On the way home from work the other day, I dropped by the local supermarket. I bought a chocolate bar — something my wife needed for baking, not the froufrou specialty kind.
One bar of baking chocolate was around $3, which struck me as expensive.
Since I knew that cocoa, the agricultural parent of chocolate, was a traded commodity, I dug around to see what was going on. I turned up a fantastic opportunity … but it wasn’t what I was expecting.
It turns out that cocoa prices are near an eight-year low. And as a natural resource investor, this kind of situation is a dream come true.
A beloved commodity staple at superlow prices. Traders giving up in disgust…
It’s the perfect setup.
Life Is Like a Box of Chocolates
This is exactly the kind of situation that my upcoming publication is designed to find and profit on. These situations don’t happen often, but when they do, they can be hugely profitable.
You can see what I mean in the chart below:
The price of cocoa fell to its lowest point in years because of a surplus, hitting $1,881 per ton in February 2017. After a brief rally, it fell back to around $1,930 due to a surplus being projected again this year.
Commodity traders who bought cocoa earlier in the year in anticipation of the crop report dumped shares on news of the projected surplus, sending cocoa futures tumbling back down.
We can profit from this short-term decline.
Some longer-term forces will send chocolate prices higher. For example, the Ivory Coast government guarantees a certain cocoa price to farmers. Cocoa makes up around one-third of the country’s export sales.
Last year, that price guarantee was about $0.80 per pound. However, due to the falling price of cocoa, the guarantee fell this year to about $0.51 per pound. That is a huge hit — around 36%.
It’s also a disincentive to farmers to plant more cocoa.
Ghana, Ivory Coast’s neighbor, will likely lower their cocoa price guarantee later this year. That will further curb supply … at a time when demand is starting to run.
A Love Affair With Chocolate
Some of the most populous countries in the world have a taste for chocolate. According to analysts at Moody’s, India’s annual compounded chocolate demand grew 17.2% from 2010 to 2015. Venezuela’s demand grew nearly as quickly. Algeria, United Arab Emirates and Saudi Arabia had demand growth above 11% over that period.
And the chocolate market can expand further. Consider this: Folks in India and China consume about 3.5 ounces of chocolate per year on average. In comparison, Western Europeans consume about 166 ounces per year on average.
To put all that in perspective, we have a situation where cocoa, a major commodity, hit an extremely low price. Speculators are quitting, selling at a loss just to get out. And we have major suppliers putting on the brakes by cutting their guaranteed prices.
At the same time, we have double-digit demand growth in five major countries.
Since 2010, the average price of cocoa has been about $2,765 per ton. Now it’s around $1,930 per ton. That means that when the price returns just to its average, we would have a 43% gain if we invested in cocoa today. And that gain could easily happen in the next 12 to 18 months.
In summary, the cocoa price is like an arrow nocked on a bow and drawn all the way back to the feathers, ready to fire. This price feels like a bottom, and the uptrend could begin at any time.
Here’s how we can make money…
There are two ways to play the coming bull market in cocoa: the iPath Bloomberg Cocoa ETN (NYSE Arca: NIB) and the iPath Pure Beta Cocoa ETN (NYSE Arca: CHOC). Both exchange-traded notes use futures to capture the performance of cocoa’s price. Either one would be a great way to play rising cocoa prices.
The price hasn’t started to move higher yet, but since we are seeing an extreme low, it’s a great time to buy.
Good investing,
Matt Badiali
Senior Editor
