In this series we debunk the jargon and explain a popular investment term or theme. Here it is cocoa.
Why do I read so much about the price of cocoa?
The price of this commodity has risen enormously – in a trend that seems set to continue. Easter eggs were smaller and more expensive, and so were many popular chocolate bars, as confectionery companies passed on rising costs.
Cocoa beans are ground into cocoa butter, which forms the basis of chocolate.
New York cocoa futures prices hit a record $11,578 per tonne this week after surpassing $10,000 per tonne last month, four times higher than the March 2023 price.
A futures contract is an agreement to purchase a commodity for delivery on a date sometime in the future.
Production issues: A combination of extreme weather conditions and crop diseases has severely reduced supply from Ghana and Ivory Coast
What’s behind the increase?
A combination of extreme weather conditions and crop diseases has severely reduced supplies from Ghana and Ivory Coast, the two main cocoa bean producing countries.
Illegal gold mining, which takes up land in Ghana, also undermines production. Most cocoa bean farms are struggling with small-scale operations and would struggle to increase production quickly.
Will the increase slow down soon?
It is predicted that cocoa bean prices will continue to rise, with no reprieve before 2025. Even then, the price of your favorite chocolate treat is unlikely to drop much.
Right now, manufacturers are working their way through stocks purchased at the lower prices of a year ago. When these run out, they may try to pass on the cost of shares bought at the new, steeper prices.
How acute is the shortage?
The shortage this year could reach 500,000 tons, which represents about 10% of the global cocoa bean market.
This is what Barry Callebaut, the Swiss manufacturer that supplies chocolate to hotels, restaurants and consumer companies, such as Unilever, maker of the Magnum ice cream bar, and Nestle, producer of Kit Kat, says.
Are there other factors behind the price increase?
The New York and London hedge funds have placed about $8.7 billion in bets on the cocoa futures markets, betting on more upward price movements.
Meanwhile, the governments of Ghana and Ivory Coast this month increased the prices paid to cocoa bean farmers to ensure they get a share of the profits on global markets.
What happens to the shares of chocolate companies?
They are less affected than you might think. Well, at least for now. Barry Callebaut shares have recovered, confident that chocolate fans will not deprive themselves of anything.
Lindt shares are rated as a hold based on the fact that taste for its premium products can remain largely unaffected.