Kids trick-or-treating this Halloween may find less chocolate in their bags.
Sky-high prices for cocoa, a key ingredient in chocolate products, mean confectioners are switching to non-chocolate candies like gummies, or they’re reducing the size or chocolate content of cocoa-based sweets.
For investors, however, there are ways that cocoa can sweeten a portfolio, whether it be through equities or futures. Here’s what you need to know about investing in cocoa:
— Why are cocoa prices so high?
— Why invest in cocoa.
— What are the risks of investing in cocoa?
— How to invest in cocoa.
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Why Are Cocoa Prices So High?
Intercontinental Exchange cocoa futures prices are nearly double what they were a year ago, primarily because of unfavorable weather in the West African nations of Ivory Coast and Ghana, which together account for half of the world’s cocoa production.
Extreme weather that is too dry, or too wet, has decimated crops by lowering yields and allowing disease to flourish.
Record temperatures and drought-like conditions are expected to worsen, says Francisco Martin-Rayo, CEO of Helios, an AI platform that incorporates climate risks to predict agricultural commodity price changes.
“We expect to see climate risk in major exporters climb above the 40% mark regularly during the crucial January through April months, driven by too-hot conditions, which in turn will impact both existing yields and the viability of new trees that have not yet flowered,” he says. “These challenges are compounded by aging cacao trees in key production areas, which are more susceptible to stress and less productive.”
It takes about five years before a cacao tree is mature enough to start producing beans, and the plants remain fragile in the first few years of their life, he says.
All the while, consumers continue to demand chocolate, with Statista Market Insights projecting volume in the chocolate confectionery market to expand by a billion kilograms between now and 2029.
In the U.S., chocolate sales accounted for a record $21.4 billion over the past year, according to the National Confectioners Association. That record high in dollar terms masked volume and unit sales declines but still indicates that Americans’ appetite for chocolate remains robust.
“Whether it’s a cherished holiday tradition or a special occasion … consumers are making allowances in their budgets for chocolate,” John Downs, CEO of the association, said in a press release in early October.
Why Invest in Cocoa
Cocoa, like other commodities, can serve as a portfolio diversifier because prices don’t necessarily correlate to those of stocks and bonds. The weather in Ivory Coast might cause cocoa prices to swing your way even if the stock market or bond market is moving differently.
Also, like other commodities, cocoa can serve as an inflation hedge. If the economy is doing well enough to support purchases of discretionary items like chocolate, that can help drive up cocoa prices.
Cocoa is also a way to play the macro trends of a growing global population that is becoming more affluent. It can give you potentially positive financial exposure to climate change risks that make droughts and floods worse and that affect where certain crops can be grown.
In addition, cocoa can be a way to play emerging markets whose economies and currencies depend on cocoa exports.
What Are the Risks of Investing in Cocoa?
Like other commodity prices, cocoa prices are very volatile. While weather plays a big factor, so does financial market speculation, which can exacerbate price swings either way.
Also, cocoa investments may not be as liquid as other commodities markets, such as those for oil or gold. That means it can be harder to sell a losing position or more difficult to buy into the market when you spot an opportunity.
How to Invest in Cocoa
Futures and Options
Cocoa is a niche market. It’s nowhere near as easy to invest in the commodity as it is in, say, bank or tech stocks. It’s not for the faint of heart, but it’s not impossible either.
Producers, exporters, manufacturers and speculators trade cocoa futures and options in New York and London. Futures contracts obligate the owner to buy or sell a commodity at a certain price on a certain date in the future. Options, meanwhile, give the contract holder the option to do so.
But futures and options trading is not for everyone. You’ll need to secure special approval from your brokerage. And for futures and some options, you’ll have to put up more margin — or the amount you have to deposit with your broker to secure a futures position — when the market becomes more volatile.
That margin allows you to hold futures or options that have a much larger value than the actual amount of money you’re putting up. That can be great if a trade goes your way, but it can also magnify losses.
In other words, futures and options are not set-and-forget investments to only check in on occasionally.
Exchange-Traded Products
Another way to invest in cocoa is through futures-based exchange-traded products that you can buy like stocks without all the hassles of actual futures. International investors can consider the WisdomTree Cocoa exchange-traded products.
Barclays Bank delisted a U.S. cocoa exchange-traded product last year. Still, U.S. investors aren’t totally out of luck. Cocoa is the top holding in the Invesco DB Agriculture Fund (ticker: DBA), making up more than 25% of its holdings.
Companies That Buy Cocoa
Another way investors can bet on the cocoa market is through companies that buy the commodity.
These include well-known names, such as Hershey Co. (HSY), Nestlé SA (OTC: NSRGY) and Mondelez International Inc. (MDLZ). Falling cocoa prices would benefit these companies while rising cocoa prices would cause them to have to absorb higher prices or pass them along to customers, which can hurt demand.
Of course, they are not pure-play chocolate companies, so there are many other factors you’ll need to pay attention to if you own these stocks.
“The higher price of cocoa beans forces producers to either increase the price of the final chocolate product or keep prices the same and lower the total quantity — ‘shrinkflation,'” Martin-Rayo says.
Companies that can’t rely on a consistent cocoa supply may discontinue items or start filling them with additives and artificial fillers to make up the difference, he says. “So your ‘dark chocolate bar’ may go from being 80% chocolate to 60% chocolate and more filler.”
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Cocoa Prices Are Soaring This Halloween. Here’s How to Invest originally appeared on usnews.com
