See my video above about how record warm oceans, brought on by El Niño and climate change are hurting West African cocoa crops
I wanted to provide you with insights into how high cocoa prices impact various equities, companies, and industries within the market. Understanding these dynamics can be essential for informed decision-making.
West Africa produces 70% of the world’s cocoa which is turned into Chocolate.
I mainly follow commodities but you may want to look into these equities. It has remainedvery wet with disease issues in parts of West Africa since summer and now some potential harvest delays. This is a major crop-impacting issue for cocoa and something I have been worried about and forecasting since June.
So how do you trade cocoa and other commodities based on the weather? Find out here.(click below)
Below is a list of some of the industries that can be affected by higher cocoa prices.
Chocolate Manufacturers – Companies like Hershey (HSY), Mars, Mondelez (MDLZ), Ferrero, and Nestle (NSRGY) are directly affected by high cocoa prices as they face increased input costs, which can put pressure on their profit margins.
Cocoa Processing Companies – Businesses like Cargill, Barry Callebaut, Blommer Chocolate, and Touton play a critical role in processing raw cocoa into ingredients for food companies. They, too, are impacted by the price fluctuations in cocoa.
Confectioners – Lindt, Godiva, Russell Stover, and Ghirardelli face higher costs for key ingredients, impacting the production of their confectionery products.
Bakeries – Companies such as Krispy Kreme (DNUT), Panera Bread (PNRA), and Dunkin Brands (DNKN) are affected as high cocoa prices influence the costs associated with cocoa-based products.
Frozen Desserts – Businesses like Unilever (UL), Nestle, and Blue Bell, known for their ice cream products, must contend with cocoa butter and cocoa powder price fluctuations.
Retailers – Giants like Walmart (WMT), Kroger (KR), and Costco (COST) may need to decide whether to absorb higher prices themselves or pass the increased costs on to consumers.
Cocoa Growers & Traders – Companies like Hershey, Cargill, Barry Callebaut, and Olam (OLAM: SP) are crucial in sourcing raw cocoa globally, and they experience the direct impact of cocoa price movements.
Cocoa ETFs – Notably, exchange-traded funds (ETFs) like NIB, used to track cocoa futures prices, and CHOC, which invests in cocoa companies, provide investment opportunities tied to the cocoa market. However, the ETF was retired last June.
In summary, rising cocoa prices have a cascading effect. While they can boost revenue for global cocoa suppliers and traders, they often squeeze the profit margins of manufacturers in the chocolate business, who probably constitute the hardest-hit links in the chain.
West Africa, particularly countries like Ivory Coast and Ghana, is a major producer of cocoa beans, which are used in the production of chocolate. The cocoa production in this region is characterized by two rainy seasons, each associated with specific cocoa crop cycles known as the main crop and mid-crop.
Currently, it is becoming too wet for parts of Ivory Coast. This, plus El Nino fears for potential drier weather later this year is causing a new bull market in cocoa futures.
The Two Crop Seasons for West African Cocoa
Main Crop: The main crop season is the primary cocoa production period in West Africa. It typically starts around October or November and extends through March or April, depending on the specific region. This period coincides with the first rainy season in these areas. The rains provide the necessary moisture for cocoa tree growth and flowering. The main crop is generally larger in volume and higher in quality compared to the mid-crop. Harvesting of the main crop usually begins around May or June, and the cocoa beans are then processed and prepared for export.
Mid-Crop: After the main crop season, there is a brief dry season in West Africa. Following this dry period, the second rainy season begins, usually around April or May, and lasts until September or October. This rainy period is known as the mid-crop season. The mid-crop season is characterized by a smaller cocoa harvest compared to the main crop but is still significant in terms of overall cocoa production. The mid-crop is considered an off-season harvest, and the cocoa beans harvested during this period tend to be of slightly lower quality, due to factors such as increased pest pressure and disease vulnerability. The mid-crop harvest typically begins around August or September.
These two rainy seasons, along with the associated main and mid-crop cycles, contribute to the overall cocoa production in West Africa. They play a crucial role in providing the necessary water and climate conditions for cocoa trees to grow, flower, and produce the cocoa beans that are vital for the global chocolate industry.
Which teleconnections are most important for West African cocoa production?
These three teleconnections above will be key factors in how the West African cocoa crop fares over the next 8 months. Right now, it is El Nino, combined with the warm TNA index that could spawn an active hurricane season in the eastern Atlantic that is driving the wet weather in parts of West Africa.
Warming at NINO12 (near Peru) can often result in a wet summer in West Africa. Typically, this is good for the beginning of the main cocoa crop (the bigger crop). However, incessant cloudy days with too much rain can often occur causing disease issues. That is what is happening now, just like the great El Nino event of 1972.
Will we see a repeat of the great cocoa bull market of 1972? After all, there have already been nearly a 30% rally in cocoa prices this year brought on by stronger global demand and production concerns due to West African farmers having fertilizer issues and being unable to take proper care of their groves.