Chocolate: a bittersweet investment story

Commodity specialists too were surprised in recent weeks. The price of cocoa beans, the main raw material for chocolate, has risen above $10,000 per ton for the first time. "This high price level would have been considered unthinkable just a few months ago," says Dea Shehu, Thematic Portfolio Manager at KBC Asset Management. "The futures market in New York is showing a new record. In just 3 months, cocoa has doubled in price."

West Africa, together with Côte d'Ivoire and Ghana, dominates the world production of cocoa. No less than 80% of the total production comes from there. The plantations in West Africa underwent particularly heavy rains last summer, resulting in severe flooding. This damaged the cocoa trees, giving fungal diseases free rein and causing the pods to rot. "In Côte d'Ivoire and Ghana, the trees became infected with the Cacao Swollen Shoot virus," Shehu clarifies. "If the tree catches such a virus, it only produces half of its usual yield. It is estimated that for this year demand will exceed supply by around 400,000 tons. The biggest market imbalance in a long time."

Climate-related weather phenomena, such as El Niño, are likely to intensify in the coming years, which could result in a lasting impact. In that respect, global warming leaves a bitter taste in the cocoa industry.

"There is also a structural problem," Shehu adds. Cocoa farmers are typically ‘small’ farmers. They have only a limited amount of land and often lack sufficient substantive knowledge about the product they grow. Most cocoa farmers, unlike growers of other crops, have never tasted the final product, in this case chocolate. "Cocoa plantations are yielding less and less for the farmers in question. The price paid by the consumer is in big contrast to the working conditions in which cocoa farmers work. We often see small farms and poverty is huge. Despite all the efforts of fair trade chocolate… As a result, there are less and less investments in new plantings, even though they are desperately needed.”

"I ‘d like to make a small turn to the famous 'deforestation law' that comes into effect in Europe from 2025, which requires manufacturers to map the entire supply chain from farm to chocolate”, Shehu adds. “For cocoa manufacturer  this poses additional challenges because, as mentioned, the farms are very small and the cocoa mining business is full of informalities- both from the farmers and from West African governments.”

Although chocolate manufacturers usually hedge against potentially difficult weather conditions, and thus lesser harvests, those hedges are rarely done for a period longer than 1 year. Typically, manufacturers maintain a cocoa supply of about 5 months. Currently, future prices have reached extreme levels. "Today, in the cocoa futures market, we see 80% speculators and 20% hedgers. The extreme increase in recent weeks has been largely motivated by speculation, which has put a kind of turbo on the price. Once that effect has worn off, the market can calm down a bit", Shehu adds. “The current market price is anything but realistic, despite the challenges facing cocoa farming.”

Apart from the current high raw material prices, chocolate remains an interesting theme for investors. Chocolate producers saw and seized the opportunity to differentiate and premiumize, resulting in strong pricing power. "The major chocolate producers have a strong presence in the global market. They have proven to be successful in providing high-quality products and in generating profits," Shehu states.

"The chocolate industry has also created a halo around other food categories, such as ice cream and cookies. And it has come up with and implemented new use cases”, Shehu adds. "The demand for vegan, organic and gluten-free chocolates, for example, is steadily increasing. Something that the producers are only too happy to respond to." The trend towards luxury variants is also striking. In the trendy neighborhoods of big cities, you will often find more exclusive chocolate boutiques. "Compare it to special coffee tastings," says Shehu. "An everyday product that is consumed by everyone is made exclusively, which makes the experience more special. And the more special the experience, the higher the price can be."

There are several ways to invest thematically in chocolate. As with other investments, the following applies: if you are looking for Easter eggs on the stock market, you have to do your homework. "Even in the wonderful chocolate world of Willy Wonka, a good analysis and sufficient diversification are in order," Shehu concludes.