This article first appeared on the Investing with the Trends blog.
History of cocoa
Mankind’s quest to get inebriated drove much of technological progress. Discoveries at Göbekli Tepe showed that hunter-gatherers made beer from barley 11,000 years ago, before they discovered agriculture and bread-making. Similarly, rice was used to make beer in Qiaotou in southern China 9,000 years ago.
Neither rice nor barley grow in Central America, so locals had to find something else to ferment. Their ingenuity led them to the cocoa bean. Archeological sites in Chiapas and Veracruz, four thousand years old, show evidence of cocoa preparation and fermentation.
The Maya turned cocoa into a non-alcoholic drink two thousand years later. Mayan cocoa was a bitter, frothy drink. It wasn’t sweet as it contained no sugar. Aztecs made it more palatable by adding vanilla, honey, and chili peppers. Cocoa beans, which didn’t spoil, became a form of currency for the Aztecs. Aztecs also coined the word “chocolate”.
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When Europeans arrived in Central America, they were, at first, not impressed with cocoa. In the words of a Jesuit missionary,
The principal product of this cocoa is a concoction which they make that they call “chocolate”, which is a crazy thing treasured in that land, and those who are not accustomed are disgusted by it, because it has a foam on top and a bubbling like that of feces, which certainly takes a lot to put up with.
It was only in the 18th century, with the wide availability of cheap sugar from Caribbean plantations, that heavily sweetened hot cocoa became popular in Europe. And it took the invention of the solid chocolate bar in 1866 and milk chocolate in 1875 for chocolate to really take off and become the pre-eminent form of confectionery that it remains to this day. All the major chocolate companies (Nestlé, Hershey, Cadbury) were founded between 1875 and 1895.
Cocoa in Africa
Cocoa only grows within 20 degrees of the equator. Aztecs themselves failed to establish it in central Mexico and had to import it from Yucatán and lands further south.
Cacao trees are persnickety. They need shade, the right amount of moisture, and a myriad other, hard to predict, factors. They do not grow well in classical plantation format of orderly rows, unlike palm trees, coffee, or tea. From the air, a cocoa plantation looks like uncultivated jungle. Even close up, it’s not obvious to an untrained eye that there is an organized agricultural plan.
Cocoa plantations resist mechanization and growing of cocoa remains extremely labor intensive to this day.
Until the late 19th century, global demand for cocoa remained small and easily supplied from Central and South America. That changed in the 1870s with the invention of milk chocolate bars that took the world by storm. All of a sudden, Central and South America could not meet the surging demand for cocoa beans.
The Portuguese introduced cocoa trees to a small island off the coast of Africa, São Tomé, in 1822 and demonstrated that cocoa could thrive in the African climate. Encouraged by the Portuguese experience, British and French authorities brought cocoa trees to their colonies in West Africa: the British to today’s Ghana in 1879 and the French to Ivory Coast in 1905.
West Africa and cocoa turned out to be perfect for each other. The climate suited cocoa trees and there was plenty of cheap labor available. Cocoa cultivation doesn’t have economies of scale so small farms are just as competitive as big operators. Cocoa farming also doesn’t require heavy capital expenditures on forest clearing, drainage, and terrain grading. Average size of cocoa farms remains small to this day and mechanization is nonexistent. Workers manually cut ripe cocoa pods and carry them around in sacks.
British and French colonial administrations encouraged cocoa farming by land grants and subsidies. Within a few decades, West Africa became the dominant producer of cocoa beans. By the 1930s, it accounted for 65% of world production.
The new supply from Africa turbocharged global consumption of chocolate, which tripled between 1900 and 1915 and continued to grow after the First World War ended. Cocoa became a global commodity, with cocoa futures listed on the newly created New York Cocoa Exchange in 1925. West Africa’s dominant position as cocoa supplier was cemented between 1915 and 1930 when an epidemic of frosty pod rot (first observed in Colombia in 1850s) and witches’ broom disease (first seen in Brazil in 1780s) decimated cocoa production in Ecuador, the largest Central American provider. Ecuador’s production dropped by 60% and triggered a national economic crisis.
