Flavor of the Month: Don't take Chocolate for Granted

Facing the fallout of political anxiety and doubled wholesale prices confectioners and chocolate manufacturers are learning how sweet it isn't.

By Diane Toops, News & Trends Editor

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No one is taking the cacao or cocoa plant for granted these days. Chocoholics and chocolate manufacturers everywhere are anxious about the political turmoil in the Ivory Coast, the West African nation that produces nearly 40 percent of the world's raw cocoa, valued at about $3.8 billion.

Cocoa prices should come down by another $100, but not more, as there is a logistics nightmare waiting for the supply chain on the ground -- banking, storage, trucking, workers, cash. No one will return until the guns are silenced.

– Luis Rangel, ICAP Futures

Alassane Quattara, the winner of the Ivory Coast's November presidential election, suspended all cocoa and coffee exports for 30 days to cut off funds to incumbent President Laurent Gbago, who refused to leave office after a run-off election and who threatened to take over the purchase and export of cocoa.

While 68 companies are licensed to export cocoa from the Ivory Coast this season, the market is dominated by major international firms, such as Cargill, Archer Daniels Midland and Barry Callebaut AG. Among them, they bought 630,371 tons of cocoa during the 2009-10 season, more than half of the tonnage registered.

Cargill Inc.'s Ivory Coast unit honored the ban and suspended purchases. ADM told Dow Jones it was evaluating the situation, as did Barry Callebaut, adding it had sufficient cocoa stocks to cover its processing needs.

Even before the ban, the wholesale price of cocoa doubled in the previous four years as global demand increased, particularly in Asia. Uncertainty of supplies -- and British commodity trader Anthony Ward's attempt at cornering the cocoa market last year -- led to cocoa powder prices holding at historical highs in 2010, and it appears volatility will continue to put pressure on prices.

Cocoa bean futures prices shot to one-year highs on news of the ban, then eased slightly when most processors said they had adequate supplies to carry them through the 30-day ban. But then they rose higher, particularly in Europe, which sources most of its cocoa beans and products from the Ivory Coast. Many U.S. suppliers source beans from Indonesia and Ghana (which has a plentiful crop), but the cash market came to a near standstill on the uncertainty of future availability, and futures cocoa powder prices advanced in December, according to U.S. Commodity Futures Trading Commission data.

When Gbagbo threatened to take over the country's signature crop, futures rose as much as 35 percent. French ground forces and troops loyal to Ouattara intervened, and in April, Gbagbo was captured and taken into custody. Cocoa bean futures rose to $3,078.47 on April 12 at ICE Futures U.S. in New York.

"Cocoa prices should come down by another $100, but not more, as there is a logistics nightmare waiting for the supply chain on the ground -- banking, storage, trucking, workers, cash," Luis Rangel, a vice president at ICAP Futures LLC in Jersey City, N.J., told Bloomberg. "No one will return until the guns are silenced."

There were expectations that the lifting of EU sanctions would allow for the resumption of trade, but traders suggest that it could be weeks before shipments normalize; plus it appears there are concerns of product degradation given the disruption.

Mars Inc. said cocoa exports would not affect production in the near term, good news for candy consumers. The outlook comes as Hershey expects "meaningfully higher" costs, but the company says it can hold adjusted margins steady through cost cuts and other measures to improve productivity.

Nestle CEO Paul Bulcke said the Swiss food giant would raise chocolate prices only if it found that the underlying long trend in cocoa prices had risen and its actions to contain that were not enough to "keep the substance of its business… It's not a one-to-one reaction. The market won't absorb that," Bulcke told Barron's at the sidelines of the World Economic Forum in Davos, where he was a co-chair this year. "Our job is to react to underlying trends, not hiccoughs." And he added that this went for all commodities used in its food production.

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