Is chocolate recession-proof?

The future of cocoa looks tasty, even in a recession.

By InvestorPlace Feb 8, 2010 11:23AM

InvestorPlacechocolate © image100/CorbisBy Paul Ausick

Is there a bull market in chocolate?


Yes, the same metric ton of cocoa that sold for just over $3,500 on Jan. 31 was going for $3,100 a week later.


But over the past 12 months, cocoa has risen 25%, according to the International Cocoa Organization -- despite that recent drop.

Companies that produce chocolate, such as Kraft Foods (KFT), Hershey (HSY), Cadbury (CBY), Rocky Mountain Chocolate Factory (RMCF) and Nestle, have also posted gains for the past year, though not as strong as the commodity itself. And of course the Kraft buyout offer for Cadbury has skewed share prices for both companies. The iPath Dow Jones-UBS Cocoa Total Return Sub-Index ETN (NIB) follows both the cocoa futures market and the U.S. and foreign cocoa-processing industry.

The fortunes of cocoa appear to be robust in the face of the current economic slump. The facts, though, complicate the matter somewhat.

More than half of the world's supply of cocoa comes from two African countries, the Ivory Coast and Ghana. But underinvestment and political instability have caused crop decreases, leading to higher demand for lower production quantities.

For 2010, cocoa prices are expected to rise as consumption again outstrips demand. It is not inconceivable that cocoa may again command more than $5,000 per metric ton, a high that the commodity reached in 1977.

But what about all the chocoholics out there? How important are they to keeping the prices of cocoa high?

Researchers in the U.K. found that a craving for chocolate is an "unfulfilled desire to eat chocolate, resulting from restraint." In other words, it's a guilty pleasure. Chocolate lovers just want to eat more chocolate -- they don't always actually do it, though.

The good news for cocoa producers and traders is that emerging middle classes in developing countries are creating most of the new demand. U.S. demand for cocoa is falling, while demand in the U.K. is up only slightly.

Cocoa and chocolate are not immune to the effects of the overall economy. People may love chocolate, but they will not buy it in hard times.

As with most agricultural commodities, tighter supplies will contribute to higher prices for cocoa. Demand is down, and in the near term that will keep cocoa prices lower.

Chocolate may not be recession-proof, but it will recover quickly once the economy turns around. After all, a chocoholic can exercise only so much restraint.


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