Other American countries have struggled with diseases since then: witches’ broom disease (WBD) reduced Trinidad’s production by 80% and led to a complete abandonment of Orinoco Delta plantations in Venezuela. The Maracaibo region of Venezuela stopped producing cocoa in the 1940s after an epidemic of frosty pod rot (FPR) and Venezuela’s cocoa production almost completely vanished since then.
Ghana
The British colony of the Gold Coast was the world’s leading producer of cocoa by 1930. Cocoa farmers and traders in the colony were unhappy with low cocoa prices in the late 1930s when all agricultural prices suffered and farming incomes dropped around the world. In 1937, they went on an 8 month strike, withholding their beans from the market.
The colonial administration responded by setting up the Cocoa Marketing Board, an organization modeled on similar Commonwealth entities as the Canadian Wheat Board and Australian Barley Board. The goal of these marketing boards was to provide stability to farmers’ incomes. The farmers had to sell their whole harvest to the marketing board, losing their right to negotiate their own commercial deals. In exchange, the marketing board promised to manage commodity prices by storing excess harvest and withholding it from the market during good times, and releasing inventories when harvest was poor.
This seemed like a good idea, and it worked for a few years. But in less than a decade, it turned into a disaster. The man to blame was Kwame Nkrumah.
Nkrumah grew up in a small village in the Gold Coast. Local Catholic missionaries noticed his remarkable intelligence and supported his education. Nkrumah graduated from the best Catholic schools in the Gold Coast and went on to get degrees from London School of Economics, University College London, and University of Pennsylvania. No one can escape this much education unharmed and Nkrumah was no exception. He fell under the spell of communism (LSE was a fertile recruiting ground for KGB spies), declared himself a Marxist, and formulated a mishmash of ideas that he dubbed “African socialism”.
Nkrumah returned to the Gold Coast in 1947 and threw himself headlong into politics. He started his own party that quickly became popular with promises of independence and socialist revolution that would bring prosperity to everyone. He swept the elections and in 1951 became the leader of the local government of the Gold Coast colony. In 1957, the colony was granted independence under the name Ghana and Nkrumah became the Prime Minister.
He immediately ordered the Cocoa Marketing Board to cut payment to farmers to only one third of global prices. His plan was to seize the enormous profits this would generate and use them to rebuild the economy on socialist principles. Understandably, there would be opposition, so Nkrumah turned Ghana into a one-party state and gave himself unlimited powers to arrest anyone. He embarked on a five-year plan, modeled on the USSR, and nationalized most of the economy.
The plan didn’t work. Cocoa farmers couldn’t make a living from the meager payments doled out by the Cocoa Marketing Board. Ghana’s cocoa production collapsed by 50% within two years (some of the lost production was quietly smuggled to Ivory Coast) and Ghana lost its position as the world’s largest cocoa producer by the end of the 1960s. It never regained it.
Ghana ran out of foreign currency in 1965. Food prices skyrocketed and there was famine. Nkrumah was overthrown in a military coup in 1966 and lived out his life in exile in Guinea. But the damage was done. Ghana’s share of the world’s cocoa market fell from 35% in 1960 to 12% in 1983, as a series of short-lived civilian governments alternated with military juntas. Only in the mid-1980s did some form of sanity return. A wave of privatizations starting in 1986 liberated the economy. The Cocoa Marketing Board was dissolved in 1992 and replaced with six competing marketing companies. Unfortunately, it was later reincarnated as the Ghana Cocoa Board (Cocobod).
Since the 1990s, Ghana has maintained its position as the #2 producer in the world, producing less than half of what Ivory Coast makes.
Côte d’Ivoire
Ivory Coast’s cocoa history makes a fascinating comparison with Ghana.
