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Portfolio > Alternative Investments

Cocoa Shortage Boosts Prices on Record Demand

By Marlene Y. Satter

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Chocolate lovers, beware–there’s a shortage afoot, the first in three years. And although cocoa grinders are boosting their output, when lack of supply meets inexorable demand, the only thing that’s going to give is price.

Bloomberg reported Tuesday that cocoa beans yield both powder and butter, the former used in such products as cookies and ice cream and the latter in those tempting chocolate bars. As global economic woes led to a fall in demand for the luscious product’s powder earlier in the year, grinders cut back output and used reserves of butter to fill supply orders for candy makers.

Now, however, a perfect storm of lower yields among cocoa bean growers in West Africa thanks to dry weather and rising demand, and depleted reserves, prices are on the rise even as grinders seek to up their output. Barry Callebaut AG, which supplies chocolate to Nestle and Hershey Co., said in the report that processing was likely to increase.

“Cocoa is a good buy at the moment,” said Shawn Hackett in the report. Hackett, president of Hackett Financial Advisors Inc. in Boynton Beach, Fla., had predicted back in February that there would be a rally; over the next three months there was a 15% increase. “When cocoa powder demand comes back in the first half of next year,” Hackett continued, “the upside rebound in cocoa bean demand will be much greater than it has been in the past.”

Cocoa futures have risen 11% on NYSE Liffe since the start of January, but are still expected to return the lowest annual average in four years. The report cited Hackett saying last week that he expects a gain of as much as 40% over present prices in the first half of 2013. Prices haven’t risen more than 40% in the first half of the year since 2008.

In September, Macquarie Group Ltd. predicted that cocoa demand would exceed production by 101,000 tons this season. According to Rabobank, the ratio is even larger, with demand coming in at 122,000 tons more than production. Global output, says Macquarie, will fall 2.9% to 3.85 million tons, with smaller yields from the four countries that produce 74% of the world’s supply of cocoa beans: Ghana, Indonesia, Ivory Coast and Nigeria.

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