Emerging Markets' Chocolate Craze Bolsters Cocoa ETNs

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Includes: CHOC, NIB
by: Tom Lydon

Summary

Cocoa prices are being supported by higher spending in the emerging markets.

Growing middle class in emerging markets demand chocolate.

Cocoa futures market currently in a state of backwardation.

Developing countries are developing a voracious appetite for chocolate, pushing cocoa prices and related exchange traded notes to a three-year high.

The iPath DJ-UBS Cocoa TR Sub-Index ETN (NYSEARCA:NIB) is up 14.7% year-to-date while the iPath Pure Beta Cocoa ETN (NYSEARCA:CHOC) is 12.6% higher.

ICE cocoa futures were hovering around $3,087 per metric ton Wednesday. According to Euromonitor International, emerging countries' share of global chocolate sales rose to 45% this year, compared to 33% a decade ago, the Wall Street Journal reports.

Leading chocolate sales growth among the developing markets, India is projected to see sales growth of 13.9% this year, followed by Algeria 10.9%, Nigeria 10.4% and Saudi Arabia 8.5%.

"Emerging-market demand is the principle reason behind the steady and consistent rise that we've seen in the cocoa market," Sterling Smith, a futures specialist at Citigroup, said in the article. "Is that demand enough to propel it higher? Oh, yes."

The emerging middle class has made chocolate into an affordable, everyday treat. Meanwhile, new products, improved transportation and better infrastructure have eased the distribution of confections.

The rising demand from developing economies surprised cocoa traders, who largely expected prices to taper off after the Ivory Coast, the largest producer of cocoa, revealed a record crop last month. Cargill Inc., one of the world's biggest cocoa processors, estimates that global demand could outstrip supply by 100,000 to 200,000 metric tons for the crop year starting Oct. 1.

The cocoa ETNs track cocoa futures contracts. Currently, the cocoa futures market is slightly backwardated, according to Trading Charts. Exchange traded products benefit from backwardation - a state where near-month contracts are priced higher than later-dated contracts - since the investments would roll contracts at a profit. However, CHOC tracks a number of contracts with varying expiration dates, which could lessen the benefits of a backwardated market.

iPath DJ-UBS Cocoa TR Sub-Index ETN

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.