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# Joint production of cocoa powder and butter: price implications, explanations

Joint production of cocoa powder and butter: price implications, explanations. Kees Burger. Leuven, 17 September 2012. Starting points. Beans are roasted and ground into paste (liquor) Paste is Either sold as is Or processed into Cake, for powder Butter

## Joint production of cocoa powder and butter: price implications, explanations

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1. Joint production of cocoa powder and butter: price implications, explanations Kees Burger Leuven, 17 September 2012

2. Starting points • Beans are roasted and ground into paste (liquor) • Paste is • Either sold as is • Or processed into • Cake, for powder • Butter • Ratio of 1. and 2. variable; ratio of a) and b) fixed at, say ½ • Returns to 1. should equal returns to 2. and therefore equal average of a) and b). • Factors affecting each of 1., a) or b) also affect the other components

3. 1. and 2. same price a) and b) move in opposite direction along a straight line Q1. Is this so? Q2. Does this provide a better basis for explaining the dramatic changes in the powder-butter prices? Some graphs: Consequences for the prices

4. A look at the relationships between the prices (EU, 2000-2010)

5. Cocoa and butter ratios, monthly, NL 1999-2011

6. Pbut Ppow Demand and supply schemes Ppaste Grindings

7. Pbut Ppow Demand and supply schemes Ppaste Grindings

8. Demand for paste Demand for butter Demand for powder Technical restrictions Economic arbitrage This by itself already suggests the 135o line: Model

9. Solve for prices: Price of paste = Price of butter = Price of powder = Implications: Consequences for the prices

10. Movement along the 135-degree line Pc-Pk Distance = M + pc – pb . M Pb-Pk

11. Compare with simply taking Pc as dependent variable: Analysis of position on line

12. Simple regression

13. Compare with estimated/predicted Analysis of position on line

14. The regression suggests sensitivity to demand (-) and supply (+) factors b1<c1 plausible (butter less sensitive to prices than powder) The lack of predictive power is reason for concern Possible reasons: European specificities Major exporter of powder; importer of butter, paste Grindings fell in 2009, 2010 Strong demand from Ukraine, Russia (and Turkey) No statistical confirmation of this effect Comments

15. Suggestions welcome Thank you

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