Is investing in cocoa a tasty move right now?

By: Robert Bell
Robert Bell
Having worked for years in the UK banking industry, I began writing and reporting financial markets after migrating abroad… read more.
on Mar 14, 2020
Updated: Apr 3, 2020
  • Climate change could affect cocoa production.
  • Huge global demand for chocolate that is growing year on year.
  • The supply of cocoa is potentially at risk in several ways.

You may remember the controversy that was provoked a couple of years ago, when scientists apparently predicted that the world would run out of chocolate in 30 years’ time. This was said to be because rising temperatures in cocoa-growing areas was threatening the cocoa plants.

It turns out that this story wasn’t exactly true. However, it highlighted the relatively fragile nature of this plant. Could global warming be a reason to invest in coca just now?

The climate situation

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This is one of the major factors to take into account when looking at cocoa investments. This plant can only grow in tropical regions with a lot of humidity and soil drainage. They need almost constant rainfall to help them to grow.

Latin America and parts of Africa are where most cocoa is grown. Traditionally, the Ivory Coast and Ghana are the countries where half of the global supply comes from. Countries close to the equator are the best places to grow these plants. Ecuador, Nigeria, Brazil and Cameroon are other places where it grows.

Any chance in the climate can have a knock-on effect on harvests. A dry summer or temperatures that are too high or low are worth looking out for if you want to predict how prices will move.

Supply and demand factors

While cocoa is grown largely in African and Latin American countries, the biggest importers are in North America and Western Europe.

It takes up to 600 cocoa beans to make a kilo of chocolate. 20% of the world’s chocolate is eaten in the US and 50% of all retail sales are in Europe. Despite producing so much cocoa, Africans only account for less than 5% of chocolate consumption.  

The global consumption of cocoa beans is reported to be over 4.5 million tons, although exact figures are difficult to hold of. What is clear is that our appetite for chocolate treats isn’t going to disappear anytime soon.

Production has steadily grown year on year, although it dropped slightly from 4.7 million in 2016/17 to 4.65 million the following year.

Demand is huge and expected to carry on growing, with Asia among the main emerging markets. Can cocoa farmers keep up with demand? Deforestation has become an issue, as farmers look to free up more land to plant this valuable crop.

The European Union is looking to bring in laws by 2022 that would encourage sustainable cocoa growing. As the planet’s biggest importer of the product, their new legislation could cause major changes in the market. If the cost of growing cocoa increases, this is likely to be passed on to consumers.

The price of cocoa

Having looked at the background, it is time to look at the price of cocoa beans. At the time of writing, it sits as $2,495 (£1,903) per ton. It is also expressed as $2.60 (£2.12) per kilo. This price has been rising fairly steadily recently. In August it was at $2.19 per kilo.

At the start of 2018, the price of cocoa beans was under $2. November 2015 was its recent high, at $3.36.

Is it time to buy?

The coronavirus outbreak has deeply affected global markets. Yet, the countries where beans are produced are among the least affected to date.

The demand for chocolate isn’t going to dip anytime soon. Indeed, with the world population growing rapidly, keeping up with demand is the biggest issue here. Any problems in the supply chain could see prices rise significantly.

This appears to a solid choice with a low to moderate risk, together with a possibility of prices rising if the global health crisis deepens or climate change causes problems for farmers.

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