Chocolate getting cheaper globally as the cocoa supply swells
Prices sink to eight-year low, good news to candy companies such as Oreo maker Mondelez
“Production is going to be much higher, and that’s why prices are falling.” DONALD SELKIN CHIEF MARKET STRATEGIST, NEWBRIDGE SECURITIES
Buying your sweetheart a box of Valentine’s Day chocolates could be cheaper this year thanks to booming cocoa supplies.
Growers are collecting bigger harvests in Latin America and in West Africa, which accounts for about 70 per cent of global production. The output gains have pushed cocoa futures to the lowest since 2008, cutting costs for companies including Mondelez International Inc., the maker of Cadbury chocolates and Oreo cookies.
Declines in the futures market are starting to translate to cheaper confections. That’s good news for romantics, since a survey by the Washington-based National Confectioners Association found that 70 per cent of Americans will give chocolate or candy to their Valentine.
The goodies will probably stay cheap even beyond the amorous holiday, celebrated on Feb. 14. Hedge funds are making a record bet that cocoa prices will keep slumping.
“Production is going to be much higher, and that’s why prices are falling,” said Donald Selkin, the New York-based chief market strategist at Newbridge Securities, who helps oversee about $2 billion (U.S.) in assets. For the trend to reverse, “you need civil unrest in these typically unstable African countries or a pickup in demand,” he said.
Money managers had a cocoa netshort position, or the difference between bets on a price decline and wagers on a rise, of 24,320 futures and options as of Feb. 7, according to figures from the U.S. Commodity Futures Trading Commission published three days later.
That was the most bearish holding in the data, which starts in 2006. The funds have been negative since mid-- December. Cocoa sank 31 per cent in the past year on ICE Futures U.S. in New York, touching an eight-year low of $1,951 a metric ton last week. Prices slipped 0.5 per cent to $1,953 a ton on Monday.
After dry weather hurt West African crops last season, growing conditions have improved and supplies rebounded.
Stockpiles at ICE-monitored warehouses have jumped 38 per cent since reaching the lowest since 2009 in December. UBS Group AG and Citigroup Inc. are both projecting that global production will outstrip use this year as harvests expand.
The supply gains have come amid slowing demand. Global chocolate sales dropped 2.3 per cent in the three months through November, according to Barry Callebaut, the world’s top cocoa processor.
In Europe, the top consumer, sales declined 3.1 per cent. There was a 2-per-cent drop in the Americas.
Even though people are eating less chocolate in favour of healthier options, they’re a bit more likely to throw caution to the wind when it comes to Valentine’s Day.
Americans are expected to spend about $1.7 billion on candy for Tuesday’s holiday, according to the Washington-based National Retail Federation. That’s unchanged from last year’s estimate, even as total spending for the occasion is expected to drop 7.6 per cent to $18.2 billion.
“Valentine’s is the biggest day for sales of the year for 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.
Torres, who’s dubbed himself Mr. Chocolate and buys about150 tons of cocoa annually for his stores, pays a premium for the high-grade beans he uses, so the drop for futures doesn’t impact his costs.
But it will be a benefit for Mondelez, chief financial officer Brian Gladden said on an earnings call Feb. 7. Because the company uses a hedging program, the impact won’t be felt right away, he said.
Some of the declines in cocoa seem to be filtering through already for chocolate buyers. In the 13 weeks ended Jan. 29, the average price per unit for the confections fell 1.7 per cent from the prior period, according to data from Chicago-based researcher IRI.
The reductions for consumers could get more pronounced as chocolate makers purchase new forward contracts at the lower prices.