Chocoholics beware. Cocoa has become this year’s hot commodity.
The price of cocoa, the key ingredient in chocolate, has soared more than 20 per cent since January. Recovering demand in the US and Europe, the largest chocolate buyers, and dry weather in west Africa, the world’s key producing region, have transformed demand and supply prospects.
After almost two years of sluggish price action – people were buying less luxury chocolate as the eurozone crisis peaked – analysts and traders believe sentiment has switched.
“Cocoa is a bullish commodity at a time when the rest have been weak,” says Derek Chambers, head of cocoa at commodity traders Sucden.
Prices have risen to their highest in two years. While a clean break above the £1,750 a tonne level has not been achieved, cocoa bulls say that the market is well supported.
Analysts believe the supply-demand balance has shifted to a small deficit in the 2012-13 crop year, which ended in September, and expect that deficit to grow to between 130,000 and 170,000 tonnes in 2013-14.
Strengthening the bulls’ case is a lack of forward buying by confectioners ahead of the traditional seasonal peak in chocolate demand that spans Christmas, Valentine’s day and Easter.
Though some chocolate producers have forward cover of about 12 months, analysts believe others have been caught out by the price rally since the middle of the year.
This has forced some manufacturers to rush into the market, putting further upward pressure on prices. Traders believe this could spur additional buying by some chocolatiers.
“I think it can go higher: in the near term there’s more upside risk,” says Kona Haque, analyst at Macquarie.
Hedge funds and other financial investors started to buy cocoa in July after reports of unseasonably dry weather in west Africa pushed prices higher.
This was followed by cooler temperatures, which harmed some of the growth of flowers and pods.
Chocolate producers decided to wait for a price correction in the belief that the price gains were based on speculative buying, rather than actual supply and demand.
However, a stronger-than-expected recovery in luxury chocolate consumption meant prices rallied further. The selling by financial investors never materialised.
Indeed, Lindt, the Swiss luxury chocolate maker and a bellwether for upmarket chocolate demand, has reported sales growth of almost 13 per cent in the first six months in North America. Its main European markets in Germany, France and the UK have also performed well, the company has told investors.
Some of the larger funds, aware that a number of chocolate producers are “short” and are likely to be forced into the market to hedge their future cocoa purchases, are loath to liquidate their positions.
“It’s become a subtle game,” says Jonathan Parkman, co-head of agriculture at brokers Marex Spectron.
Another source of selling, which could have allowed manufacturers to hedge at lower levels, has also disappeared.
Ivory Coast, the largest cocoa producer, announced forward sales of its 2013-14 crop reached 1m tonnes at the end of July, much earlier than expected.
Although further gains would mean pain for chocolate makers, higher prices should in the longer term incentivise cocoa farmers to meet growing demand for chocolate in emerging markets.
Weak cocoa prices in the past few years have discouraged investment by farmers.
In some producing countries, a growing number of farmers have switched to palm oil and rubber, which offer better yields and returns.
Mr Chambers of Sucden believes current prices are too low to guarantee cocoa supplies in coming years. He says: “You need sustained higher prices than this to stimulate production to satisfy growing chocolate demand, perhaps in the £1,850 to £2,250 range.”