Last year was a disastrous one for many commodities. Oil finished down 35%; cotton plummeted to 7 year lows; and sugar, well, that never really got properly started. But one shining light in the commodity world was cocoa.
And this hasn’t just been a good year for cocoa, it has been a fantastic four years. Prices have soared almost 50% since 2012, a feat which hasn’t been matched by any other traded commodity during this time period.
As the world’s desire for chocolate grows, production simply can’t keep up due to the underinvestment. This season alone we are looking at a shortfall of almost 150,000 tons, and that’s before we account for an increase in demand which is likely to come.
Small production, big profits
The reasons behind cocoa’s rising prices seem simple. Many people think that it is a case of supply and demand, with the supply end unable to keep up with the burgeoning demand. But really, if you look closely at the markets, there is another reason why cocoa is the best performing commodity – underinvestment.
The majority of global cocoa production is dominated by millions of small scale farmers. These farmers, working on provincial land, produce cocoa to the best of their abilities with rudimentary equipment and basic knowledge. Soil care and fertilization are the last of their concerns, and in many cases out of their skill-set entirely. These farmers are then organized into co-ops, who in turn take the harvest to a handful of companies that process the beans into the final product.
As the world’s desire for chocolate grows, production simply can’t keep up due to the underinvestment. This season alone we are looking at a shortfall of almost 150,000 tons, and that’s before we account for an increase in demand which is likely to come.
Why aren’t we all planting cocoa trees?
With demand and prices soaring, you’d think we’d all be planting cocoa trees to cash in on the available profit. Well, the simple reason that we aren’t is because cocoa plantations take a significant amount of time to establish themselves, and after that the crop remains prone to pests and disease, arguably more so than other agricultural commodities. In addition, the plants need very specific conditions in which to thrive.
Simply, the route to becoming a cocoa farmer is not an easy one.
At the moment Peru and Indonesia are trying to muscle in on the cocoa trade, which up until now has been a two-horse race between the Ivory Coast and Ghana. Large plantations are currently being expanded on, but growers are aware that they won’t bear significant fruit until 2025 at the earliest.
And that leads us back to that ol’ problem we mentioned – underinvestment. Investors are weary of putting a sizeable amount of money into future plantations, because of the timescales required and the lack of a guaranteed return.
Keepin’ it sweet
In order to stay competitive in the world of cocoa, with rising prices and no sign of let up, many companies have had to alter the sizes of their products whilst keeping the prices the same. Or worse, recipes are changing.
Cadbury’s, owned by Kraft Food and the largest confectionary company in the UK, came under fire last Easter when they altered the recipe of their beloved Crème Egg product. It led to internet petitions, talks of a boycott, and irate customers. Cadbury’s however stood firm, quickly pointing out that if the recipe didn’t change, the product would be significantly more expensive. The consumer had no choice but to keep, well, consuming the product. Cadbury’s simply couldn’t afford to revert back to the previous version.
So where is cocoa heading in 2016?
Whether companies alter their recipes, the sizes of their products or a combination of the two, one thing that we can be sure of is that we are going to eat the stuff. Chocolate is the most popular confectionary item on the planet, and that isn’t going to change any time soon.
So in the interests of attempting to grow your investment and not your waistline, what should we expect from the global cocoa markets in 2016? Well, we can anticipate that the price of cocoa is going to continue to rise. The rise could be significant, with a 150,000 ton deficit already clocked and fears that could grow, or it good be a steady increase egged on occasionally by weather or pest concerns.
Whichever way the price rise happens, you are going to want to be on the right side of the market, as cocoa is sure to produce a sweet return in 2016.
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