Valentine’s chocolate buzz comes just as cocoa supplies tighten

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Chocolates are displayed during the 2nd Chocolate Fair in Barcelona, October 21, 2006. -- REUTERS

JUST AS AMERICANS rush to load up on chocolates for Valentine’s Day, the global cocoa glut is finally starting to ebb.

Cocoa futures in New York have climbed almost 9% in 2018, making them one of the year’s best-performing commodities. As signs of tighter supplies mount, hedge funds have switched to betting on an extended rally, after holding negative wagers for the past two months.

This year’s gains for cocoa are a stark reversal from the last two years, when futures plunged more than 40% amid a global glut. The lower prices took a toll on growers, who cut spending on farm maintenance. That’s now showing up in crop quality as yields begin to drop in Ecuador, South America’s largest producer and a supplier of high-grade beans to companies such as Lindt & Spruengli AG. Indonesia, which used to be the world’s third-largest grower, is expected to become a net-importer this year as production declines and demand climbs. Recent dryness is also threatening output in parts of West Africa, which accounts more than two-thirds of global supplies.

“The lower prices have discouraged farmers, which we see often in these markets,” said Phil Streible, a senior commodity strategist at RJO Futures in Chicago. “The market has good fundamentals. Prices will perform quite well.”

In the week ended Feb. 6, hedge funds had a net-long position, or the difference between bets on a price increase and wagers on a decline, of 8,560 futures and options, according to US Commodity Futures Trading Commission data released Friday. That compares with a net-short holding with 6,810 contracts a week earlier.

Valentine’s Day, celebrated Feb. 14, represents the biggest “rush” for chocolate buying in the US, said Jacques Torres, a former pastry chef who now runs eight eponymous stores selling luxury chocolate products and ice cream across New York City. About 55% of Americans celebrating the holiday plan on purchasing candy, up from 50% in 2017, according a survey by the National Retail Federation and Prosper Insights & Analytics.

Even beyond the sweethearts’ holiday, chocolate consumption is on the rise. In the five years ending 2022, US retail sales of confectionery chocolate will climb 2.2% to 1.4 million metric tons, fetching $20.3 billion, according to researcher Euromonitor International. In recent years, consumers have shown a leaning toward higher-grade products and have bought more dark chocolate, which typically uses more raw material.

Rising prices could signal higher costs down the line for retailers like Mondelez International, Inc., the maker of Cadbury chocolates and Oreo cookies. Cocoa’s decline over the past several months should start to play out favorably for the company this year, Chief Financial Officer Brian Gladden said on an earnings conference call in late January. There’s often a lag between movements in the futures market and the impact for retailers because of a company’s stored inventory and hedging positions.

For makers of specialty chocolates like Torres, higher cocoa prices are actually good news because rising revenues for farmers will allow them to produce more high-grade beans that require bigger investments.

“Prices are too low for farmers,” said Torres, who’s dubbed himself Mr. Chocolate, also runs a cocoa-processing facility and buys about 150 tons of the commodity a year. “If they continue at these levels, they will keep planting high-yielding trees, and not premium qualities,” he said, adding that his concerns over finding better beans have spurred him to buy a 5,000-tree cocoa plantation in Mexico. — Bloomberg