In this series, we bust the jargon and explain a popular investing term or theme. Here it’s cocoa.
Why am I reading so much about the price of cocoa?
The price of this commodity has been soaring – in a trend that seems set to continue. Easter eggs were smaller and more expensive and so too are many popular chocolate bars, as confectionery companies pass on spiralling costs.
Cocoa beans are ground into cocoa butter which forms the basis of chocolate.
Cocoa futures prices in New York reached a record $11,578 a metric ton this week, having surpassed $10,000 a ton last month which was four times higher than the price in March 2023.
A futures contract is a deal to buy a commodity for delivery at a date sometime in the future.
What’s behind the rise?
A mixture of extreme weather events and crop disease has severely reduced supply from Ghana and the Ivory Coast, the two main cocoa bean producing nations.
Illegal gold mining, which is taking up land in Ghana, is also undermining output. Most cocoa bean farms are struggling small-scale operations and would be hard-pressed to rapidly boost their output.
Will the increases slow soon?
Cocoa bean prices are predicted to continue to rise, with no respite before 2025. Even then it’s unlikely that the price of your favourite chocolate indulgence will fall much.
At the moment, manufacturers are working their way through stocks bought at the lower prices of a year ago. When these run out, they may try to pass on the cost of stocks purchased at the new, steeper prices.
How acute is the shortage?
The shortage this year may be as much as 500,000 tons, which represents about 10pc of the global cocoa bean market.
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That’s according to Barry Callebaut, the Swiss manufacturer which supplies chocolate to hotels, restaurants and to consumer companies, like Unilever, maker of the Magnum ice cream bar, and to Nestle, producer of Kit Kat.
Any other factors behind the price increase?
New York and London hedge funds have placed about $8.7billion worth of bets on the cocoa futures markets, gambling on more upward moves in prices.
Meanwhile, the governments of Ghana and the Ivory Coast have this month raised the prices paid to cocoa bean farmers to ensure that they get some share of the profits being made in global markets.
What’s happening to chocolate company shares?
They have been less hard hit than you might suppose. Well, for the moment at least. Shares in Barry Callebaut have bounced back, amid confidence that chocolate fans will not deny themselves a treat.
Lindt shares are rated as a hold on the basis that the taste for its premium products may be largely unaffected.
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