Valen­tine’s choco­late buzz comes just as co­coa sup­plies tighten

Business World - - AGRIBUSINESS | THE LUNCH GUIDE -

JUST AS AMER­I­CANS rush to load up on choco­lates for Valen­tine’s Day, the global co­coa glut is fi­nally start­ing to ebb.

Co­coa fu­tures in New York have climbed al­most 9% in 2018, mak­ing them one of the year’s best-per­form­ing com­modi­ties. As signs of tighter sup­plies mount, hedge funds have switched to bet­ting on an ex­tended rally, af­ter hold­ing neg­a­tive wa­gers for the past two months.

This year’s gains for co­coa are a stark re­ver­sal from the last two years, when fu­tures plunged more than 40% amid a global glut. The lower prices took a toll on grow­ers, who cut spend­ing on farm main­te­nance. That’s now show­ing up in crop qual­ity as yields be­gin to drop in Ecuador, South Amer­ica’s largest pro­ducer and a sup­plier of high-grade beans to com­pa­nies such as Lindt & Spru­engli AG. In­done­sia, which used to be the world’s third-largest grower, is ex­pected to be­come a net-im­porter this year as pro­duc­tion de­clines and de­mand climbs. Re­cent dry­ness is also threat­en­ing out­put in parts of West Africa, which ac­counts more than two-thirds of global sup­plies.

“The lower prices have dis­cour­aged farm­ers, which we see of­ten in these mar­kets,” said Phil Streible, a se­nior com­mod­ity strategist at RJO Fu­tures in Chicago. “The mar­ket has good fun­da­men­tals. Prices will per­form quite well.”

In the week ended Feb. 6, hedge funds had a net-long po­si­tion, or the dif­fer­ence be­tween bets on a price in­crease and wa­gers on a de­cline, of 8,560 fu­tures and op­tions, ac­cord­ing to US Com­mod­ity Fu­tures Trad­ing Com­mis­sion data re­leased Fri­day. That com­pares with a net-short hold­ing with 6,810 con­tracts a week ear­lier.

Valen­tine’s Day, cel­e­brated Feb. 14, rep­re­sents the big­gest “rush” for choco­late buy­ing in the US, said Jacques Tor­res, a for­mer pas­try chef who now runs eight epony­mous stores sell­ing lux­ury choco­late prod­ucts and ice cream across New York City. About 55% of Amer­i­cans cel­e­brat­ing the hol­i­day plan on pur­chas­ing candy, up from 50% in 2017, ac­cord­ing a sur­vey by the Na­tional Re­tail Fed­er­a­tion and Pros­per In­sights & An­a­lyt­ics.

Even beyond the sweet­hearts’ hol­i­day, choco­late con­sump­tion is on the rise. In the five years end­ing 2022, US re­tail sales of con­fec­tionery choco­late will climb 2.2% to 1.4 mil­lion met­ric tons, fetch­ing $20.3 bil­lion, ac­cord­ing to re­searcher Euromon­i­tor In­ter­na­tional. In re­cent years, con­sumers have shown a lean­ing to­ward higher-grade prod­ucts and have bought more dark choco­late, which typ­i­cally uses more raw ma­te­rial.

Ris­ing prices could sig­nal higher costs down the line for re­tail­ers like Mon­delez In­ter­na­tional, Inc., the maker of Cad­bury choco­lates and Oreo cook­ies. Co­coa’s de­cline over the past sev­eral months should start to play out fa­vor­ably for the com­pany this year, Chief Fi­nan­cial Of­fi­cer Brian Glad­den said on an earn­ings con­fer­ence call in late Jan­uary. There’s of­ten a lag be­tween move­ments in the fu­tures mar­ket and the im­pact for re­tail­ers be­cause of a com­pany’s stored in­ven­tory and hedg­ing po­si­tions.

For mak­ers of spe­cialty choco­lates like Tor­res, higher co­coa prices are ac­tu­ally good news be­cause ris­ing rev­enues for farm­ers will al­low them to pro­duce more high-grade beans that re­quire big­ger in­vest­ments.

“Prices are too low for farm­ers,” said Tor­res, who’s dubbed him­self Mr. Choco­late, also runs a co­coa-pro­cess­ing fa­cil­ity and buys about 150 tons of the com­mod­ity a year. “If they con­tinue at these lev­els, they will keep plant­ing high­yield­ing trees, and not pre­mium qual­i­ties,” he said, adding that his con­cerns over find­ing bet­ter beans have spurred him to buy a 5,000-tree co­coa plan­ta­tion in Mex­ico.

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