African cocoa cartel’s price hike stirs up Korean chocolate makers

South Korean chocolate manufacturers are holding their breath as the world’s top two cocoa producers have decided to charge a fixed premium on their produce.

Last July, the West African nations of Cote d’Ivoire and Ghana -- which command more than 60 percent of global cocoa production -- announced a $400 premium over the futures price of every metric ton of cocoa from October 2020.

Though the “living income differential,” or LID, premium aims to provide higher and stable income to cocoa farmers, it has stirred up worries about a potential hike in production cost among some domestic chocolate brands.

“The LID will put extra burden on us,” said an official from Lotte Confectionery, a leading chocolate maker that accounted for 202.1 billion won ($170.7 million), or 39.5 percent, of domestic chocolate sales in the January-September period in 2019, according to the Food Information Statistics System.

The company added that such a move could raise the cost of its mass production of chocolates, which would be passed on to customers eventually.

“As most of our cocoa comes from Ghana, we are out of options. But we can’t really change our suppliers as things stand,” said the official. Lotte directly imports cocoa from the government of Ghana.

The $400 premium translates into a 13.6 percent increase in the price of cocoa from Monday’s closing price of $2,940 per metric ton on the Intercontinental Exchange Futures US exchange.

However, the fixed premium has not sent shockwaves through the domestic chocolate market yet.

“We haven’t seen significant fluctuations,” said an official from Orion, another major confectionery firm in Korea.

“Orion imports cocoa powder from a Dutch company (not cocoa beans directly from farmers) typically on a yearly contract, so there hasn’t been much fluctuation after the announcement of the LID last July.”

Despite some pushback, the cocoa producers’ plan aims to tackle a systemic problem of the chocolate industry.

In the $100 billion global chocolate market, cocoa growers get a modicum of 6.6 percent of value for every ton of cocoa they sell, data from Cocoa Barometer showed. As a result, 80 percent of cocoa growers, or 4 million people, and their families, live on less than $3 a day, according to World Bank.

Furthermore, 2.2 million children in West Africa work in cocoa fields, the International Cocoa Initiative estimated.

Both Lotte and Orion do not currently run or engage in programs or initiatives for boosting cocoa farmers’ income or tackling child labor.

By Kim Byung-wook (kbw@heraldcorp.com)