"Chocolate is one of those things that becomes a luxury in tough times," said Sameer Samana, a global strategist at Wells Fargo Investment Institute in St. Louis, which oversees $1.6 trillion. "Chocoholics are realising chocolate may be more of a want than a need. Once again, it seems that the world has plenty of cocoa, and that supplies won't be put into jeopardy."
Cocoa futures are down about 14 per cent since touching a three-year high in September. Prices that entered a bear market on January 29 will extend losses by 18 per cent to $2,400 a metric ton by the end of the year, from $2,931 on Friday, according the median of 10 estimates in a Bloomberg News survey. Futures were little changed at $2,929 in New York on Tuesday after no trading on Monday because of the President's Day holiday.
Production should match demand this year, the International Cocoa Organization estimates, while saying that a small surplus is possible. If output tops usage, it would be the third straight season of excess supplies and the longest streak since 1991, data from the group show.
Resilient demand in the United States can help make up for declines in Europe and Asia. In the 12 months ended December 28, American retail sales of chocolate at supermarkets, drugstores and other outlets rose 2.4 per cent from a year earlier to $3.88 billion, according to IRI, a Chicago-based market researcher.
Threatened supply
Extreme weather is threatening supply, pushing prices up almost 9 per cent in February. Dry, dusty winds coming from the Sahara desert in January lasted twice as long as a year earlier in parts of West Africa, destroying pods on cocoa trees.
In Ghana, the second-largest producer, dry conditions will cut the nation's output by as much as 9 per cent to 820,000 tons this season from a year earlier, a person familiar with the government's forecast said last month.
"Long term, we still need to see investment in the cocoa industry to meet growing chocolate consumption," said Bill Pearce, a vice president for Oakland, California-based McKeany Flavell, a brokerage whose clients have included Barry Callebaut, the world's largest processor of bulk chocolate. "If prices get too cheap, farmers will not invest, and the crop won't keep up with demand."
Last season, Ivory Coast farmers collected the biggest crop ever, boosting inventories and allowing for ample supplies even as dry weather hampers this year's harvest. As of February 15, cocoa arrivals to the nation's ports reached 1.184 million tons, up about 3 per cent from a year earlier, and the fastest pace in a decade, according to KnowledgeCharts, a unit of Commodities Risk Analysis in Bethlehem, Pennsylvania.
Raised prices
While cocoa futures are down about 1 per cent in the past 12 months, they are still almost 90 per cent higher than a decade earlier. In 2014, chocolate manufacturers including Hershey and Mars raised prices to cover increasing costs.
"Inputs for our chocolate business are among the highest, and they were a key" contributor to "the $1.6 billion of pricing that we took this past year," Irene Rosenfeld, the chief executive officer of Deerfield, Illinois-based Mondelez said on an earnings call February 11.
Rising expenses have curbed consumers' appetite, and demand is unlikely to recover before "significant" price declines, according to Jonathan Parkman, the co-head of agriculture at Marex Spectron Group in London.
Hershey's international sales growth was hampered last quarter because of "macro-economic headwinds that have yet to subside," John Bilbrey, the chief executive officer of the Hershey, Pennsylvania-based company, said on an earnings conference call on January 29.
"We expect chocolate demand to remain limited throughout most of the year, especially in Europe and Asia," Carlos Mera Arzeno, commodity analyst for Rabobank International in London, said in a telephone interview. "Demand has been relatively weak and arrivals in Ivory Coast have been improving as well."
