The summer of 2010 saw cocoa prices shoot up, much to bears’ skepticism. They said there was no fundamental reason for the move: It was just a hedge fund manipulation.
On that notion, coca prices fell from a 33-year high at over $3,400 a metric ton down to about $2,600 in September. But the bearish view proved wrong in the end.
Any intelligent observer can see the big problems brewing in the Ivory Coast. Accounting for 40% of global supplies, the country is the world’s largest coca bean producer.
That key chocolate ingredient factors in heavily to the Ivorian economy. Cocoa is its biggest source of revenue, with sweet bean sales valued at $45 billion annually.
But the country’s cocoa trees have long-term problems, not to mention major political problems. And the latter has pushed coca prices back up above $3,300 once again.
Never Mix Chocolate and Politics… at Least not in the Ivory Coast
On November 28, 2010, the Ivory Coast elected a new leader, Alassane Ouattara. But while the United Nations certifies that victory, sitting president Laurent Gbagbo refuses to leave … and he has the full support of the military.
Countries around the globe are imposing sanctions on the Ivory Coast, but Ouattara has taken that idea a step further. He has called for a 1-month ban on cocoa exports and most other nations – including the U.S. – have signed onboard.
That ban will hit Gbagbo, who funds the military through such sales, hard. Without their pay, the troops will likely defect.
Unfortunately, the ban also adds fuel to an already-burning political fire. The Ivory Coast, which has been at peace since 2003, could too easily erupt into a civil war.
Commercial interests have little choice but to heed the ban. So companies such as Cargill and Archer Daniels Midland (NYSE:ADM), the world’s two largest cocoa buyers, have stopped purchasing cocoa in the Ivory Coast.
European Sanctions Add to Chocolate Woes
Even before the export ban, the Ivory Coast coca industry was already suffering the effects of sanctions imposed by the European Union.
The EU blacklisted Ivorian economic entities, individuals and even ports such as Abidjan and San Pedro. That keeps the Union’s vessels from docking there, leaving cocoa exports in limbo in the longer term.
International cocoa intake hasn’t seen any drastic changes yet. But that’s only because the main Ivorian crop is harvested from October to February.
Traders estimate the country already reaped some 840,000 tons of cocoa this season. That’s up 10.5% from last year’s 760,000.
However, of that, 100,000-300,000 tons still remain in the country’s warehouses. With sanctions in place, it may be difficult to get those beans out of the country.
More than likely, smugglers will have their hands full of cocoa soon enough.
A Sweet Treat in the Bears Defeat
Despite all of that, cocoa bears don’t seem to care. They predict bumper crops elsewhere offsetting Ivory Coast losses.
Aging cocoa trees, poor soil conditions, lousy weather: Nothing is phasing their beliefs. And they expect political strife to blow over quickly, allowing exports to resume as usual.
But don’t bet on it. Most observers there anticipate it to drag on for months, if not years. And if a civil war does occur, the cocoa trees themselves will suffer, with long-term effects.
Under all of that stress, cocoa prices could hit as high as they did in the 1970s… when they were above $5,000 a ton!
Investors can get in on the action through iPath Dow Jones-UBS Cocoa Subindex Total Return (NYSEARCA:NIB). The ETN largely mirrors cocoa futures contract’s performance.
With the continued bearish talk, cocoa has not skyrocketed… yet. Investors should take advantage and sweeten their portfolio with some cocoa today.