It’s been a tough year for commodities. The S&P GSCI index – which measures the performance of major commodities – is down 25% this year. The price of everything from gold to oil to soybeans has dropped.
But cocoa, the key ingredient in chocolate, has risen 54% from recent lows in early 2013. It’s the best-performing commodity in 2015, up nearly 10%. That compares to a 16% decline in the S&P GSCI Agriculture Index.
Reduced demand and continued strong supply have pushed down the prices for most commodities, such as oil. But cocoa has been different.
Cocoa is the essential ingredient in chocolate. Demand has been rising by 2.4% per year since 2005. This has been spurred in part by India and China. According to Euromonitor International, chocolate demand in India has been growing 17% per year since 2010, faster than anywhere else in the world.
In China, demand has been growing nearly 9% per year over the same period. China is expected to consume 220,700 tonnes of chocolate this year (which is as much as 4.9 billion four-fingered Kit Kat bars.)
Chinese demand still has a long way to go to catch up to Switzerland, the world’s biggest consumer of chocolate on a per-person basis. The average Swiss eats nearly 9 kilograms of chocolate a year. By comparison, the average person in China still only consumes about 0.2 kg a year. And in India, consumption is only 0.1 kg per person per year.
While people in China and India will probably never eat as much chocolate as the Swiss, there’s a lot of room for growth in Asian demand for chocolate. The global chocolate market is expected to reach $115 billion by 2020, up from $50 billion in 2001, according to Euromonitor International.
The supply of cocoa isn’t keeping up with the increasing demand. Cocoa trees grow only in a small number of countries in a narrow belt 10 degrees on either side of the equator in tropical rainforest climates. Cote d’Ivoire (Ivory Coast) and Ghana in West Africa account for 70% of the world’s cocoa production.
It’s a lot harder to grow cocoa than a number of other agricultural commodities, like wheat or corn or canola. Cocoa trees need a lot of rain and are sensitive to changes in weather. The El Nino climactic pattern has resulted in less rain for key growing regions, and reduced the supply of cocoa beans. Pests and disease can destroy as much as 40% of the cocoa crop every year. And large-scale agricultural businesses are reluctant to operate large cocoa tree plantations because they can use the same land to grow higher–yielding, less risky palm oil trees.
As a result, the International Cocoa Organization expects production for 2014/15 to decrease 3.9% from the previous year to 4.2 million tonnes. And they are forecasting that cocoa bean demand will outpace the supply by 96,000 tonnes in 2016.
Shortfalls represent a small portion of total production. But meanwhile, demand is going up while supply is falling. So the price of cocoa looks to remain strong next year as well.
Buying and storing 90% dark chocolate bars in your safe at home is one way – but not the best way — to invest in cocoa. It would be easier to buy the iPath Bloomberg Cocoa Subindex Total Return ETN (symbol NIB) or the iPath Pure Beta Cocoa ETN (symbol CHOC), both of which trade on the New York Stock Exchange. These exchange-traded notes (ETN) invest in cocoa futures contracts. NIB and CHOC have both outperformed the S&P GSCI Commodity Index by around 30% this year. And it looks like cocoa will continue to perform well.