Chocolate: where the real treasure lies

The
saying “money doesn’t grow on trees” couldn’t be more wrong,
especially with how cocoa prices continue rising. To put it better, they are
skyrocketing, costing more than copper – over $9,600 per metric ton.

But
what’s the problem – has a sort of OPEC-style chocolate cartel emerged?

Fortunately,
no.

It’s
about crop failures, smuggling, and this nasty swollen sprout disease that
wreaks havoc. Nevertheless, these factors do not solely dictate market
movements; various economic events also play a crucial role. Successfully
navigating markets requires vigilant monitoring of such events, which can be
achieved through the use of an economic
calendar.

And, of course, the disastrous market system that has locked in purchase prices
for beans from farmers a year in advance.

Then
there is the other big problem: years of underinvestment and speculation.

Cocoa
production has lagged behind growing demand, nearly doubling in the last two
decades. As for the latter, it is estimated that hedge funds have accumulated
an $8.7 billion bet on new profits, the largest in history.

How long
can this upturn last?

In
addition to the fact that the value of cocoa has almost tripled in just one
year and that there has to be a correction at some point, the cocoa futures curve shows pullbacks, i.e.,
future prices below current prices. Just six months ago, everything was flat,
even lower.

Thus, we
could deduce that there is an expectation in the market that demand will
decrease as prices rise and producers will produce more, which will lower
prices. Moreover, it is doubtful that manufacturers will buy the products at
such high prices.

That
said, probably in the next six months to a year, we could see prices come down.And what about chocolate
prices around the world?

They are
already on the rise. Nestlé, for example, has just launched tablets in the UK
that are two-thirds lighter than its competitors, while some confectionery
manufacturers are replacing chocolate with cheaper peanut oil and caramel
to cut costs.

But
Europe is in for a shock.

Since
December 30, local authorities have demanded proof that imported cocoa beans
have not contributed to forest clearing. If they fail to prove it, cocoa
consumption will be banned, and heavy fines will be imposed. Guess who will
foot extra expenses? Yes, the consumers.

And if
companies try to squeeze profits from farmers, they will try to ship
non-compliant farmers to the United States and Asia. Europe, in turn, will face
a supply shortage, with a consequent increase in domestic prices.

But what
if cocoa bean prices continue to rise?

Trying
to figure out how much cocoa futures drive inflation is like trying to read a
crystal ball. So, let’s avoid jumping to conclusions about their impact on
monetary policy. But one thing is sure: chocolate lovers are in for a bumpy
ride.

This article was written by FL Contributors at www.forexlive.com.