What You Need To Know
Cocoa futures have soared past the unprecedented mark of $10,000 a ton, continuing a historic rise that has doubled prices this year and is increasing chocolate costs. Prices of cocoa, the main ingredient in chocolate, have been skyrocketing due to shortages caused by poor harvests in West Africa. The situation is worsened by decades of underinvestment in farmers and insufficient support. Major cocoa processor Guan Chong is searching the world for cocoa and paying premiums to secure beans, as there are concerns that some suppliers in top cocoa-producing countries may default on their contracts.
This surge is driven by a combination of factors, including poor harvests in West Africa—home to the majority of the world's cocoa production—caused by adverse weather and crop diseases. Additionally, financial challenges in Ghana, the world's second-largest cocoa grower, have exacerbated the situation. The Ghana Cocoa Board, responsible for buying beans from farmers, is facing a funding shortfall that further tightens the supply of cocoa beans.
The price of cocoa has increased by about 60% this month and has more than doubled this year, reaching levels that make it more expensive than some industrial metals, like copper.
Surging prices have led candy manufacturers to produce new products with less cocoa or none at all, passing on higher costs to consumers. Acute cocoa shortages are expected to persist into the next season, and upcoming EU regulations may make it even more challenging for chocolate makers to secure supplies.
The world is facing a third consecutive cocoa deficit, and there are concerns that aging trees and crop diseases may prolong the shortfall, resulting in a long-term supply issue and high costs for chocolate consumers.
Despite the soaring prices and market enthusiasm, some investors are stepping back, as indicated by a reduction in open interest and net-bullish wagers among money managers. The industry is also closely watching the upcoming mid-crop harvest in West Africa, particularly in Ivory Coast, the top cocoa producer, which is expected to be smaller than usual. New European Union regulations aimed at preventing the sale of products linked to deforestation could further challenge the ability of chocolate makers to secure cocoa supplies.
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Why This Is Important for Retail Investors
Potential Impact on Consumer Goods Companies: The soaring prices of cocoa and the resulting cost pressures on chocolate manufacturers can have a significant impact on the financial performance of consumer goods companies. Retail investors who have investments in these companies could see fluctuations in stock prices based on their ability to manage higher input costs and pass them on to consumers.
Supply Chain Risks: The cocoa shortage highlights the risks associated with global supply chains, particularly in agricultural commodities. Retail investors should consider the potential disruption to supply and production capabilities of companies heavily reliant on cocoa, as this can impact their revenue streams and long-term growth prospects.
Market Volatility and Investment Opportunities: The volatility in cocoa prices can create trading opportunities for retail investors actively participating in commodities markets. Understanding the factors influencing cocoa prices and monitoring market trends can allow investors to take advantage of price fluctuations and make informed investment decisions.
Long-Term Sustainability Concerns: The cocoa shortage raises awareness about sustainability issues within the industry, including underinvestment in farmers and the potential environmental impact of cocoa production. Retail investors who prioritize sustainable investing may consider these factors when evaluating investment opportunities in the food and beverage sector.
Consumer Behavior and Pricing: The rising cost of cocoa may lead to changes in consumer behavior, such as decreased demand for chocolate or the emergence of alternative products with lower cocoa content. Retail investors should monitor how these shifts in consumer preferences and pricing strategies could impact the financial performance of companies in the chocolate industry, helping them make informed investment decisions.
Publicly-Listed Chocolate Companies
Some companies that may be affected by this news include:
The Hershey Company (NYSE: HSY) - As one of the largest chocolate manufacturers globally, Hershey relies heavily on cocoa as a primary ingredient in its products. Cocoa shortages and surging prices could lead to increased production costs for Hershey, potentially impacting its profit margins.
Mondelēz International (NASDAQ: MDLZ) - Mondelēz, the owner of iconic chocolate brands like Cadbury and Milka, is another major player in the chocolate industry. Cocoa supply disruptions could affect Mondelēz's ability to meet demand and may result in higher input costs.
