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This article describes a commodity traded on a commodities exchange. View articles referencing this commodity. |
Americans consume about 3 billion pounds of chocolate annually, but consume less per capita than Europeans. Sixteen out of twenty of the top chocolate consuming countries (per capita) are European. Chocolate consumption is seasonal. People tend to consume more chocolate during Winter time. Prices for chocolate have nearly doubled since 2006, due to crop shortages, and increased consumption of chocolate (especially of dark chocolate, which requires more cocoa).
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Chocolate must be processed from cocoa powder, cocoa butter, and sometimes other oil products. Companies like BT COCOA, Barry Callebaut, Cargill, and Archer-Daniels-Midland Company (ADM) buy cocoa in bulk from Cote d'Ivoire, Ghana, Indonesia and a few South American countries, then process and sell it to confectioners like Hershey Foods (HSY), Nestle (NSRGY), Mars, and Cadbury Schweppes (CSG) , to melt, mold, and package. Demand for chocolate directly creates the demand for cocoa, while the supply of cocoa is contingent on the production of African and South American farms.
In July 2008, demand for cocoa powder exceeded supply more than it has for 20 years as companies placed increasing numbers of orders for cocoa powder while suppliers were producing less. This situation means that prices of cocoa will increase further until increasing chocolate prices decrease cocoa consumption and lower demand. Supply and demand of cocoa are measured by the stocks to grinding ratio. A low ratio means that there is not a lot of cocoa powder to sell and grinders are working at capacity to meet demand. [2] As of June 2008, cocoa prices had risen 50% from the previous year, hitting a 28 year high. [3]
[edit] Prices and Delivery Dates
Cocoa futures contracts are traded on the New York Mercantile Exchange under ticker symbol "CJ". The contracts are delivered every year in March, May, July, September, and December. (For more information on commodity tickers, check out the commodity ticker construction page.)
Cocoa futures with July, 2009 delivery. US Dollars per metric ton.
[edit] Companies that stand to benefit from cocoa prices
- Hedge funds and financial institutions buying cocoa futures will benefit from increasing cocoa prices. Hedge funds currently hold about one third of Cocoa futures contracts. [6]
- Companies which make non-chocolate sweets will benefit from increased Cocoa Prices. When chocolate products become more expensive due to increased cocoa prices, people may consume more non-chocolate goods to satisfy their sweet tooth on a budget. Companies producing these goods stand to benefit.Examples are as follows:
- The Cheesecake Factory (CAKE) produces cheesecakes and owns restaurants. When chocolate becomes more expensive, premium sweets like cheesecake become more attractive as substitutes.
- Kraft Foods (KFT) produces a wide variety of cookies, wafers, and sweets like Jell-O, Fig Newtons, Nutterbutters, Nilla Wafers, Snackwells, and Oreos. Increasing cocoa prices do not affect the prices of these foods.
- Wm. Wrigley Jr. Company (WWY) makes Lifesavers and sweet gums, while Tootsie Roll Industries (TR) makes a chocolate-flavored candy that doesn't use real chocolate.
[edit] Companies that stand to lose from higher cocoa prices
- The Archer-Daniels-Midland Company (ADM) company buys cocoa to process into chocolate. As it becomes more expensive, they incur more expense to create the same product.
- Hershey Foods (HSY) and Cadbury Schweppes (CSG) buy chocolate from the Archer Daniel Midlands company, and other wholesalers. Another publicly traded confectioner which relies on cheap cocoa prices for good mark-ups is the Rocky Mountain Chocolate Factory (RMCF). One executive analysis notes that large confectioners can only pass about 80% of raw material costs to customers. They absorb the other 20% of the costs on their income statement.[7]
- American Dairy Incorporated (ADY), Dean Foods Company (DF), Lifeway Foods (LWAY) and other companies that create chocolate milk must pay more to do so with increased cocoa prices.
[edit] What factors increase the price of cocoa?
