Wednesday, May 28, 2008

Chocolate companies feeling the pinch: Cocoa prices rising up, up and away

Have you noticed that the average Nestle or Cadbury chocolate bar has



become expensive? One can directly blame that on soaring cocoa prices.

Cocoa is sold in metric tons round the world. At the start of 2007, the price was $1,700 and now it is $2,600.

Cocoa contributes about 15% to 30% of the average chocolate bar ingredients. Premium chocolates, however, may contain upto 99% cocoa, therefore, the latter are the most susceptible to fluctuations in cocoa prices.

So why are the cocoa/chocolate prices rising anyway?? I summed up a few reasons
  1. With cocoa prices being traded, both physically and in futures market, chocolate makers are not the only consumers of cocoa. Investor demand, as a result, increased the pressure on cocoa supply, thus driving up the prices.
  2. The chocolate makers are pointing fingers on alleged 'speculative buying' on the part of hedge funds (who employ extremely aggressive and unhedged positions and strategies - see the article on hedge funds below). Another reason may be that due to uncertainties in the global stock markets, hedge funds have turned to agricultural commodities, for instance, cocoa and others.
  3. It may appear that this conundrum on soaring cocoa prices isn't because of an imbalance between demand/supply. So there might be no apparent reason for the rising chocolate/cocoa prices.
  4. Other commodites such as sugar, oil and milk may have risen thereby increasing chocolate prices and therefore, everyone is shifting blame on cocoa producers.

The International Cocoa Organization has taken to research the cocoa prices reason on a war footing. And then, why should we be behind. Think of your own reasons for high chocolate prices and shoot a comment on the comments page.

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