Now that Santa has dropped off all the presents for 2013, he might want to think ahead on 2014′s gifts for chocolate lovers, and visit the commodities market—because the price of cocoa is going up.
The market for cocoa has been volatile for some time, to say the least. Everything from bad weather to political strife to hedge fund activity has sent the price of cocoa beans either soaring or plunging.
Uncooperative weather, for instance, has cut crop yields in the Ivory Coast—the country that produces the most cocoa beans in the world—and earlier a failed political coup in that country did its part to send antsy traders to the buy side. Ghana, also one of the world’s largest producers, suffered poor crops thanks to bad weather, delivering a double whammy to supply.
And only a little over three years ago hedge fund manager Anthony Ward—christened “Chocfinger” for his bold moves in the chocolate market—practically cornered the market on cocoa beans, buying up 7% of 2010′s yield and sending prices soaring to what was then a 33-year high on the London market.
While Ward’s Armajaro investment firm group went bust this past November, and had to be rescued by selling off its Armajaro Trading component to Ecom Agroindustrial, a commodities competitor based in Switzerland, it wasn’t falling cocoa prices that did the firm in. Other factors contributed to Armajaro’s losses: higher costs associated with supply chain activities and the physical movement of commodities and larger staffs, among other issues, sent Armajaro Trading to the auction block. Meanwhile, cocoa prices, which had seen ups and downs since then, are back on the rise.
What’s really pushing the price of cocoa beans higher this time—it’s up 24% this year, and expected to increase by 23% by the third quarter of 2014, according to Rabobank—is the increasing taste for chocolate in emerging market countries in Asia. Particularly in China, chocolate is becoming more popular, with demand there expected to rise 6.6% in 2014 on top of a 6.9% consumption increase in 2013. Companies are looking to customize their products to regional tastes, and the rise in affluence among Chinese is helping to drive the market.
But China isn’t the only Asian country looking for that chocolate fix. In Australia, a taste for premium chocolates, as well as strong interest in Fair Trade products, is driving the market higher. The country already accounts for the highest per capital chocolate consumption in the region.
Asian demand lags far behind that of Europe, already a strong force in the chocolate market and expected to rise even higher on recovering economies.
So if that’s the good news, what’s the bad? The fact that growers can’t boost production quickly enough to satisfy this rising demand. In fact, use is already outstripping demand, and the shortfall is expected to continue to rise at least through 2018, according to the International Cocoa Organization. That’s the longest shortfall in half a century, and with the taste for chocolate rising, prices will remain on the rise for some time to come.