Cocoa Sweetens On Dropping Dollar

Melinda Peer, Forbes.com

Although supply shortfalls won’t be as large, investors are still hungry for the tasty commodity.

A weaker U.S. dollar whetted investors’ appetite for cocoa at a time when spending on frivolous items is down.

The International Cocoa Organization signaled demand looked weak on Wednesday by revising its estimates to account for a larger drop in chocolate production and a smaller supply deficit. The group projected that global production will decline by 7.2% year-over-year compared with its previous forecast for a drop of roughly 5.8%. It expects the cocoa supply deficit to come in at a narrower 84,000 metric tons, from 193,000 metric tons, as previously projected. Investors weren’t deterred by a looser squeeze on supply, especially since the shortfall is still expected to exceed last year’s deficit of 60,000 metric tons. Cocoa prices closed Wednesday’s trading session looking 3.9% sweeter at $2,509 a metric ton.

“ICE cocoa prices have risen firmly over the week as the market has attempted to shrug off the slew of earlier bearish grindings data, as well as the improved prospects of the mid-crop in the Ivory Coast [the world's largest producer], and has rebalanced its focus toward the structurally deficient supply-side dynamic,” said Barclays Capital analyst Kevin Norrish, adding that prices should remain strong in the medium-to-long-term period.

Prices across chocolate confectioners traded broadly weaker on Friday afternoon. Hershey ( HSY – news – people ) shares were down by 4 cents, or 0.1%, at $34.91; shares of Rocky Mountain Chocolate Factory ( RMCF – news – people ) shed 10 cents, or 1.2%, to $8.30; and stock in Cadbury ( CBY – news – people ) listed on the New York Stock Exchange was down by 31 cents, or 0.9%, at $34.95.

BATS Real-Time Market Data by XigniteCocoa supplies are always tenuous since production disruptions are common among the world’s top cocoa exporters: Nigeria, Ghana and Indonesia. (See “Hot Cocoa.”) Some analysts expect the chocolate ingredient to come into greater demand from emerging markets like China and India, which haven’t been as derailed by the global economic crisis as more developed countries, and where a growing middle class is developing a taste for higher-quality proteins and sweets. (See “Hungry For Raw Materials.”)

Cocoa’s price has increased 63% in the past two years as global production led by growers in the Ivory Coast and Ghana lagged demand, according to the International Cocoa Organization. The deficit will be 64,000 tons in the upcoming 2009-2010 season, Fortis forecasts. The market has been consolidating for 10 months, a bullish shift in psychology now that it’s out of that range.

Continued fund buying boosted ICE Futures U.S. cocoa to a nearly seven-week high Thursday along with a weaker U.S. dollar as the market digests news of a production deficit forecast, analysts said.