The 2015 Cocoa Harvest: A Glut of Problems
Gold and oil represent finite commodities in that there's only so much of both located beneath the planet's crust; once both have been completely dug up there's no way to get more (at least, not without finding a way to drill on Mars). That's one factor that keeps their prices far higher than that of non-finite commodities such as soybeans, which could theoretically only be exhausted once they have been grown over every surface of the planet. Yet concerns over peak consumption and peak value of commodities isn't limited to precious metals and energy given the tug-of-war factors that determine the availability of soft commodities -- including but not limited to climate, land use, and conflict. All three factors appear to be set to hit particularly hard on one particular soft commodity, cocoa. It's possible to buy a chocolate bar for a pocketful of spare change today, but the scarce growing regions of the world dedicated to cocoa are experiencing significant difficulties that could send the price of chocolate soaring in only a few years.
Chocolate: A Sweet Track Record
We can thank Mesoamerican civilization for today's global appetite of chocolate even if we didn't adopt their other habits, like eating the hearts of their enemies and carving extremely large heads. Cocoa production originated in modern-day Mexico, where societies like the Aztec and Maya enjoyed chocolate in its natural, bitter form. Not until the introduction of sugarcane agriculture during the 18th century did chocolate take on the sweet flavoring that we know and love. A Swiss candymaker called Henri Nestle pioneered the union of milk and chocolate, forming the basis of a number of desserts and founding the world's largest food company in the process (currently trading at $78.07 a share, having nearly doubled since 2011). Today, the world snacks and dines on about 7.5 million tons of chocolate annually, about three times as much as the global consumption of sugar overall. While there's fierce debate about the health effects of chocolate, with scientists claiming and counter-claiming that chocolate (and other favorite indulgences like red wine and butter) can affect heart health negatively or positively, there's no doubt that our love for this sweet treat has nothing to do with its health quotient.
Cultivation Concerns: Growing In A Bad Neighborhood
With chocolate established as a global dessert of choice, it may seem like the cocoa industry has little to worry about; their product largely sells itself and there's not much competition from vanilla. Where cocoa may be in peril, however, lies in the first rule of real estate: location, location, location. Unfortunately where it comes to chocolate, it's hard to pick a worse location for growing. Cocoa's a far more delicate plant than foodstuffs like corn, soy, or wheat, requiring a copious amount of sunlight and water without the risk of cool temperature. That drastically limits the choices for growing, with most candidates on the list bearing one black eye or the other. About 60% of all cocoa comes from two African nations, Ghana and the Ivory Coast. If both names sound familiar, you likely heard about them during the Ebola scare of 2014 in which the disease ran rampant through West Africa and killed approximately 10,000 persons, with contact and paranoia spreading into the wider world. While the virus itself wasn't as big a deal as the media made it out to be -- in the same span of time as the Ebola outbreak, one hundred times as many Africans died from malaria, while ten times as many Americans died from lung cancer -- the disease devastated the developing economies and limited foreign investment. At the same time, a variety of threats ranging from the Islamic terrorist cabal Boko Haram to soil nutrient collapse to drought have pushed the global cocoa crop to a perilous place. If you can imagine a Venn Diagram of West Africa, cocoa, and stability, there's only a small confluence of all three factors.
The Numbers Game of Cocoa
Bad for cocoa farmers represents excellent news for cocoa investors. Some 40% of the land used to grow the delicious beans ten years ago has become unusable, whether by civil war or desertification or the decision to switch to higher-profit crops like palm oil. While chocolate produced today relies on stockpiles from previous years (cocoa beans, like coffee beans, effectively will never go bad once they are baked), the stockpile is by no means infinite. By 2020, the cocoa shortfall will rise to hit some one million tons, or over 10% of current global consumption. While cocoa prices on the market tend to be volatile due to fluctuations of weather, crop disease, and harvest sizes, the fluctuations of late have trended solidly in one direction. Cocoa price quotas have doubled in the past decade and enjoyed nearly a 50% gain since 2013 alone. The resulting price increases haven't kept consumers from switching to taffy or caramel, either. 130 million Americans eat chocolate daily -- and yes, the stereotype is quite true; 57% of those Americans are women. Chocolate has made its way into non-traditional markets too: a Euromonitor report on Middle Eastern cocoa consumption noted that Saudi Arabia will consume 46% more chocolate in 2016 than they will this year. With expanding demand hedged against dwindling supply, we may have already hit peak chocolate even if a package of M+Ms costs just a dollar.
Tasty Investment Strategies
The harvest of cocoa usually takes place at the end of the African rainy season, usually in July. Come August, statistics on the availability of cocoa will become available and will start to influence the market. Investing in cocoa now, before news of a shortage sends prices up, allows investors to get in before solid growth. What's good for cocoa will also be good for chocolate companies, like the aforementioned Nestle or the American staple Hershey's, which gained nearly 25% between July and January of the past year to its current share price of $102.09, double its value from 2011. Stocks and commodities alike allow an investor to profit from the world's love of chocolate -- a love that may be tried in the near future.