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In this series, we break down the jargon and explain a popular investing term or topic. Here is the cocoa.
Why do I read so much about the price of cocoa?
The price of this basic product has skyrocketed, in a trend that seems set to continue. Easter eggs were smaller and more expensive, as were many popular chocolate bars, as confectionery companies pass on rising costs.
Cocoa beans are ground to obtain cocoa butter, which forms the base of chocolate.
Cocoa futures prices in New York hit a record high of $11,578 per metric ton this week, having surpassed $10,000 per ton last month, four times higher than the March 2023 price.
A futures contract is an agreement to purchase a commodity for delivery at a future date.
Production problems: A combination of extreme weather events and crop diseases has severely reduced supplies from Ghana and Côte d’Ivoire.
What is behind the increase?
A combination of extreme weather events and crop diseases has severely reduced supplies to Ghana and Ivory Coast, the two main cocoa-producing nations.
Illegal gold mining, which is taking up land in Ghana, is also undermining production. Most cocoa farms struggle to run small-scale operations and would be hard-pressed to rapidly increase production.
Will the increases slow soon?
Cocoa bean prices are expected to continue rising, unabated until 2025. Even then, the price of your favorite chocolate is unlikely to drop much.
At the moment, manufacturers are looking for stock purchased at lower prices than a year ago. When they run out, they may try to roll over the cost of the shares purchased at the new higher prices.
How serious is the shortage?
The shortage this year may reach 500,000 tons, representing about 10 percent of the global cocoa bean market.
This is according to Barry Callebaut, the Swiss manufacturer that supplies chocolate to hotels, restaurants and consumer companies, such as Unilever, maker of the Magnum ice cream bar, and Nestlé, producer of Kit Kat.
Any other factors behind the price increase?
Hedge funds in New York and London have placed about $8.7 billion worth of bets on cocoa futures markets, betting that prices will continue to rise.
Meanwhile, the governments of Ghana and Ivory Coast have this month increased prices paid to cocoa farmers to ensure they get a share of the profits made in global markets.
They have been less affected than one might assume. Well, at least for the moment. Barry Callebaut shares have recovered, amid confidence that chocolate fans will not deny themselves a treat.
Lindt stock receives a hold rating because taste for its premium products may be largely unaffected.