In 2010, a U.K. hedge fund manager spent around $1 billion to acquire the legal rights to about seven percent of the world’s annual production of cocoa – enough beans to make over 5 billion bars of chocolate. This cocoa trader, dubbed “Chocolate Finger” as a nod to the Bond villain Goldfinger, never intended to actually use his hoard of cocoa for anything. He was a financial speculator, an investor who made millions of dollars when the world cocoa supply did not meet the demands of chocolate makers, the price of cocoa went up, and the chocolate companies came to Chocolate Finger for desperately needed cocoa.
The condemnation of Chocolate Finger was universal, with the loudest objections coming from European chocolate companies and transnational cocoa suppliers. The London Exchange investigated Chocolate Finger’s purchases but found “no evidence of abusive behavior”. By the standards of commodity trading, that is probably true. But when the real-world impacts of cocoa commodity trading are investigated, the evidence shows that traders such as Chocolate Finger are hurting the farmers, who risk everything to grow cocoa, in two major ways. First, they take money from the total revenue generated by cocoa products despite not adding any value to the cocoa economy. Second, the commodity market amalgamates the world’s cocoa supply into one giant pool of identical goods, with no differentiations between high-quality, sustainable, ethically produced beans and the low-quality beans grown by trafficked children.
How has the cocoa industry addressed this commoditization issue since 2010?
Cocoa commoditization has attracted even more speculators in recent years. From October 2024 to February 2024, financial institutions poured $8.7 billion into cocoa contracts on the New York and London exchanges, betting that cocoa’s price would rise. It did. Cocoa reached an all-time market high of $12,538 per metric ton in April 2024. At the peak of this spike, non-commercial investors held over 60 percent of the cocoa contracts (futures and options) on the New York commodities market. In plain English, this meant that over 60 percent of the contracts that determine who receives cargo ships full of cocoa beans belonged to financial institutions with no actual need for cocoa.
To be clear, there are real reasons for cocoa’s price increase, which is why investors were eager to buy cocoa contracts. A commodity’s price increases when supplies are diminished and/or demand is up. Cocoa’s price jump is mostly the result of real world conditions that have severely damaged this year’s harvest in West Africa: tree diseases such as black pod disease and swollen shoot virus, extreme rain and drought conditions exacerbated by climate change, and two preceding years of low production that forced farmers to overharvest their trees (which weakens their fruit production and disease resistance). This year, there is an estimated 400-500 metric ton world-wide shortage of cocoa. There has also been a slight uptick in demand for cocoa. As the economists say, the “fundamentals” of cocoa supply and demand do explain an increase in cocoa’s price increase. But the crisis in production is estimated to have driven cocoa’s “true” price to somewhere around $6,000 per metric ton, not $12,538. The rest of the price spike was likely driven by financial speculation. As of August 2024, the price has fallen to about $8,100, a 135 percent increase over last August’s price of $3,380.
What do commodity prices have to do with cocoa farmers?
On the ground in West Africa, farmers are reading reports about the skyrocketing price of cocoa on markets in London and New York. “We work hard here,” Ghanaian farmer Peter Aidoo told a German reporter recently, “but we only get a tiny fraction of the price. That is a great pity.” While cocoa farmers in countries with better harvests (Ecuador, Brazil, Indonesia) are enjoying better incomes from the global price spike, West African farmers are not getting high enough prices to offset their decreased production. This is partly due to the government-set “farmgate” prices in Ghana (about $1,900 per MT) and Cote d’Ivoire ($1,600 per MT) not meeting the moment. These pricing standards are meant to act as a protective floor for farmers, but they have become a harmful ceiling as the commodity cocoa price skyrocketed. Both countries have increased their farmgate prices this year, but not enough to match the commodity price. In response, some farmers in Ghana and Cote d’Ivoire are taking their harvests on dangerous journeys into neighboring countries where they can receive higher prices.
Farmers earn on average a paltry 6 percent of the value generated by the chocolate bars their cocoa makes. Retailers and manufacturers – who take about 80 percent of that value – can at least claim to be essential contributors to that eventual chocolate bar. Financial speculators in the cocoa commodity market are, in the parlance of economists, “rent-seekers.” In more honest terms, they are sophisticated gamblers who skim profits out of the world’s most vulnerable workers.
In Ghana and Cote d’Ivoire, only about 25 percent of smallholder cocoa farmers earn a living income. These farmers are already being pushed to the brink by crop disease, climate change, theft, and fraudulent practices by purchasers. Child labor, including forced child labor, is still endemic to the West African cocoa industry, which produces about 60 percent of the world’s cocoa. There is clear evidence that children from Mali, Burkina Faso, and other countries are trafficked into Cote d’Ivoire to work on farms, as well as evidence of internal trafficking of children. Children between the ages of ten and eighteen are often lured by promises of money or other gifts to travel to work on cocoa farms. Once there, these children are given dangerous work, like harvesting beans with machetes and are exposed to toxic pesticides. Those promises of money and gifts are not kept.
What alternatives do we have to this vast, financialized cocoa trading market?
Policy makers and cocoa industry companies need to recognize that our global economy is not an Econ 101 classroom. It is a complex, highly financialized system where institutions with significant capital, powerful computer analysis, and an army of analysts are making huge profits by playing games of “chicken” with a handful of corporations that buy most of the world’s cocoa. Speculative commodity trading is risky not only for the speculators, but also for supply chains. Some of the world’s largest buyers of cocoa (such as Cargill, Olam, and Barry Callebaut) called BS on this cocoa bubble and decided to wait for prices to drop before contracting for their future cocoa needs. Now that prices have dropped, some investors are left holding contracts for impending boatloads of cocoa they do not want, or they are reluctantly selling those contracts at prices far below what they paid during April’s peak.
The problem with the cocoa commodity price spike is not the increased price. Cocoa should be priced higher! But more of that value needs to go to the farmers who grow it. Outside of the commoditized market that supplies bulk quantities of cocoa to corporations such as Nestlé and Mondelez, alternative supply chain models already exist. Some smaller “premium” chocolate companies contract directly with farmers, paying up to $12,000 per metric ton of cocoa. They pay the premium price to ensure a supply of beans that are harvested by ethical, well-compensated laborers on an environmentally sustainable farm. Instead of being “discovered” by a volatile market dance between supply and demand, the $12,000 price is designed to not only cover the farmer’s cost of doing business, but also to ensure that the farmer can make investments in their health, education, and agricultural practices. The buyer benefits too – fairly compensated cocoa farmers have more productive farms. Instead of leaving it to a few good actors to pay the higher price, the Nestlés, Mars, and Ferreros of the world also need to do so in a way that ensures that farmers receive the real benefits.
Carla Martin, a Harvard University professor and researcher on the cocoa industry, points out that the commodity cocoa market is probably not even an efficient way to price and ship cocoa. “There’s actually a ton of money in cocoa, it’s just getting captured in very specific nodes of the supply chain,” Martin said. “The market itself does not actually solve these kinds of problems, the problems get solved by people.” Cocoa farmers are the problem solvers. They just need to be empowered by the goliaths of the cocoa industry to set their own prices, prices that fairly compensate them for the fruits of their labor.
Johnny Lamont is a CAL legal intern and a rising 2L at Emory University School of Law.
