Recently, the International Cocoa Organization broke some news that’s sure to put a frown on every chocoholic’s face…
Chocolate lovers will soon be paying more for their favorite candy bars.
You see, the cost to produce a chocolate candy bar has surged 35% since the start of 2012, and that’s bad news for the $120-billion global confectionery industry.
The price of cocoa has risen 40% in the past year alone and is nearing a three-year high, at over $3,125 per ton, while cocoa butter – a key ingredient in making chocolate – has surged more than 70% this past year.
So what’s driving this price surge?
Culprit #1: Soaring Demand
Regular commodities investors won’t be surprised to hear that the emerging markets are driving demand.
In China, India and Russia, chocolate consumption is growing at double-digits rates annually. More specifically, Asian demand for cocoa beans has risen 29% in the past five years, compared to a 1% decline in Europe.
And, amazingly, the trend toward higher cocoa consumption has just begun.
Right now, the average Chinese consumer eats barely more than two candy bars each year. Imagine what will happen when the Chinese start consuming as much chocolate as the United States.
For starters, it’ll put an even greater strain on supplies.
Culprit #2: Dwindling Supplies
About 55% of the world’s cocoa comes from very small farms in Ghana and the Ivory Coast… but lately, the farmers are struggling to make ends meet. Relative to the cocoa value chain, they get a terrible deal on their crop.
Additionally, their trees are very old and, in many cases, diseased.
The farmers don’t have the money to plant new cocoa trees, so many are simply giving up on cocoa and planting more lucrative tropical products like coffee, rubber, sugar and palm oil. These products provide a larger, steadier income for the farmers.
A Tasty Investment
Cocoa is poised to face its third consecutive deficit (when demand is greater than supply) this year.
Amazingly, it’s been nearly 50 years since such a long deficit occurred… yet the situation is only going to get worse in the years ahead.
Demand is forecast to grow nine-fold, to one million metric tons, by 2020. That’s the equivalent of one-quarter of the current global output of cocoa beans… and that means higher cocoa prices for many years to come.
If you’re interested in breaking off a piece of this sweet opportunity, there are two ETNs worth looking into: the iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NIB) and the iPath Pure Beta ETN (CHOC).
Both are up about 14% so far this year and are trading at their best levels since September 2011, much like cocoa itself. That should continue well into the future, too.
And “the chase” continues,