Cocoa prices on the rise – consider hedging, buy lots of chocolate!

We’ve become accustomed now to demand from China for raw materials having a significant effect on world prices of metals and other traded commodities. Those have been core to that country’s huge investment programme over recent years. It seems amazing to think that when I first started in business, no-one really considered Chinese usage as  major factor driving steel prices, for instance, whereas now it is literally the number one variable for any analyst.

But maybe we don’t always immediately think that way when it comes to ‘soft’ commodities. So it was a bit of a shock reading over the weekend that increasing demand in Asia, and China in particular, may be driving the price of cocoa upwards, and could even lead (shock horror) to chocolate shortages soon!

Now bear in mind it is compulsory for UK newspapers to feature a chocolate related story at Easter, as the festival of the death and resurrection of Jesus, for reasons I don’t fully understand, is now inextricably linked with chocolate egg consumption. But there does seem to be some truth in these reports. The International Cocoa Organisation said recently that there could be a 150,000 tonne deficit in terms of cocoa bean production in 2014 versus usage. In March, cocoa prices reached a two and a half year high at £1,896 per tonne in London and US$3,031 per tonne in New York.

Much of this does seem to be driven by the rapidly growing wealth in countries such as China, meaning people can afford luxuries like chocolate. Consumption has tripled there over the last four years. But it is not just the basic supply / demand equation. Bad weather, fears around crop diseases and even political uncertainties in growing regions can all add to the pressure on prices. Currently, there are fears around El Nino and weather patterns leading to a dry season in Africa, for instance.

So what can we do? Well, I’m sure my old firm Mars will have complex hedging strategies in place, alongside all their development activities around new sources, improved yields and so on. But as an individual chocolate lover?  I’m afraid price rises are likely. Particularly for cheaper, but good quality products (‘filled bars’ such as the Mars Bar), cocoa does form a significant part of the overall cost base. That’s less true for luxury products from Leonidas or Hotel Chocolat.

EASTER-HOMEPAGE-HUB-V2-283x352But if you are a chocoholic like me, you can follow the example of the pros and ‘go long’. Chocolate keeps for a surprisingly long time. And eating it somewhat beyond the 'best before' date usually won’t do you any harm – it becomes less pleasant, but it would be quite a while before it makes you ill. Solid chocolate bars, particularly plain chocolate, keep happily in decent storage conditions for a year or more.  A good excuse there to go and stock up on middle of the road plain chocolate, I think.

I wouldn’t stock up on Eggs though, unless they're at a very large discount post Easter.  It will come as no surprise to tell you that that the cost of the packaging can far exceed the cost of the cocoa element in the egg itself.

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