soother, stress reliever, or potentially a past-time with the creation of campfire s'mores. In this case, one might turn to a yoga class or exercise as their new stress relieving agent, or perhaps a start a new tradition of campfire snacks. One's ability to determine how tangible the threats are piling up against chocolate and what the most formidable substitutes are, will likely be on their way to a very successful business venture.

Dave Tufte said...

Nickwb: 50/50

Nickwb has raised a good point here; but it's one that is very difficult to model mathematically.

Y'all love doing the math in economics, right?

Part of the problem in doing economics is that what seem like simple ideas on the surface turn out to be extremely complex under the surface. This is a good example.

First thing I want to emphasize is that we don't just "decide" that two things are substitutes. Instead, we go out and measure whether things are bought together (complements) or in place of one another (substitutes).

The second thing is that Nickwb is really saying that if we looked right now, we wouldn't be able to find (much, if any) evidence that some good X is a substitute for chocolate. But, if circumstances changed, then we might see that evidence. What that's really saying is that the measurement of substitutability is non-linear.

That's doable, but I don't want to go there with master's students.

Anyway, we do see instances of this in the real world. A good case is the substitution of one intoxicant for another, particularly when one is illegal or hard to obtain. For example, we have a meth problem, in part, because penalties for crack possession were changed. Another example is Moslem societies, where alcohol is religiously forbidden, so people substitute caffeine, ket, and THC (none of which are really substitutable if you're just interested in the pharmacological effects). And we have our own example in this region: ephedra, commonly known as Mormon Tea. Mormons may or may not have used it due to religious discouragement of caffeine. What's certain is that it became a substitute for caffeine because it was widely (and cheaply) available in the southwest: it was particularly popular with teamsters who had to drive low grade ore (like borax) by oxcart to places where it could be processed. Ephedra wasn't a substitute because they couldn't get coffee, or because it was particularly expensive, but rather because the Ephedra plants grew by the side of the trail and merely needed steeping in hot water.

Vader said...

It is interesting that someone posted about the price of chocolate since this week, while listening to NPR, I heard a segment on this same topic but with a little different spin. I tried to find the article to quote it but was unable. I did find an article on a similar topic at http://www.yorkdispatch.com/breaking/ci_24369363/wolfgang-hershey-bite-into-rising-cocoa-prices.

One curious item that was mentioned on NPR was that it takes a long time for the increase in price of cocoa to translate to an increase in the price of chocolate. In fact, one company announced an increase in cocoa prices but almost two years after the announcement, they still have not increased the price of their chocolate. One of the reasons for this is that they tend not to pass the increase on to consumers. Instead, they avoid passing on the increased costs by using less cocoa and reducing the size of the product being sold. One other reason for a slow change in price is that chocolate orders are made at least six months in advance.

Dave Tufte said...

Vader: 50/50.

Now, here's some real micro to sink your teeth into.

The real goal of economics is not to teach arcane theories, and then try and find some story in the real world that fits them as an example. I know it may seem that way to students, but that's only because you mostly see that side.

Instead, economics is about seeing unusual behavior, and saying "Ahh ... I can explain that." In this case, why would chocolate producers not pass on cocoa price increases to consumers?

Astute readers will recognize this as a problem of incidence. If a supplier can pass an input price increase onto buyers, then the increase is incident on buyers. That happens when demand is more inelastic than supply. If it doesn't happen, then we know that demand is more elastic than supply.

Why is that so? Two reasons come to mind. One is that demand for chocolate is more elastic that we might expect. I don't find that very reasonable. The other would be that production of chocolate is inelastic. This might happen if chocolate machinery and labor is not easily retasked into production of other stuff. Now that seems plausible. I would predict that if we went and did a case on the chocolate industry, we'd find that factories pretty much produce just chocolate, and that they like to keep them running at high capacity.

10-S Pro said...

It’s hard to think that real chocolate will ever be “scarce.” For those people who will “eat nothing but the best,” they will be willing to pay extra for the best. Also, chocolate especially dark, in educated moderation, is good for one’s health. Not only does it help reduce chances of heart attacks, strokes, cancer, and diabetes, but British psychologists found it even helps with math!

There are many more benefits to your health, but imitation flavoring can be more harmful than good. Producers should “keep it real” and pass on the cost to the consumers; there are many out there who will pay the extra cost for higher quality chocolate.

Dave Tufte said...

10-S Pro: 50/50

Not much ManEc in this post, that I can see.

Businesses don't just "pass on the cost to the consumers". Instead, managers make a decision to try and do this.

But the decision doesn't make it so. If the incidence is such that the cost is passed on, then the manager looks smart. But if the incidence does not fall on the buyer, then the manager looks bad and frequently has to back off the decision.

Dave Tufte said...

I just had a thought about the general line of discussion here — that no one would really give chocolate up over price.

I think we're forgetting our American history. The reason Americans drink coffee (generally) and the English drink tea (generally) is usually attributed to the steep taxes imposed on tea in the 1770's.

Ryan Horlacher said...

In doing a bit of reading about the supply of the Cocoa bean, I found that nearly 70% of the world's supply is produced in West Africa. I found this interesting because it seems quite expensive to export Cocoa beans all the way from West Africa when they can be grown easily in much of South America. I then found that most of the Chocolate of the world is consumed by Europeans rather than Americans.

This causes me to think that as the demand curve shifts out, there is plenty of room for the supply curve to shift with it. Additional suppliers will move into the market as the the price for chocolate and related goods rises. If new suppliers don't move in, current suppliers will increase production. This will mitigate some of the price increases caused by growing worldwide demand. Because much of the additional supply can be grown closer to home than West Africa, additional savings may be realized.

Dave Tufte said...

Ryan Horlacher: 50/50

Interesting. You know I kinda' sorta' knew both of those facts, but I didn't put them together like you did.

But, your second paragraph is more pie-in-the-sky.

I don't know that there's ever a sense in which making the "plenty or room" argument is worthwhile. Conceptually, cost curves always extend infinitely outward, even if management hasn't made the decision to produce that much yet.

I think you're right that existing producers may ramp up production, but that comes with increasing marginal costs. It's not clear how steep that tradeoff is.

I'm not sure about your assertion that there will be new entrants. Positive profits would signal potential entrants to enter, but this whole thread really isn't about increasing profits at all ... so I wonder if that will be the case.

Lastly, for the "additional savings" to be realized, the boom would have to be restricted to America, and I don't see that either.