The trending topic in the food industry is that the world faces a shortage in chocolate due to the wide gap between global demand and the limited supply of cocoa.

The causes of the supply disruption are analyzed, potential solutions are laid out, and the impact on the retail price structure is explained. The future outlook of the chocolate supply situation is reviewed as well as the top global consumers of confection products.

The news this week that the world is facing a chocolate shortage is representative of yet another commodity product in which the global consumption has drastically outpaced the supply. In the case of the chocolate market, a series of supply disruptions in the main ingredient of the product, cocoa, has created a supply side deficit that will lead to increased prices on the retail level.

These retail price increases will occur over the course of the next several months. However, they follow a price hike which began in 2012 by Hershey's and was followed by other major confectionary producing corporations. In fact, the retail price for chocolate has soared up by 60% since 2012.

Hershey's conducted what is known as a graduated price increase where they marked up the products' retail number incrementally by a certain percentage over a period of time. In this method, the consumer is less prone to "sticker shock" at a dramatic increase in the retail price and is more likely to still purchase the product rather than avoid that purchase entirely.

The cost of cocoa on the supplier side is the cause for the increase in retail pricing for products containing chocolate. The price of cocoa has gone up by 10 percent in 2014 but this follows a 20 percent increase in the price of this commodity in 2013. This type of supply side pricing volatility results in a major shift in retail pricing strategy.

In my own food industry experience, I remember the shortage on the supply of vanillin from Madagascar and other supplier nations, and the impact that disruption had on the pricing of any product containing vanilla was dramatic.

A Perfect Storm

The global cocoa supply is predominately sourced from West Africa which is responsible for 70 percent of the total supply worldwide. That region is suffering from drought conditions due to dry weather which has ravaged the crops of all sorts of products including cocoa.

The International Cocoa Organization reports that another contributing factor to the supply side shortage of cocoa is a fungal disease called frosty pod that has wiped out 30-40 percent of the global crops of this ingredient which is crucial to the production of chocolate.

These environmental factors coupled with a seemingly insatiable appetite for chocolate creates the perfect storm conditions responsible for the growing shortfall between supply and demand of chocolate.

The consumption patterns are trending increasingly upward for chocolate and chocolate related confections. In fact, global consumption outpaced production of chocolate by 70,000 metric tons internationally in 2013. That deficit is expected to rise, and analysts believe it could reach 1 million metric tons by 2020, which would represent a 14 fold increase in the gap between supply and consumption.

Driving Forces

The wide disparity between the decreasingly lower levels of supply and the skyrocketing demand for chocolate is being driven by a few factors:

-- Increasing interest in chocolate from China -- a market that is enormously untapped for confection products is demanding more chocolate.

-- Western European consumption is the top market for chocolate ($12 billion market in 2012) and has increased in the past two years led by Switzerland (top consumer) United Kingdom, Ireland, and Belgium.

-- U.S. consumption has declined (12th in per capita consumption) but the trend is shifting toward premium chocolate products and dark chocolate products which both utilize more cocoa than lesser premium milk chocolate products (dark chocolate uses 70 percent cocoa while milk chocolate uses about 10 percent.)

-- Former Eastern Bloc countries are emerging chocolate consumers, especially Estonia and Lithuania. Russia has also seen an increase in consumption in recent years.

Potential Solutions

The mainstream media has reported that the potential solution to this worldwide chocolate shortage could come from agricultural experiments currently being conducted in Africa with new plants that have a higher yield of cocoa production. This new product does have a different flavor profile once it is converted and processed into the chocolate bars we know and enjoy.

In the coming months many methods will be tested in order to make chocolate more cost effective and abundant which will compromise the taste but make it affordable. The major confectionary manufacturers such as Mars, Nestle, and Hershey are hedging their future sales projections on the fact that the consumer will accept a change in the flavor profile in exchange for the affordability of the product at the retail level.

The biggest fear surrounding the chocolate industry right now is that the supply situation leads to further retail price increases which create conditions where chocolate is seen as a luxury item. The situation could devolve into one where the standard candy bar and chocolate snacks would be unaffordable to the average American family.

In the immediate short term the chocolate manufacturing industry will take steps to stretch the current supply of cocoa by using more fillers in their respective products by incorporating nougat, caramel, and nuts into the formulations.

Outlook

The chocolate shortage that is the trending topic in the food industry is yet another commodity which will undergo a transition phase until it stabilizes once again. The various methods used to flatten the demand curve will be aimed at increasing supply and lowering costs for both the manufacturer and the retail consumer.

Unfortunately these same methods will alter the flavor profile of chocolate but this same scenario has occurred with chicken, vanilla, and a variety of other commodity products. The industry wanted to make those products more affordable and plentiful with the unintended consequence of altering the taste. The chocolate industry is banking on the fact that the consumer will make that compromise again in order to be able to drown their respective sorrows in Milky Way bars.

I certainly hope that their assessment is correct.

Frank J. Maduri is a freelance writer and journalist with numerous publishing credits for a variety of websites and news organizations. He has food industry experience on the supplier side, which involved setting prices on product utilizing commodity products sourced from across the globe.