The increases registered this year by cocoa mark a clear change of course compared to the last two years, when futures fell more than 40% amid a global surplus of raw material
Just as Americans rush to stock up on chocolates for Valentine’s Day, the excess of global cocoa is finally starting to disappear.
Cocoa futures in New York have risen almost 9% in 2018, becoming one of the best performing commodities of the year. As signs of declining supplies grow, hedge funds have begun to bet on a broad rebound after holding negative bets over the past two months.
The increases registered this year by cocoa mark a clear change of course compared to the last two years, when futures fell more than 40% amid a global surplus of raw material. The fall in prices affected producers, who reduced spending on agricultural maintenance.
The effect is now evident in the quality of crops, at a time when production is beginning to decline in Ecuador, the largest producer in South America and supplier of high quality grains to companies such as Lindt & Spruengli AG. Indonesia, which was previously the third largest producer in the world, is expected to become a net importer this year as production decreases and demand decreases.
The recent dryness is also threatening production in parts of West Africa, which accounts for more than two-thirds of world supplies.
“The lower prices have discouraged the farmers we often see in these markets,” said Phil Streible, a senior commodity strategist at RJO Futures in Chicago. “The market has good fundamentals, prices will perform quite well.”
In the week ending February 6, hedge funds had a net long position, or the difference between betting on a price increase and bets on a decline, of 8,560 futures and options, according to data from the Trading Commission of Commodity Futures (CFTCs) of the United States published on Friday. That compares to a short net tenure of 6,810 contracts a week earlier.
Valentine’s Day, which is celebrated on February 14, represents the biggest “fever” for buying chocolates in the US, said Jacques Torres, an ex-spoiler who now runs eight stores of the same name that sell luxury chocolate products and ice cream in New York. About 55% of Americans who celebrate the holiday plan to buy candy, compared to 50% in 2017, according to a survey by the National Retail Federation and Prosper Insights & Analytics.
Beyond Valentine’s Day, chocolate consumption is growing. In the five years ending in 2022, retail sales of US confectionery chocolate they will increase 2.2% to 1.4 million metric tons, which represents US $ 20.3 billion, according to research firm Euromonitor International. In recent years, consumers have shown an inclination towards higher grade products and have purchased more dark chocolate, which generally uses more raw material.
The increase in prices could indicate an increase in costs for retailers such as Mondelez International Inc., the maker of Cadbury chocolates and Oreo cookies. The fall in cocoa prices in recent months should start to favor the company this year, CFO Brian Gladden said in a conference call on earnings in late January. There is often a delay between movements in the futures market and the impact for retailers due to the stockpiling and the hedging positions of the company.
For specialized chocolate makers like Torres, the increase in cocoa prices is actually good news, because higher incomes for farmers will allow them to produce more high quality grains that require more investment.
“The prices are too low for farmers,” said Torres, who has nicknamed himself Mr. Chocolate, and also runs a cocoa processing plant and buys about 150 tons a year of the raw material.
“If they continue at these levels, they will continue to plant high-yielding trees, not premium quality,” he said, adding that his concerns about finding better grains have driven him to buy a 5,000-cacao plantation in Mexico.
If the futures are going to register more gains, it will depend largely on what happens with the cocoa harvested during the West African harvest between April and September. In Côte d’Ivoire, the largest producer, a large harvest is still expected, even as farmers struggle with the current price environment. The grain arrivals of the country, an indicator of production, slightly surpass those of the previous year, which indicates a large harvest.