Cocoa futures are soaring again.
Check out this chart …
I’ve been writing about cocoa futures for a few years now. Mostly due to evidence that increases in extreme weather events are pressuring cocoa farms in Africa.
And sure enough, here we are again.
Futures rose nearly 5% today. An unwelcome move for chocolate companies that have already been struggling with high cocoa prices.
According to Bloomberg, prices soared earlier this year because of weak harvests in West Africa. And this has sunk the world into a third straight supply deficit.
After cooling, the rally recently regained momentum as adverse weather further threatens farms there, limiting the chance to rebuild already low global stockpiles.
While the main-crop harvest for this season has fared relatively well, the outlook for the smaller mid-crop has deteriorated following heavy rains that flooded farms. And now the seasonally dry Harmattan winds that can dry soil and stress crops are intensifying.
Cocoa’s supply challenges have been compounded by longstanding industry problems. These include crop disease and a legacy of low farmer pay. Newly-planted trees also take a few years to bear pods, delaying a meaningful production rebound.
While we do expect to see decreased production in West Africa, Ecuador and Brazil are looking to pick up the slack. With the latter expected to double cocoa production by 2030.
Meanwhile, companies reliant upon less-burdensome cocoa prices are likely to feel the pinch in the near-term. These include, but are not limited to …
- Mondelez (NASDAQ: MDLZ)
- General Mills (NYSE: GIS)
- Nestle (OTCBB: NSRGY)
- Lindt & Sprungli (OTCBB: LDSVF)
- The Kraft Heinz Company (NASDAQ: KHC)
- Barry Callebaut (OTCBB: BRRLY)
- Unilever (NYSE: UL)
- Hershey (NYSE: HSY)
Unfortunately, for most U.S. investors, there’s no way to play the rise in cocoa futures. Other than shorting chocolate companies. And that’s not a strategy I would recommend, given the risk vs. reward proposition.
If you have a broker that can allow you to trade on the London Stock Exchange, there’s the WisdomTree Cocoa ETC (COCO). That one has absolutely crushed it. Check it out …
Over the past three years, COCO has delivered gains in excess of 540%.
Soaring Cocoa Futures Breed Opportunity
The continued pressure on West African cocoa has also instigated a fair amount of new investment in lab-grown chocolate.
Earlier this year, Japan’s largest chocolate company Meiji Holdings (OTCBB: MEJHY) announced that it decided to partner with California Cultured, which is a California-based start-up that’s producing cocoa from cell structures. The process takes days instead of the months or years it takes to grow and harvest cocoa in a conventional way.
MEJHY is no startup, either. This is a major player boasting a market cap of $5.8 billion.
California Cultured also landed a strategic investment from the Belgian international group Puratos. This happened back in October.
If you’re unfamiliar, Puratos is an ingredients supplier for bakeries and the chocolate industry. It boasts 75 production units in 52 countries. Chances are, at some point in your life, you’ve eaten something that included ingredients from Purato. After all, the company has supplied ingredients to Dunkin Donuts, Starbucks, McDonalds and Walmart – just to name a few.
Then last week we got word that Planet A Foods raised $30 million in a Series B funding round. Planet A Foods produces cocoa-free chocolate by utilizing a fermentation process. That company’s product is already available in more than 42,000 retail outlets in Europe.
We expect to see more alternative cocoa products hit the market in 2025. And we also expect to see a lot more funding into the space. While traditional cocoa will not disappear from the planet, the demand for alternatives will continue to grow as traditional cocoa costs increase.
