International Effect on Cocoa Prices

OVER THE PAST DECADE, AN ECONOMIC AWAKENING has occurred across Asia. The over 2.4 billion people that make up both China and India have finally joined the Western world in the 21st century. Over a third of the world’s population has recently become consumers, and they are consuming at record-breaking levels.

The effect of China and India’s awakening has already been felt in the oil and precious metals markets. But there is something else that all this economic freedom has brought. China and India have finally developed their sweet tooth. Cars? Check. Roads? Check. Now all they need is something sweet for later.

That’s right, the citizens of China and India have developed a taste for some of the finer things in life, chief among them chocolate. Simple, sweet, delicious chocolate has become big business. With all these new mouths to feed, we can certainly expect continued upswings in the cocoa futures market.

Much of the world’s cocoa is produced in Africa, notably in the Ivory Coast. In recent years, the demand in China for different commodities produced in Africa has risen exponentially. China’s economy is on the rise, and the Chinese are finally ready to start importing as a reward for all that tireless exporting they’ve been doing.

The taste for chocolate had not really existed previously in China. You were much more likely to find someone snacking on more savory dishes like dried fish or meats. The idea of a milk-based dessert was virtually unknown, compared with the popularity of rice-based treats. Of course, that is partly to do with cultural and historical differences. Many people in China were not brought up eating chocolate as we have been in the U.S. But economic factors are a big reason for the absence of what is relatively quite common here.

Importing such a delicacy would have been unheard of only a few decades ago. Across the ocean, in Japan, there has already been the desire and demand for chocolate. The average Japanese person consumes about five pounds of chocolate per year, compared with less than a quarter of a pound for the average Chinese, and even less for the average Indian.

Of course, those figures are soon likely to change. Like many things in China, past numbers for chocolate consumption appeared to be spread equally among economic classes. Affluent members of society were consuming as much chocolate as the citizens hovering around the poverty line. That has changed now. Reflecting just how wealth can change tastes, we find that richer Chinese are eating chocolate now in numbers more relative to their wealth.

The increased Asian demand for chocolate has not been overlooked by prominent chocolate businesses. Barry Callebaut, the Swiss chocolate seller and the largest maker of chocolate in the world, has recently decided to build a new factory in China. This move is one that could lead to tremendous growth for the Swiss chocolate giant. Chinese demand for chocolate is set to rise 10-15% per year, compared with only 2-3% for the rest of the world.

“The Chinese market is already the second biggest in the region,” says Maurizio Decio, vice president of Asia-Pacific for Barry Callebaut, “and it is growing at incredible speed.”

Decio believes that this is a great move by his company, due to the economic changes in the region. With the increases in production and employment, wealth has been on the rise in China.

“With the growth in income,” Decio says, “consumption of impulse food is going to become much more accessible for a larger population.”

As the growth of chocolate demand is good news for companies in the chocolate business, the Chinese themselves still have a lot to get used to when it comes to the rich delicacy.

Last month, the South China Morning Post published an almost comical article describing the health effects of chocolate. The article discusses some of the benefits that chocolate possesses, while also answering some frequently asked questions that many Chinese have had on the subject: Does chocolate contain fat? Does chocolate cause acne? Does chocolate contain caffeine? Will chocolate improve my mood?

The answers to these questions may sound simple and obvious to us, but for over a billion people in China, chocolate is a new and unique delicacy that they are not yet used to. However, they certainly are enjoying themselves.

China’s National Food Industry Association believes that the chocolate industry should grow by more than six times its current size. It believes the chocolate industry in China will soon be worth as much as $2.8 billion, making it the largest market in the world.

Chocolate companies are making a push for the emerging Indian market, as well. Already, Nestle and Cadbury sell chocolate in the subcontinent and make up 90% of the chocolate market. Despite this big market share, Hershey Foods has decided to make a big Indian push, as well. The candy giant is attempting to alter the tastes and consuming habits of over a billion potential customers and establish itself as the chocolate leader in India, just as it is here in the United States.

The emergence of these two new huge markets is big news for investors dealing in cocoa futures. Some of the largest supplier regions of cocoa in the world have been hit with weather problems over the past several months that have made it more difficult for the countries to reach their desired outputs. The Ivory Coast, for example, has been without rain for more than a month.

These factors, along with the increased worldwide demand for the products derived from cocoa beans, have prompted many investors to get onboard. Traditionally, the price of cocoa has fluctuated wildly and has made the commodity difficult to predict. However, many hedge funds have begun betting on cocoa’s rise and have seen some good returns on their investments.

The emerging markets in India and China are changing the way a lot of commodities are traded and invested. Many American companies are altering their business models to target these growing areas, and that is only pushing the price higher and higher. As long as the economic climate continues moving in this direction, some investors could find some delicious profits on their pillows very soon.

Until next time,
Jamie Ellis
February 11, 2008

The Daily Reckoning