Under the French colonial administration, the country pursued almost the same policies as the British did in Ghana, but always a little behind, a perennial number two. It subsidized and promoted cocoa farming and gave land grants to cultivators.
In the 1930s, Félix Houphouët-Boigny, a young, energetic, well-educated son of a village chief from central Ivory Coast, took over his father’s cocoa farms. He modernized their cultivation methods, bought fertilizer, and improved yields. In less than a decade, he became the largest cocoa baron in the country.
In 1944, Houphouët joined with seven other wealthy farmers to form the Syndicat Agricole Africain (SAA), an economic cooperative and the country’s first political organization. Half of all cocoa farmers in Ivory Coast joined it within a year. Houphouët turned SAA into his personal political machine and got himself elected to the French parliament as a representative of France’s African colonies. He was one of the wealthiest men in the legislature and was promoted to the Minister of Public Health in the French government of 1956. Despite opposing independence for Ivory Coast, he became its President in 1960. He immediately turned it into a one-party state and gave himself dictatorial powers, like Nkrumah. His economic policies, however, couldn’t be more different. He invited foreign capital, kept taxes low, and allowed repatriation of profits made by foreign companies. While Ghana was spiraling into economic abyss, Ivory Coast GDP and cocoa exports doubled between 1960 and 1970. In the following 10 years, the value of its cocoa exports went up 7x.
Houphouët promoted cocoa production with a laudable vigor. The number of cocoa farmers doubled in the first 10 years of his rule. But Houphouët had an ulterior motive. He created an Ivoirien equivalent of the Ghana Cocoa Marketing Board, called CAISTAB (Caisse de Stabilisation et de Soutien de Prix des Productions Agricoles). CAISTAB paid below market prices to farmers and kept the difference, most of which found its way into Houphouët’s pockets. By the time of his death in 1993, his net worth was estimated at $10 billion. He bragged that 25% of all bank deposits in Abidjan, the capital of Ivory Coast, were personally his.
The 1970s boom and bust
In early 1970s, bad weather in Central America caused the return of frosty pod rot (FPR) which destroyed a meaningful proportion of cocoa harvest outside of West Africa. (Costa Rica’s cocoa industry has not recovered to this day.) Cocoa prices tripled from 1973 to 1974, followed by another tripling from 1976 to 1978.
Weather conditions normalized after 1978 and high prices led to investment in supply in Ivory Coast and Ghana, as well as Nigeria, Indonesia, and Brazil. After a brief peak in 1979, cocoa prices collapsed by 40% in the next two years.
These swings in prices should have given an opportunity to CAISTAB to shine. Extra profits in periods of high cocoa prices should fill its coffers, so that it could support payments to farmers in lean years. It turned out not to be so. The extra profits were stolen by Félix Houphouët-Boigny and his cronies and CAISTAB coffers were empty. But it would be embarrassing to admit that publicly . So CAISTAB continued to pay the same prices to farmers as during the boom years and the government of Ivory Coast made up the difference. But even the government couldn’t afford to subsidize local prices above world market levels, especially because smuggling from Ghana took off as Ghanaian farmers took advantage of artificially high Ivoirien prices.
The government of Ivory Coast ran out of money frighteningly fast. It had to cancel Independence Day celebrations in 1981 due to lack of funds; debt servicing consumed a third of government budget by 1982; and by 1987, the country was close to bankruptcy. Only a last minute debt deal with the Paris Club of creditors in 1988 saved it and bought it a little bit of time.
The great cocoa market gamble of 1988
Félix Houphouët-Boigny built his fortune from cocoa and launched his political career by starting a cocoa farmers’ association. He was not about to give up and he decided to roll the dice, big time.
In January 1988, the government of Ivory Coast embarked on an audacious plan to corner the cocoa market. It announced that it would only sell cocoa at $2,000 per ton or above while the market price was about $1,500. The government thought that, with its control of 1/3 of the global cocoa supply, it could bring buyers to their knees and entice other cocoa producers to join Ivory Coast in creating the OPEC of cocoa.
