Valentine’s chocolate cheaper as cocoa supply swells

New York - Buying your sweetheart a box of Valentine’s Day chocolates could be cheaper this year thanks to booming cocoa supplies.

Growers are collecting bigger harvests in Latin America and in West Africa, which accounts for about 70% of global production. The output gains have pushed cocoa futures to the lowest since 2008, cutting costs for companies including Mondelez International, the maker of Cadbury chocolates and Oreo cookies.

Declines in the futures market are starting to translate to cheaper confections. That’s good news for romantics, since a survey by the Washington-based National Confectioners Association found that 70% of Americans will give chocolate or candy to their Valentine. The goodies will probably stay cheap even beyond the amorous holiday, celebrated on February 14.

Hedge funds are making a record bet that cocoa prices will keep slumping.

“Production is going to be much higher, and that’s why prices are falling,” said Donald Selkin, the New York-based chief market strategist at Newbridge Securities, who helps oversee about $2bn in assets. For the trend to reverse, “you need civil unrest in these typically unstable African countries or a pickup in demand,” he said.

Money managers had a cocoa net-short position, or the difference between bets on a price decline and wagers on a rise, of 24 320 futures and options as of February 7, according to figures from the US Commodity Futures Trading Commission published three days later. That was the most bearish holding in the data, which starts in 2006. The funds have been negative since mid-December.

Eight-year low

Cocoa sank 31% in the past year on ICE Futures US in New York, touching an eight-year low of $1 951 a metric ton last week. Prices slipped 0.5% to $1 953 a ton on Monday.

After dry weather hurt West African crops last season, growing conditions have improved and supplies rebounded. Stockpiles at ICE-monitored warehouses have jumped 38% since reaching the lowest since 2009 in December. UBS and Citigroup are both projecting that global production will outstrip use this year as harvests expand.

The supply gains have come amid slowing demand. Global chocolate sales dropped 2.3% in the three months through November, according to Barry Callebaut, the world’s top cocoa processor. In Europe, the top consumer, sales declined 3.1%, and there was a 2% drop in the Americas.

Even though people are eating less chocolate in favour of healthier options, they’re a bit more likely to throw caution to the wind when it comes to Valentine’s Day.

Americans are expected to spend about $1.7bn on candy for Tuesday’s holiday, according to the Washington-based National Retail Federation. That’s unchanged from last year’s estimate, even as total spending for the occasion is expected to drop 7.6% to $18.2bn.

“Valentine’s is the biggest day for sales of the year for us,” said Jacques Torres, a former pastry chef who now runs eight eponymous stores selling luxury chocolate products and ice cream across New York City.

Mr chocolate

Torres, who’s dubbed himself Mr. Chocolate and buys about 150 tons of cocoa annually for his stores, pays a premium for the high-grade beans he uses, so the drop for futures doesn’t impact his costs. But it will be a benefit for Mondelez, CFO Brian Gladden said on an earnings call February 7. Because the company uses a hedging program, the impact won’t be felt right away, he said.

Some of the declines in cocoa seem to be filtering through already for chocolate buyers. In the 13 weeks ended January 29, the average price per unit for the confections fell 1.7% from the prior period, according to data from Chicago-based researcher IRI.

The reductions for consumers could get more pronounced as chocolate makers purchase new forward contracts at the lower prices.

For example, Hershey maker of chocolate kisses, typically has “between three and 24 months of coverage for various raw materials, and so drops that you see right now don’t necessarily translate into the current year,” Michele G. Buck, chief operating officer, said on an earnings call February 3.

When more of the lower costs start to show up at the check-out aisle, that could help chocolate demand to rebound and ease the global surplus. At the same time, production can fall short of expectations. In west Daloa, a key producing region of top grower Ivory Coast, crops got almost no rain in the past two months, according to Speedwell Weather.

“The lower prices will incentivize demand at some point in the next six months,” especially ahead of Halloween and Christmas, holidays which “tend to push demand,’’ said Carlos Mera Arzeno, a London-based commodity analyst for Rabobank International. “We are getting close to the bottom here, but it’s hard to say where that point is. It would be like trying to catch a falling knife.”

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