Cocoa Prices: How Much Does Your Chocolate Cost?

| March 31, 2011 | 0 Comments

War and chocolate.

What could these two things possibly have in common?  How could something as somber as war even be put in the same sentence with the world’s favorite food indulgence?

Just ask anyone from the Ivory Coast and they’ll tell you.

More specifically, they’ll tell you how civil war is wreaking havoc on the small African country’s biggest export… cocoa (the main ingredient in chocolate).

Politics often have a significant impact on commodity prices.  And the Ivory Coast situation is a perfect example of what can happen to a commodity’s price when extreme events occur.

It also shows how difficult it can be to predict a commodity’s price movement.

I’ll get back to that in a minute.  First, let’s look at what’s going on in the Ivory Coast…

At the end of 2010, a presidential election in the Ivory Coast resulted in two candidates claiming victory.  Alassane Ouattara is recognized by the international community as the legitimate winner of the election.  However, incumbent Laurent Gbagbo refused to relinquish the presidency.

Gbagbo believed he could stay in power because he had backing from the military.  But as the people’s choice, Ouattara refused to give up his claim.  The situation escalated until the Ivory Coast became divided in two… and eventually erupted in civil war.

So what does any of this have to do with cocoa?

The Ivory Coast is the largest exporter of cocoa on the planet.  This small country supplies a third of the world’s cocoa!

As you may imagine, the political conflict has caused major disruptions in the cocoa trade.  In fact, it’s become a major part of the conflict itself.

You see, Gbagbo was using the proceeds from cocoa shipments to finance his hold on the presidency.  Of course, this didn’t sit well with Ouattara.  So, he called for a ban on the export of any cocoa from the country.  The goal was to cut off Gbagbo’s cash flow and force him to the negotiating table.

Because Ouattara is recognized as the true president of the Ivory Coast, the rest of the world complied with the export ban.

Guess what that means…

400,000 tons of cocoa are sitting in warehouses!

The chocolate industry is in a state of panic.  Most candy companies only carry a five month supply.  For now, the shortfall is being made up by other cocoa exporters such as Ghana.

But in the long-term, there simply is no way to make up for the 1.2 million tons of cocoa the Ivory Coast can produce in a year.

And that’s not all…

The rainy season is fast approaching.  The cocoa beans stuck in warehouses across the country could spoil as humidity starts increasing.  If the civil war isn’t resolved soon, there could be hundreds of thousands of ruined cocoa beans!

So how does all this impact the price of cocoa?

Civil war… An export ban… Possibly huge amounts of spoilage… You’d think cocoa prices would be skyrocketing.  And for awhile, they were.

Cocoa recently hit a 34-year high of $3,700 a ton.  To put that in perspective, cocoa prices were as low as $2,600 a ton this past September.  Cleary, the Ivory Coast situation is having a major impact on prices.

But then everything changed… and it happened quickly.

The disaster in Japan caused a general commodity selloff.  And cocoa got hit hard because demand was expected to soften quite a bit.  Apparently people don’t spend money on chocolate when there’s an impending nuclear meltdown.

But just when the nuclear crisis started to stabilize, the Ivory Coast conflict took an unexpected turn.

Several of Gbagbo’s generals defected to the other side.  The rebels scored some key military victories.  And suddenly Gbagbo started warming to the idea of negotiations.

Just like that, the prices of cocoa plunged.

You see, it now looks like the civil war is coming to a close.  The situation is nearing resolution.  And 400,000 tons of cocoa is going to be dumped on to the market.  That’s a lot of Hershey’s bars.

As of this writing, cocoa was trading at $2,980 a ton.  That’s a far cry from the $3,700 price we saw earlier in the month.

So what can we learn from this?

For one, there’s quite a bit of risk in trading commodities.  Two weeks ago, almost no one would have predicted cocoa would be as cheap as it is right now.  Imagine being on the wrong side of that trade.

On the other hand, there’s a boatload of opportunity for profits in commodities.  With huge moves like the ones we’re seeing in cocoa, it’s no wonder people can get rich trading this stuff.

Due to the extreme volatility, commodity trading isn’t for everyone.  But if you stomach the big moves and manage your risk, there’s the chance for huge profits.  If you want to get an idea of how much a commodity’s price can move in the short-term, just take a look at cocoa.  It’s been a crazy year for the world’s favorite food.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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