Future Growth Of Volatile Cocoa & Coffee Rests In Emerging Markets

December 08, 2014

These two commodities exemplify how prices react to nature and circumstances.


Both cocoa and coffee have seen significant price increases this year, and readjustment as the year enters its last quarter. What has been going on?

Cocoa And The Scylla Of Ebola

Both cocoa and coffee share the distinction that, for each, there is a small core of major producing nations, with the others being essentially “also-rans.” In the case of cocoa, the vast majority of the world’s production is concentrated in West Africa. The rest is produced in South America, Asia and Oceania.



Global Coffee Bean Production – 2012/13

Source: International Cocoa Organization


Cocoa Bean Production – Africa ('000 Tonnes)

Source: International Cocoa Organization




Cocoa Bean Production – America ('000 Tonnes)

Source: International Cocoa Organization


Cocoa Bean Production – Asia and Oceania ('000 Tonnes)

Source: International Cocoa Organization


Over the past 10 years, supply has usually kept pace with demand (using cocoa bean grindings as a proxy).


Gross Crop vs Grindings (‘000 Tonnes)

* Estimated

Source: International Cocoa Organization



Cocoa is, of course, one of the main ingredients in chocolate. And a lot of people like chocolate—in particular the Europeans. According to figures for per capita consumption in 2014 from Euromonitor International, Switzerland still tops the table, at 9 kg per year (equal to around 209 regular size (43g) bars). (According to Confectionery News, daily consumption of a single regular size bar would see you eating some 15.7 kg every year.)

In some of the developed-market countries, however, consumption has actually dropped since 2012. The U.S., by value the world’s largest market for chocolate, is a case in point. Other such countries include Denmark, Finland, the Netherlands and Norway.


Chocolate Consumption per Capita (kg) – Top 20 Countries 2014

Source: Euromonitor International from Confectionery News


In addition to chocolate consumption going up both in Russia and a number of Eastern European countries, for example, Estonia and Lithuania, it has also been on the rise in a number of emerging market countries, including China and Brazil.


Emerging Markets per Capita Consumption (kg)

2014 Increase
Since 2012
China 0.2 0.1
India 0.1 0.0
Russia 5.3 0.2
Brazil 1.6 0.1
Indonesia 0.3 0.0
Mexico 0.5 0.0
Nigeria 0.0 0.0
Turkey 2.0 0.4

Source: Euromonitor International from Confectionery News




One forecast, quoted in The Wall Street Journal in July this year, has the developing-market share accounting for some 45 percent of the global chocolate market, up from some 33 percent in 2004.

The great hope of the confectionery industry, however, remains India, where, at present, per capita chocolate consumption remains very low, but has the potential for huge expansion as people’s incomes increase. Indeed, sales in India are expected to increase nearly 14 percent in 2014.


Forecast Chocolate Sales Percentage Growth – by Volume

Source: The Wall Street Journal


Investing In Cocoa

The two most obvious investment options are exchange traded products (ETPs) and futures.


Two specific cocoa ETPs (in the form of ETNs—so there will, for each, be a credit risk related to the issuing institution) available in the U.S. are:

  • iPath Dow Jones-AIG Cocoa Total Return Sub-Index ETN (NIB)
  • iPath Pure Beta Cocoa (CHOC)


And ETF Securities in the UK has the ETFS Cocoa ETF, ETFS Daily Short Cocoa and ETFS Daily Leveraged Cocoa.





Cocoa futures, with a contract size of 10 metric tons, are traded on both the CME and the ICE.

Over 2014, cocoa futures have continued to rise, albeit somewhat choppily. In late September, at $3,371 a ton, they hit a 3 ½-year high. While toward the end of October, they had fallen back to around $3,000 a ton, they were still up 15 percent on the year. However, during the single week ending Oct. 31, they dropped 5 percent, falling 1.6 percent alone that Friday, to end the month at $2,899 a ton.


ICE Cocoa Front Month – Settlement (US$)

Source: ICE


Despite the possible potential for cocoa in the long term, in the short term, if nothing else, the performance of cocoa futures over the past two or more months illustrates just how volatile the futures market in it can be.

In cocoa’s case, the threat to supply (which forced futures up so much at the end of September) was the Scylla of Ebola and the fear among many that it would engulf the cocoa-producing West African nations.

Indeed, fears were such that the International Cocoa Organization (ICCO) itself issued a statement emphasizing that “its thoughts and prayers are with the citizens and governments of three member countries, Guinea, Liberia and Sierra Leone, who are most affected by the Ebola outbreak in West Africa.”

So far, however, these fears have not been realized, and the threat appears to have diminished. This has been reflected in the recent corrections downward in the price of cocoa futures.




Coffee And The Charybdis Of Drought


Global coffee production is dominated by Brazil, followed (not all that closely) by Vietnam, which, itself, produces more than the next two countries—Indonesia and Colombia—together.