Cocoa beans started to pile up in Ivory Coast’s ports as buyers turned to other sources. Lines of trucks idled outside port facilities, waiting to unload unwanted beans. CAISTAB kept up its payments to farmers, bleeding hundreds of millions of dollars. By May 1988, the government stopped paying interest on its debts and multiple major banks went bankrupt. Farmers in Ivory Coast started to smuggle cocoa into Ghana which sold it on the world market.
And cocoa prices kept falling.
Ivory Coast gave up in July 1989 and dumped its stockpiles of cocoa on the world market. Cocoa price dropped to $1,000 / ton by the end of 1989, its lowest level since the mid-1970s. Ivory Coast repeatedly defaulted on its debt between 1989 and 1992 and became an economic basket case. But worse was to come.
Félix Houphouët-Boigny died in 1993 without leaving a designated successor. The country descended into chaos, suffering disputed elections, ethnic conflict, and military coups. A full blown civil war broke out in 2002 and sputtered on for a decade. Even France got involved, repeatedly sending its special forces and the Foreign Legion to intervene. Things only calmed down in 2011 when the French-backed President Ouattara defeated his predecessor and rival Laurent Gbagbo and firmly seized the reins of power, which he holds to this day.
Meanwhile in Latin America
Cacao trees are native to Central America. That means that pests and diseases had millions of years to develop a taste for them and become endemic to Central American jungles. Growing cocoa in Central America means constant battle against them.
I already mentioned the devastation of Ecuador’s plantations in the 1920s and Venezuela’s in the 1940s. These were neither the first nor the last times when fungi and other pests destroyed entire regions. Plantations in one of the earliest growing areas in the world, Cúcuta in Colombia, disappeared in 1850 because of widespread frosty pod disease.
Brazil, the 3rd largest cocoa producer in the world in the early 1980s, peaked in 1986 when the first evidence of witches’ broom disease emerged. Production of cocoa in Brazil collapsed by 75% in the 10 years after WBD emerged and Brazil became a net importer of cocoa in 1997.
Costa Rica also saw its production drop by 75% since the end of 1970s.
West Africa’s wars and relative isolation from the rest of the world protected it from importing the most damaging American diseases. Even today, air passenger traffic from Abidjan and Accra, the capitals of Ivory Coast and Ghana with combined population over 60m people, is less than the traffic at Reno airport in Nevada. While there are local pests in West Africa, it avoided wholesale destruction of its plantations.
Chocfinger
The 2000s and 2010s were good times for the cocoa industry. Prices climbed steadily from $1,000 / ton to $3,000 / ton through the 2000s and stabilized in the $2-3,000 range through the 2010s.
The biggest excitement of the decade came in July 2010 when a hedge fund based in London tried to corner the cocoa futures market.
Armajaro Trading was founded in 1998 by Anthony Ward, previously the head of cocoa and coffee trading at Phibro. He bailed out from Salomon Brothers, the owner of Phibro, when it merged with Travelers Group and Citibank. It was the right move, Citigroup under Sandy Weill had no appetite for swashbuckling traders like Ward.
Armajaro Trading built both physical and derivative trading operations, with people on the ground in Africa and a full-time meteorologist on staff. Ward was not afraid to push the boundaries: he was briefly banned from operating in Ghana because the government suspected him of smuggling cocoa into Ivory Coast.
His moment of glory came on July 17, 2010. Armajaro built a large long position in cocoa futures over the preceding few months. Instead of selling and rolling them over as they approached maturity, it held onto them all the way to expiry and took delivery of 240,100 tons of cocoa, worth over $1 bn. This represented 7 percent of global cocoa supply. When the news came out, the press gave Ward the nickname Chocfinger, after the Bond villain Goldfinger. The market held its breath and waited for his next move. Would he try to engineer a short squeeze?
