The Story CBC Didn’t Get Wrong

We commented this month on two stories about supply shocks that the CBC got wrong. The first was prediction of a bacon shortage, which was subsequently recanted. The second was a prediction of a disposable diaper shortage.

This week, the CBC reported nothing about the start of the annual cocoa harvest in Ivory Coast, where 40% of the world’s chocolate originates. This is a good thing, because the CBC can’t get it wrong if they don’t report it. Fortunately, Reuters’ African branch did file a report. The weather has, apparently, been ideal for the harvest of cocoa beans and that suggests that there will be an increase in supply. Given the CBC’s last two reports, we suspected that they would predict a surplus of chocolate (like that could ever happen). An increase in supply would, initially, cause a surplus but competition among the sellers would quickly drive the price down and get rid of the surplus. This is exactly the opposite case of the bacon and diaper stories where supply decreased and price went up.

Before you go and get all excited about lower chocolate prices, however, we need to explore another Reuters article that explains some misguided government policy. In an effort to protect and/or increase the incomes of Ivory Coast cocoa farmers, the government has imposed a minimum farm-gate price on cocoa. This year’s price has been set at about 9% above last year’s price. The problem with this strategy is that last year’s harvest was unusually poor and the price rose as a result. This year’s abundant harvest should cause prices to fall, not rise.

As every student that has every taken a micro course from me knows, effective price floors always lead to surpluses. In labour markets, minimum wages cause unemployment. In cocoa markets, there will be a surplus of cocoa in Ivory Coast. Not surprisingly, “Farmers said very few buyers were active”.

The price controls in Ivory Coast are good news for Ghana where Bloomberg reports that a lack of rain fall has hurt this year’s crop. The higher farm-gate prices in Ivory Coast increase the demand for cocoa grown in Ghana. The higher prices will partially offset the lower crop yields, and the total effect will depend on the price elasticity of demand – a topic for another day.