Cocoa Hits Its Sweet Spot

February 21, 2008

This Valentine's Day, skip the heart-shaped box - buy futures instead.

  • Heart-healthy message spurs demand
  • War, drought plague supply
  • New 24-year price record

 

With Valentine's Day still in our memory, cocoa's back in a big way, hitting the sweet spot with investors. Last week, cocoa prices hit 24-year highs, with few signs of slowdown apparent in the short term. Is this sugar high too good to be true?

Boning Up on Beans

Our love affair with cocoa stretches back thousands of years to when the Olmecs first cultivated cacao trees along the Mexican Gulf Coast. Mayan nobles chugged frothy pitchers of the stuff, laced with chili and spices, and the Aztecs even traded cocoa beans as currency. When the Spanish brought cocoa back with them to Europe, the obsession quickly spread - to Africa, the West Indies, Philippines and beyond.

Today, the cocoa industry tops $1.4 billion worldwide. Over 3.6 million metric tons of cocoa beans were harvested globally in 2004, and the International Cocoa Organization (ICCO) predicts yields for the 2007-08 year could be as high as 3.78 million metric tons.

Almost 70% of the world's cocoa comes from West Africa. By far, Côte d'Ivoire is the largest producer, harvesting 40% of the world's crop, followed by Ghana, Indonesia and Nigeria. (The Americas, where cocoa once reigned supreme, only represent 20% of global production.)

Three-quarters of all cocoa beans are collected between October and February (a secondary harvest, or "midcrop," takes place from May to August). But cocoa's a finicky crop. Cacao trees need consistently hot and humid climates - like the lower story of a rainforest - and are especially vulnerable to drought. They're also particularly susceptible to insects and fungal diseases; some experts estimate that each year, farmers worldwide lose as much as 30-40% of their crop just from disease and pests.

Despite thousands of years of cocoa industry, bean harvesting is still a labor-intensive task. Ripened pods, which look like pale green footballs, are knocked from cacao trees with a pole or knife. Using a machete, workers slice them open and scoop out the pulp and "beans," or seeds, and pile them in heaps. This goopy mixture is left alone for several days, during which the pulp ferments and "sweats" out, leaving the beans to be collected and dried in the sun.

 

Supply, Demand And Chocoholism

Back in the 1970s, cocoa prices skyrocketed due to worldwide drought, hitting $4,000, even $5,000/ton. The high prices fueled increased production in countries like Malaysia and Indonesia, but as more cocoa plantations started up, prices fell through the 1980s. Despite a slight recovery midway through the 1990s, cocoa has yet to recapture its astronomical 1970s levels.

But these days, demand's on the rise. Some of that's from developing countries, like China and India, hungry for goods and commodities of all varieties.

However, mostly the increased demand is fueled by Westerners - especially Americans - entranced by dark chocolate's health benefits. Every day, scientists find yet another plus side to chocolate consumption, from antioxidants that lower blood pressure and cholesterol levels, to lowered incidence rates of cancer and heart disease. Doctors say we should eat more chocolate? You don't have to tell us twice.

At the same time, the supply side of cocoa has been tightening. Although the civil war in Côte d'Ivoire (which spanned from 2002 to 2007) has ceased, the country's cocoa industry still runs well below peak capacity. In addition, strikes by West African cocoa exporters in late 2007 bottlenecked bean shipments; work stoppages at Côte d'Ivoire's Coffee and Cocoa Bourse left 380,000 tons of raw beans sitting in the port cities of Abidjan and San Pedro in January. That's not even accounting for the dry weather and pod fungus decimating crop yields throughout West Africa.

Sounds like a sweet time to get into the cocoa game.

Cuckoo for Cocoa

Investors looking to get into cocoa have several options. You could, of course, funnel your money into confectionary stocks:

Company

Total Sales in 2005 (in US$ millions)

Mars, Inc.

9,546

Cadbury Schweppes PLC

8,126

Nestlé SA

7,973

Ferrero SpA

5,580

Hershey Foods Corp.

4,881

Kraft Foods Inc.

2,250

Meiji Seika Kaisha Ltd.

1,693

Lindt & Sprüngli

1,673

Barry Callebaut AG

1,427

Ezaki Glico Co.

1,239

Table 1: Top Ten Confectionaries Worldwide, ranked by 2005 sales

Source: Candy Industry, January 2006 - via ICCO

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