Problems of intervention in the market for Cocoa

The buffer stock scheme was intended to keep prices almost constant but due to a single target price i. e. a fixed price offered it would encourage farmers to mass produce goods that may not necessarily be needed/demanded as they knew that anything left over would be bought by the authorities as buffer stock. This would lead to "butter mountains" and wine lakes". This way when the price is between a certain range no intervention will be needed, however if there may be a good harvest one year then the authorities would purchase the stock and store it as buffer stock.

This way it means that the excess stock is purchased and the price would increase. In case of a bad harvest, the authorities would sell back the buffer stock to decrease prices. This scheme would therefore regulate the cocoa market as prices should remain fairly constant. Schemes such as the buffer stock scheme may be ineffective as many years of bad harvest would cost a lot of money in order prices fairly constant. Many years of bad harvest means that the authorities will not be able to sell back any buffer stock and hence prices would be at an all time high.

They consequently will have to buy products/goods from other countries hence the large cost. Another problem with the scheme is that since cocoa beans are perishable it means that if there are many years of good harvests, any cocoa beans stored as buffer stock must be sold quickly back into the market or they will be wasted. If the cocoa beans are wasted it will mean that extra money is spent not only on purchasing the buffer stock in the first place but also having to store them.

Supply of cocoa beans is not constant throughout each year. There are many factors that can't be controlled by the farmers causing this inconsistency of supply of cocoa beans. These factors include changes in the weather, increase in the number of pests and even a wide spread crop disease. The cob web theory states that farmers base their supply decisions on prices received in previous years. Assuming that in year 1 there is a bad harvest; this will mean that prices are going to be high.

In year 2, farmers will decide to supply more i. e. increase supply of cocoa beans in hope to receive the same price as year 1 but since demand is lower than supply it means that prices fall in order to for all the cocoa to be sold. In year 3, the farmers would decrease supply as they expect prices to be as low as last year, this causes prices to rise again as more cocoa is demanded than there is supply. This process continues leading to fluctuations.

Large multinational companies such as Nestle, Jacob Suchard, Cadbury Schweppes and Mars may dominate the market for chocolate confectionery as they are more liable to benefit from economies of scales. The obvious economies of scale that the big multinational companies benefit from are purchasing and marketing economies. Discounts would be given by suppliers to these companies on bulk purchases of raw material and components, leading to a lower per unit cost. If suppliers do not want to sell at a lower price, then they face losing a customer as the multinational companies could easily just go to another supplier.

In terms of market economies of scale, the large companies could easily just market many products at once instead of having a number of adverts and hence advertising costs are also unlikely to increase in proportion to increase in output. However depending on how much supply there is of cocoa beans, it means that prices are going to rise and therefore making it more difficult for large multination companies to benefit from economies of scale as they may only purchase the confectionery when required instead of storing for later use.

Another reason they may dominate the market for chocolate confectionery is that many retailers are more willing to stock better, more popular brands such as nestle and Cadbury meaning a greater demand for their produce and therefore they require more chocolate confectionery for their goods. A large demand for their goods means that these large multinational companies must be able to supply their products efficiently and on time or face being off the shelves.

Some retailers don't necessarily just stick to using the most known brands of chocolate and instead may actually use their own brand of chocolate and/or other chocolates from a niche market for example 'Sainsbury's own' or 'Lindt'. So large multinational companies may not, to a large extent dominate the market for chocolate confectionery. Government intervention in the market for cocoa is often considered to be desirable as they could reduce or overcome shortages of agricultural products whilst also increasing agricultural productivity.

Producers may not necessarily be able to receive such a reasonable price for their produce from large multinational companies and therefore intervention helps them receive a fair price. Other reasons why government intervention can be seen as desirable is that they allow for prices to remain stable as when there is a good harvest they would purchase the stock to increase prices and when there was to be a bad harvest they would release this buffer stock causing prices to decrease; and also ensures greater stability of farmers' income as they are guaranteed to receive a certain amount of money for their produce what ever happens.

Consumers of cocoa/chocolate may also find government intervention desirable as it means that they won't have to pay high prices just in case there is a bad harvest in a year. Nevertheless, some people may not find intervention to be as desirable because it means that farmers are getting income for not really trying hard as they could easily mass produce a certain product.

Inefficient farmers would be less likely to leave the farming market due to the intervention by the government as they will be receiving high revenues through their production of agricultural products. Efficient farmers would also be less likely to exit the farming market as they would be more acquainted with using chemicals and other harmful substances in trying to increase their surplus and therefore their guaranteed revenue/income. This would lead to acidification of lakes, loss of habitats and even soil erosion.

Intervention may mean that it increases agricultural productivity but in actual fact it may not be so efficient because many years of good harvests would mean that the government would have to purchase and then store any surplus goods. This would lead to high costs of storage. Countries with large agricultural sectors would require a lot of help from the government and that would also consequently increase the costs of any new schemes.