Chocolate: a bittersweet investment story

Easter is over. In large parts of the world, chocolate Easter eggs were traditionally eaten. But maybe there were a little less eggs hidden this year? Because although delicious, it can no longer be said that they are cheap. Cocoa prices have skyrocketed in recent months. What impact does this have on your portfolio? At the supermarket checkout? And as an investor?

Chocolate is and will continue to be popular. Even despite higher prices. In a similar way Willy Wonka saw the magic in chocolate, investors spot the opportunities in the growth story chocolate can be.

Dea Shehu, Thematic Portfolio Manager KBC Asset Management


Cocoa price at an all-time high

Commodity specialists too were surprised in recent weeks. The price of cocoa beans, the main raw material for chocolate, has risen above $10,000 per ton for the first time. "This high price level would have been considered unthinkable just a few months ago," says Dea Shehu, Thematic Portfolio Manager at KBC Asset Management. "The futures market in New York is showing a new record. In just 3 months, cocoa has doubled in price."

Weather conditions and structural problems are at the root of the skyrocketing cocoa price.

Dea Shehu, Thematic Portfolio Manager KBC Asset Management

Supply under pressure

West Africa, together with Côte d'Ivoire and Ghana, dominates the world production of cocoa. No less than 80% of the total production comes from there. The plantations in West Africa underwent particularly heavy rains last summer, resulting in severe flooding. This damaged the cocoa trees, giving fungal diseases free rein and causing the pods to rot. "In Côte d'Ivoire and Ghana, the trees became infected with the Cacao Swollen Shoot virus," Shehu clarifies. "If the tree catches such a virus, it only produces half of its usual yield. It is estimated that for this year demand will exceed supply by around 400,000 tons. The biggest market imbalance in a long time."

Climate-related weather phenomena, such as El Niño, are likely to intensify in the coming years, which could result in a lasting impact. In that respect, global warming leaves a bitter taste in the cocoa industry.

"There is also a structural problem," Shehu adds. Cocoa farmers are typically ‘small’ farmers. They have only a limited amount of land and often lack sufficient substantive knowledge about the product they grow. Most cocoa farmers, unlike growers of other crops, have never tasted the final product, in this case chocolate. "Cocoa plantations are yielding less and less for the farmers in question. The price paid by the consumer is in big contrast to the working conditions in which cocoa farmers work. We often see small farms and poverty is huge. Despite all the efforts of fair trade chocolate… As a result, there are less and less investments in new plantings, even though they are desperately needed.”

"I ‘d like to make a small turn to the famous 'deforestation law' that comes into effect in Europe from 2025, which requires manufacturers to map the entire supply chain from farm to chocolate”, Shehu adds. “For cocoa manufacturer  this poses additional challenges because, as mentioned, the farms are very small and the cocoa mining business is full of informalities- both from the farmers and from West African governments.”

Chocolate is loved. Most consumers are not likely to give up their chocolate bar when it becomes slightly more expensive.

Dea Shehu, Thematic Portfolio Manager KBC Asset Management

Although chocolate manufacturers usually hedge against potentially difficult weather conditions, and thus lesser harvests, those hedges are rarely done for a period longer than 1 year. Typically, manufacturers maintain a cocoa supply of about 5 months. Currently, future prices have reached extreme levels. "Today, in the cocoa futures market, we see 80% speculators and 20% hedgers. The extreme increase in recent weeks has been largely motivated by speculation, which has put a kind of turbo on the price. Once that effect has worn off, the market can calm down a bit", Shehu adds. “The current market price is anything but realistic, despite the challenges facing cocoa farming.”


Delicacy or luxury product?

The average European eats almost 5 kilos of chocolate a year. And while supply is falling, the demand continues to rise systematically. "In the West, chocolate has always been popular. Moreover, the increasing global prosperity makes chocolate accessible to larger groups of people. Chocolate is primarily a European and, increasingly, an American story. In most Asian and African countries, chocolate is not as well known as it is here, which brings with it room for growth. It is also used in more and more products, such as biscuits, ice cream or sweets. A lot of people, from all social classes, have a bar of chocolate in their kitchen cupboard," says Shehu


The big food giants or chocolate producers, such as a Nestlé, a Mondelez International or a Lindt, for example, enjoy a solid reputation worldwide, which allows them to maintain their pricing power.

Dea Shehu, Thematic Portfolio Manager KBC Asset Management


When commodity prices rise, companies have several options to deal with them. They may offer smaller sizes of the product, increase production efficiency or work with cheaper packaging. They can also adjust the product itself: replace some of the solid cocoa ingredients with cocoa powder (a lower quality ingredient), or replace cocoa butter with milk or other vegetable oils. They can increase the percentage of other ingredients, such as nuts, for example. In cookies, they can very easily use less cocoa chips. The possibilities are endless. “Or, they can pass on the higher price to the consumer”, says Shehu.. "Although we, as consumers, are not yet fully feeling the full impact, the higher cocoa costs will inevitably be passed on this year and next. Costs typically take 6 to 12 months to reach the consumer. Although I very much doubt that a higher price will also reduce the demand for chocolate." Whatever it may become, it will be the small, generally unlisted manufacturers who will be hit hardest. Those who have less room to adapt.

Striving for greater strategic independence

More and more chocolate companies are taking measures to cope with the tight supply. Both closer cooperation with local farmers and diversifying purchasing regions can reduce the vulnerability of supply chains. Sustainable agricultural practices, with a view to ensuring long-term consistent supply, are being promoted more actively. "This involves, for example, training farmers to adopt environmentally friendly practices or initiatives to improve the livelihoods of local farmers”, Shehu clarifies. "A more efficient supply chain is also crucial. Think of optimising logistics, transport and storage." Some manufacturers are even looking for alternatives to cocoa. "But for now, developments in this area are still in their infancy," says Shehu.

The way to investors' love is through their stomach

Apart from the current high raw material prices, chocolate remains an interesting theme for investors. Chocolate producers saw and seized the opportunity to differentiate and premiumize, resulting in strong pricing power. "The major chocolate producers have a strong presence in the global market. They have proven to be successful in providing high-quality products and in generating profits," Shehu states.

"The chocolate industry has also created a halo around other food categories, such as ice cream and cookies. And it has come up with and implemented new use cases”, Shehu adds. "The demand for vegan, organic and gluten-free chocolates, for example, is steadily increasing. Something that the producers are only too happy to respond to." The trend towards luxury variants is also striking. In the trendy neighborhoods of big cities, you will often find more exclusive chocolate boutiques. "Compare it to special coffee tastings," says Shehu. "An everyday product that is consumed by everyone is made exclusively, which makes the experience more special. And the more special the experience, the higher the price can be."

Chocolate can serve as a great long-term investment. When you look beyond the short-term challenges, chocolate producers offer the opportunity for structural growth, thanks to an innovative mindset, a drive for quality and a strong pricing power.

Dea Shehu, Thematic Portfolio Manager KBC Asset Management

There are several ways to invest thematically in chocolate. As with other investments, the following applies: if you are looking for Easter eggs on the stock market, you have to do your homework. "Even in the wonderful chocolate world of Willy Wonka, a good analysis and sufficient diversification are in order," Shehu concludes. 

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This article is informational only and should not be considered investment advice.