[edit] More demand for chocolate
More demand for chocolate increases the price of cocoa, which is chocolate's primary ingredient. Demand for chocolate increased by 20% between 2002 and 2007, as measured by consumption. [8]
Increased standard of living in India and China are creating demand for chocolate bars, which used to be considered an elite luxury item. Because of their massive populations, these countries could drive up demand for chocolate and increase the price of cocoa. Chocolate consumption in India, China and demand has been increasing by 15-20% annually. [9]
[edit] Mandatory Improvement in African Labor Standards
If the the world's governments act against child slavery and widespread human rights violation in Cote d'Ivoire and Sub-Saharan Africa, the price of cocoa will rise. Below poverty wages and the use of child labor keeps the price of harvesting cocoa down. Reports of up to 200,000 child slaves busy harvesting cocoa has raised humanitarian pleas, but no significant action has yet been taken to improve working conditions in the Ivory Coast.[10]Once the humanitarian crisis in Darfur is resolved, the UN will have more resources to deploy in Africa. Cote d'Ivoire would be a logical next step for intervention. When workers receive proper wages and working conditions, African production costs will increase, and raise cocoa prices.
[edit] Conflict in the Cocoa Rich Ivory Coast
Intervention in the Ivory Coast (and Africa in general) is made difficult by regional instability. Cote d'Ivoire almost had a civil war in 2002, and is still in a precarious political situation. The country also produces 46% of the World's cocoa. If conflict breaks out, expect cocoa prices to go through the roof due to destroyed or unharvested crops and damaged shipping infrastructure in Africa.
[edit] Soil Erosion, Drought, and Disease
Small crops in cocoa producing countries lower the supply of chocolate. World chocolate consumption is increasing, so the price of cocoa increases. Destructive diseases and drought have plagued cocoa yields in Africa for the past 15 years, losing growers $700 million annually. [11] Drought and disease have struck once again, and cocoa prices have skyrocketed due to shortage. The director of Ghana's Nature Conservation Research Council, John Mason, believes that African cocoa may be extinct in 20 years due to irresponsible growing practices and resulting soil erosion in Africa. [12]
[edit] Increasing Focus on Antioxidants
Increased publicity of cocoa's antioxidant content may entice people who value their Health & Wellness . Cocoa contains far more antioxidants (which can prevent stroke, cancer, and heart disease) than any other food. For a while, people were encouraged to drink red wine for the antioxidants. A cup of cocoa has twice as many antioxidants. [13]
[edit] What factors decrease the price of cocoa?
[edit] More Demand for Non-Chocolate Sweets
More demand for other sweets that could substitute for chocolate could lower cocoa prices. This demand for other sweets may arise precisely because of increased chocolate prices, though. These sweets could include cakes, hard candy, and non-chocolate cookies.
[edit] Genetic Research Boosting Cocoa Supplies
Not nearly as much genetic research has gone into cocoa as other foods. The Mars Company is spearheading research into the cocoa genome to make more pest, disease, and sun-resistant cocoa crops. Cocoa used to grow best in well shaded areas, until genetic research made cocoa plants considerably more sun-resistant. African farmers also need to implement better crop rotation, and farming techniques to improve their yields. [14] As cocoa farming becomes more technologically advanced, there will be more cocoa on the market, driving prices down.
[edit] Obesity Concerns Lowering Chocolate Consumption
Less demand for chocolate could lower cocoa prices. Even though cocoa powder is healthy because of its high antioxidant products, chocolate bars and actual hot chocolate are full of fat and sugar. As Obesity drives up the cost of Health Care, and causes many problems, society will feel increasing pressure to eat less fattening chocolate. On the other hand, Europeans do not face the same obesity problem and eat more chocolate per capita than Americans.[15] Health conscious people who eat less chocolate to lose weight will drive chocolate prices down.
[edit] News and External Sources
Despite the shortening supply of cocoa, prices have recently fallen due to decreasing demand, attributed to the slowing world economy. Cocoa grinding fell 16% in the second quarter in 2008, compared to 2007. [16]
[edit] Cocoa Futures Contracts
[edit] Notes
- ↑ The World Atlas of Chocolate
- ↑ [http://www.confectionerynews.com/The-Big-Picture/Pressure-for-chocolate-industry-as-cocoa-breaks-3000-barrier Confectionery News]
- ↑ Confectionary News Reports Skyrocketing Cocoa Prices
- ↑ Source: International Cocoa Organization
- ↑ Source: International Cocoa Organization
- ↑ Hedge Funds Buying Cocoa
- ↑ Cocoa Price Absorption
- ↑ Growth of Chocolate Demand
- ↑ Asian Chocolate Consumption Spikes
- ↑ Child Slavery in the Chocolate Industry
- ↑ Drought and Cocoa Crop Damage
- ↑ Chocolate Production Could Halt Due to Soil Problems
- ↑ Cocoa Has Major Antioxidant Content
- ↑ Avoiding Chocolate Extinction
- ↑ European Chocolate Consumption
- ↑ Slowing Cocoa Demand
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