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Cocoa Price Volatility and Its Effects on the Marketing of Cocoa in the Caribbean

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Cocoa Price Volatility and Its Effects on the Marketing of Cocoa in the Caribbean

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    1. Cocoa Price Volatility and Its Effects on the Marketing of Cocoa in the Caribbean By Carlisle Pemberton Afiya De Sormeaux

    2. Introduction Most prices including commodity prices tend to exhibit long term upward trends. However there is the tendency of commodity prices over shorter periods of time, to move upwards and downwards - Volatility.

    3. Objectives of Paper To explain the concept of volatility and describe how it may be measured. To examine the trends in short time series of international cocoa and coffee prices and measure the volatility of these international prices.

    4. Objectives cont’d To examine the trend and measure the volatility of the export price of cocoa in Trinidad. To examine the effects of the volatility of commodity prices, especially the effects for the marketing of cocoa in the Caribbean.

    5. Price Volatility Commodity price volatility: the short term movement upwards and downwards of the price of a commodity.

    6. Measure of the Volatility of a Commodity Price Series where: N is the length of the interval over which the volatility is being measured, for example a quarter (3 months) Pij is the price of the commodity in period j of interval i is the mean price of the commodity in the interval i .

    7. Measure of the Quarterly Volatility of a Commodity Price Series Thus, volatility is measured here as the square root of the variance.

    8. Measure of the Volatility of a Commodity Price Series This allows for the tracking of the changes or fluctuations in the volatility of a commodity price over time. That is, it must be realized that price volatility itself may fluctuate over the time. (Pindyck, p. 1029)

    9. Measure of the Volatility of a Commodity Price Series Brown et al. (2008, p. 1) report that commodity price volatility is increasing across a broad range of commodities. Over the 40 years to 2008, there have been as many price shocks across a wide range of commodities, as in the 75 years preceding 1968.

    10. Volatility of International Cocoa Prices

    11. Volatility of International Cocoa Prices: Data Cocoa prices - period January 2005 to July 2011. Utilizing monthly averages of daily prices obtained from the International Cocoa Organization (ICCO). These prices are the daily average of the prices for cocoa futures contracts.

    12. Volatility of International Cocoa Prices: Data Volatility of the price of coffee for the same period was determined. Utilizing monthly averages of price data from the International Coffee Organization (ICO) Composite Price.

    13. ICCO Monthly averages of Daily Cocoa Futures Prices (January 2005 – July 2011)

    14. International Coffee Organization (ICO) Composite Price (January 2005–July 2011)

    15. Volatility of International Cocoa and Coffee Prices January 2005 - December 2007

    16. Volatility of International Cocoa and Coffee Prices January 2008-June 2011

    17. Average Annual Price of Cocoa Beans Exported from Trinidad and Tobago: 1966-2009

    18. Triennial Volatility of the Export Price of Trinidad and Tobago Cocoa

    19. Premium for Cocoa in Trinidad & Tobago

    20. Effects of Price Volatility Difficulty of planning: Exists at all levels of the supply chain. May cause fluctuations in Government revenues.

    21. Effects of Price Volatility cont’d 1. cont. Difficulty of planning: May cause undesirable fluctuations in economic growth in economies dependent on commodities like cocoa. May cause household income volatility causing difficulty to sustain expenditures on education, health and farm investment.

    22. Effects of Price Volatility cont’d Exploitation of the Environment: High prices ? Increased production often without regard for resource sustainability ? extensive land clearing and planting. Low prices ? Abandonment of resource conservation programs.

    23. Effects of Price Volatility on Marketing Boards 1. Taking unnecessary risks: High prices disguise risks leading to: Setting guaranteed or fixed prices too high; New programs such as pension schemes, extension support for farmers & investment in new plant and equipment. Marketing Boards may end up in severe financial difficulties.

    24. Effects of Price Volatility on Marketing Boards cont’d High prices attract very spectacular headlines in newspapers and online.

    25. Effects of Price Volatility on Marketing Boards cont’d

    26. Effects of Price Volatility on Marketing Boards cont’d No headlines when prices decline. Dramatic headlines of high price rises remain in the minds of producers ? demands for high prices.

    27. Effects of Price Volatility on Marketing Boards cont’d Marketing Boards are pressed to increase “guaranteed” or “fixed” prices to producers, and commissions to agents etc in times of high prices. Not able to reduce these prices and commissions when prices fall again. Marketing Boards may end up in severe financial difficulties.

    28. Conclusions Cocoa prices are fairly volatile. Volatility caused by a number of factors including weather fluctuations and civil strife and wars e.g. Côte d’Ivoire.

    29. Conclusions cont’d Those involved in commodity marketing should not ignore previous instances of high volatility of commodity prices.

    30. Conclusions cont’d Remember, inevitably high commodity prices will fall and all decisions should be done with this reality firmly established in the minds of all marketing agents.

    31. Thank You! Carlisle Pemberton Chairman, Cocoa and Coffee Industry Board (CCIB), Trinidad and Tobago Afiya de Sormeaux, Graduate Student, UWI.

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