In later years, Ward steadfastly denied that he tried to corner the market. Even if he tried, it didn’t work. That year’s Ivory Coast’s harvest came in ahead of expectations and cocoa price started to fall almost immediately. Perhaps Ward hired the wrong meterologist. Armajaro Trading got out if its position at a loss. Ironically, cocoa prices jumped to 30 year highs soon afterwards.
Armajaro Trading was sold in 2013 and shut down in 2017. The cocoa market has a way of punishing those who try to push it around.
The rocket
After Chocfinger had departed the scene, the cocoa market became incredibly boring. For 10 years after 2010, cocoa prices stayed in the range $2,000-$3,500 / ton. Between 2019 and 2022, it traded even tighter, between $2,100 and $2,800. This somnolescent market slipped below most traders’ radar.
That all changed in 2024.
The weather in West Africa was not great for cocoa in the summer of 2023. It rained more than usual. That’s not necessarily devastating for the harvest, but something else was happening. The soggy weather encouraged spread of fungal and other diseases that had been kept under control in West Africa until now. Black pod disease (a fungus) and cocoa swollen shoot virus (spread by insects) became endemic. Black pod disease can be fought with fungicide, if it is noticed early, but the only treatment for cocoa swollen shoot virus (CSSD) is to cut down the tree and burn it, so the virus doesn’t spread. It takes about five years for a cocoa seedling to reach maturity; replacing the lost trees will take a long time.
Both Ghana and Ivory Coast are seeing double digit production declines in the 2023/24 season. Rather then responding to higher prices by expanding output, West African farmers are switching to rubber and coconut where they can sell their crops at world prices without having their pockets picked by the government. Farmers are still being paid low prices by CAISTAB and Ghana’s Cocoa Board because prices are locked in for a year. History suggests that they won’t see much benefit next year either, or the year after that. There may be, however, a surge in Swiss bank account balances held by bureaucrats and their cronies.
New output growth will have to come from Cameroon, Nigeria, Ecuador, and Brazil, countries without price controls. It will take them years to replace lost production from Ghana and Ivory Coast. While they have plenty of cheap labor, they don’t have the land or the infrastructure, including capital to invest in seedlings. Our best hope for lower chocolate prices rests on West Africa and its ability to control the spread of diseases.
The whiplash
It didn’t take long for trend-following hedge funds to notice the increase in cocoa prices. They started buying cocoa futures by the summer of 2023 when the evidence of weak harvest first emerged. Commercials generally took the opposite position, shorting futures as a hedge against the value of their inventories.
The news of widespread disease hit the market in January 2024, driving prices above $4,000 for the first time since the 1970s. They didn’t stop there, accelerating above $6,000 by early March. At this level, commercial hedgers could no longer post margin on their short positions and they started unwinding them by buying long futures. This dynamic added fuel to the fire: desperate buyers couldn’t find sellers. Price rocketed to unprecedented $11,000 per ton by the third week of April. As hedgers closed their positions, open interest collapsed by 50% in a matter of two months, dropping to 15 year lows.
Margin liquidations climaxed in April. Prices dropped by a third from $11,000 to $7,500 at the end of May where they seem to be stabilizing as of this writing.
Throughout the run-up in prices there has been little sign of a decline in demand. Cocoa grindings are down only 2-3% year-on-year. Cocoa price is only a small part of the retail cost of a bar of chocolate. Given the widespread inflation in food prices, chocolate doesn’t stand out and consumers are not switching away to cheaper alternatives. In inflation-adjusted terms, price of cocoa remains 50% below its peak in 1979.
So this is where we are now
Decades of mismanagement, corruption, and civil war left the industry in West Africa fragmented and undercapitalized, unprepared to deal with the challenge of diseases. The rest of the world cannot quickly replace lost production in West Africa. The market is awaiting with baited breath to see how the 2024/25 harvest turns out. While we aren’t telling anyone to start stockpiling chocolate, we aren’t telling anyone not to, either. The cocoa tree remains a temperamental plant, always resisting man’s efforts to tame it and make it predictable.