Nestlé (OTCMKTS: NSRGY) - Nestlé's confectionery segment includes popular chocolate brands such as KitKat and Nestlé Crunch. Cocoa shortages could impact Nestlé's chocolate production and profitability, particularly if it struggles to secure an adequate supply of cocoa beans.
Barry Callebaut (SWX: BARN) - As one of the world's leading suppliers of high-quality chocolate and cocoa products to the food industry, Swiss-Belgian cocoa processor and chocolate manufacturer, Barry Callebaut may face challenges in sourcing cocoa beans at affordable prices. The company may need to pass on higher costs to its customers, affecting its profitability.
How Can You Use This Information?
Here are some of the investing ideas that can be explored using this information:
Value Investing
Retail investors may explore value investment opportunities by analyzing the impact of cocoa shortages on companies in the chocolate industry. The potential for lower stock prices due to cost pressures could present buying opportunities for value-oriented investors.
Value investing searches for undervalued companies that trade for less than their intrinsic values, with the expectation that the market will eventually recognize them.
Dividend Investing
Rising cocoa prices and potential challenges for chocolate manufacturers may affect their ability to pay dividends. Retail investors focusing on dividend investing should assess the financial health and sustainability of companies in the sector to make informed decisions.
Dividend investing targets companies that regularly distribute a portion of their earnings to shareholders as dividends.
Defensive investing
Given the potential volatility and uncertainty surrounding cocoa prices and its impact on the consumer goods industry, retail investors may consider defensive investing strategies. This approach involves investing in companies with stable earnings, solid fundamentals, and the potential to withstand market turbulence.
Defensive Investing focuses on securing a portfolio by choosing companies that are less sensitive to economic downturns.
Thematic Investing
The cocoa shortage and rising chocolate prices could be an opportunity for retail investors to explore thematic investing in agricultural commodities or related sectors. By identifying companies involved in cocoa production, alternative ingredients, or sustainability efforts, investors can align their portfolios with the thematic trend.
Thematic Investing selects assets based on projected trends or themes believed to offer growth opportunities.
Ethical Investing
The awareness of sustainability issues and underinvestment in cocoa farmers may prompt retail investors to incorporate ethical considerations into their investment decisions. By supporting companies with sustainable practices and responsible supply chains, investors can align their portfolios with their values.
Ethical investing prioritizes a company's social and environmental impact, aligning investments with the investor's personal values.
Read What Others Are Saying
Bloomberg: Chocolate Panic Escalates as Cocoa Crunch Sparks Scramble to Buy
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What you should read next:
Popular ETFs
Some investors prefer to invest in stocks via an exchange-traded fund for ease and reduced risk. Some popular ETFs include the following:
iPath Bloomberg Cocoa Subindex Total Return ETN (NIB): This ETF provides exposure to cocoa futures contracts, allowing investors to directly track the performance of cocoa prices. It can serve as a proxy for investing in the cocoa market itself.
Invesco Dynamic Food & Beverage ETF (PBJ): While not solely focused on cocoa or chocolate companies, this ETF includes a range of food and beverage stocks, which may include companies affected by cocoa supply issues. It employs a dynamic selection methodology based on various fundamental and quantitative factors.
Invesco MSCI Global Agriculture Index ETF (PAGG): This ETF offers exposure to companies involved in various aspects of the agriculture industry, including crop production and processing. While not specific to cocoa, it may include companies affected by agricultural supply chain disruptions, including those related to cocoa production.
VanEck Vectors Agribusiness ETF (MOO): Another ETF focused on the agricultural sector, MOO includes companies engaged in agribusiness, such as crop production, equipment manufacturing, and food processing. While not directly tied to cocoa, it may include companies involved in addressing agricultural supply chain challenges.
iShares Global Consumer Staples ETF (KXI): This ETF provides exposure to global consumer staples companies, including those involved in food and beverage production. While not specific to cocoa, it includes companies that may be affected by cocoa supply issues and rising input costs.