Global Coffee Production – Top 10 Exporting Countries ('000 Bags)

Source: International Coffee Organization (ICO)

* Not a member of the ICO One Bag = 60 kg or 132.276 lb


There are essentially just two types of coffee: arabica and robusta. Arabica is more common than robusta, and around 60 percent of coffee produced is arabica. Robusta is cheaper and hardier and is what instant coffee is usually made of.

According to the ICCO: “Arabica coffee is grown throughout Latin America, in Central and East Africa, in India and to some extent in Indonesia.” And: “Robusta coffee is grown in West and Central Africa, throughout South-East Asia and to some extent in Brazil, where it is known as Conillon.”


Arabicas vs Robustas – Exporting Country Production ('000 Bags)

Source: International Coffee Organization





Figures published by the ICCO in March this year (in World coffee trade (1963 – 2013): A review of the markets, challenges and opportunities facing the sector), indicate that there has been a steady annual growth in coffee consumption of 1.9 percent over the past 50 years, from 57.9 million bags in 1964 to 142 million bags in 2012. In addition, the growth rate has “accelerated since 1990 to 2.1 percent, and to 2.4 percent since 2000.”

And while historically, the traditional import markets like the EU, Japan and the U.S. have accounted for most of demand growth, more recently, the impetus behind such growth has come not only from the emerging markets, but the coffee-producing countries themselves.


World Coffee Consumption by Type of Market (1964-2012)

Source: International Coffee Organization


Indeed, of the exporting countries, the ICCO believes that “[a]lthough per capita consumption levels are still low in several exporting countries, there is considerable potential in the medium and short term, particularly given their economic development prospects.” However, it expects the emerging markets “to be a significant source of growth in world consumption over the next few years.”


Consumption Trends in Traditional Markets, Exporting Countries and Emerging Markets

Source: International Coffee Organization




World Coffee Consumption – 2010-2013 ('000 bags)

2010 2011 2012 2013* CAGR
Exporting Countries 41,005 42,755 44,078 44,656 2.9%
Traditional Markets 71,015 70,735 71,411 73,878 1.3%
Emerging Markets 25,158 26,002 27,430 27,266 2.7%
Total 137,179 139,492 142,919 145,800 2.1%

Source: International Coffee Organization


And over the last 12 to 13 years, there has been quite a deal of seesawing in the “world coffee balance.”


Source: F.O. Licht Commodity Analysts




Investing In Coffee

The two most obvious options are: exchange traded products (ETPs) and futures.


Two specifically coffee ETPs (in the form of ETNs—so there will, for each, be a credit risk related to the issuing institution) available in the U.S. are:

  • iPath Dow Jones-AIG Coffee Total Return Sub-Index ETN (JO)
  • iPath Pure Beta Coffee (CAFE)


And ETF Securities in the U.K. actually has a number of coffee ETPs: ETFS Coffee (COFF), ETFS EUR Daily Hedged Coffee (ECOF), ETFS Short Daily Coffee (SCFE LN) and ETFS Daily Leveraged Coffee (LCFE LN).


Coffee futures, both robusta and arabica, used to be traded on the Tokyo Grain Exchange, but after it was acquired by the Tokyo Commodity Exchange last year, these ceased to be offered. Coffee futures are now traded on both ICE and CME, and also on the Singapore Commodity Exchange and BM&F Bovespa in Brazil.

In 2014, the price of coffee shot up from January through May and has not fallen that far from its highs earlier in the year. Indeed, in October, there was another brief surge in its price, leading to a new high for the year. According to the ICCO, the average monthly price in October (172.88 U.S. cents/lb) was the highest it had been in over 2 1/2 years.


ICE Coffee Front Month – Settlement (US$)

Source: Quandl




As with cocoa, despite the possible potential for coffee in the long term, in the short term, the performances of coffee futures and the price of coffee itself over the past 10 months illustrate just how volatile coffee can be.

In coffee’s case, the threat to supply (which forced its price so much higher in October) was the Charybdis of drought in Brazil (and the effect it would have on this year’s production.) As the ICCO described the situation, with a monthly average price the highest since February 2012 and 6.9 percent higher than September … “The price swing has been driven almost entirely by weather reports from Brazil, with dryness at the beginning of the month spurring prices higher, before scattered showers dampened any bullish spirits.”

The market’s concerns now, however, are “whether damage to the 2015/16 crop is already irreversibly, and to what extent these rains can encourage new flowering.”


The performances of both cocoa and coffee this year demonstrate importantly not only how exogenous factors (in cocoa’s case, Ebola), but also current conditions (in coffee’s case, the drought in Brazil), continue to have a major influence on the markets for individual commodities, whatever the long-term outlook for any of them may actually be.

Taking a positive long-term view may get you where you want to go in the end, but the ride along the way could be quite bumpy.

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