A little item in the Economic Times of India shows yet again how market forces and agriculture don’t really work together very well. The article points out that due to the recent high prices for cocoa, cocoa cultivation has increased in India (I have reported on that earlier). The report focuses on the speed with which farmers in the Indian state of Tamil Nadu have adopted cocoa .
Tamil Nadu joined the rank of cocoa producers only three years ago. Since then acreage under cocoa production has risen to 6,000 hectares (~15,000 acres) with another 2,000 hectares (~5,000 acres) to come. Other states have added more acreage as well.
That, of course, has always been the pattern in the cocoa economy. Prices rise due to a perceived or actual shortage in supply. Farmers respond by clearing more land for cocoa production. Eventually, the new cocoa supplies enter the market. Then prices drop again.
Economists call this the “hog cycle,” named after a model developed in 1928 by German Economist Arthur Hanau. The key is the time lag between the market signals low supplies (higher prices) and the time the new supplies enter the market. To raise a pig to market weight takes a year. When the new supplies finally show up the price drops and the farmers earn nowhere near the money they expected when making the decision to invest in hogs. The low prices lead farmers to abandon hog farming, leading the next spike in prices and so forth ad infinitum.
For hog farmers, the decision to abandon hogs for an alternative crop seems relatively easy. The General Union of Cooperatives in Maputo, Mozambique faced such a situation after the implementation of free market reforms in the early 1990s. The UCG then switched from hogs to chickens which only take six weeks to reach maturity thus reducing the time lag.
For cocoa farmers, the switch is not so easy. The investment in trees is substantial and it takes three years to harvest the first crop. Once the trees bear pods, it’s not easy to switch to something else. Chop all those trees down for an alternative crop? That’s not likely.
With Ghana aiming for a million tons of cocoa production in 2011, the Côte d’Ivoire ready for its elections to end its civil war, Indonesia and Malaysia rehabilitating their cocoa plantations, it doesn’t take much to predict a future glut of cocoa.
Arthur Hanau proposed that farmers not make their investment decisions on the basis of current prices but on the basis of expected prices. While that information may have been available for the hog farmers in Germany in 1928, cocoa farmers around the world do not have access to the futures prices in New York and London. Given the past experience in the 1980s, the farmers in Tamil Nadu would be well advised to plan for an alternative crop.