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10 Jul 2007

Cocoa Prices Surge on Supply Worries

Cocoa Prices Surge on Supply Worries

The food of the gods has gotten significantly more expensive.

Cocoa futures reached a four-year peak this week, as worries about tight global supplies of the chocolate bean were compounded by renewed political violence in the Ivory Coast, the world's top supplier. At the same time, market analysts don't expect any easing of demand that would take the pressure off: Higher prices do little to kill chocolate consumption.


Last week, a plane carrying Ivory Coast's prime minister came under heavy gunfire. Guillaume Soro escaped unharmed but three others were killed. The incident underscored the fragility of a peace accord brokered earlier this year to reunite a country that had been divided into north and south by civil war.

 

Although the attack did nothing to interrupt cocoa supplies, the cocoa market -- much like the markets for crude oil and other commodities -- often reacts to violence in producer nations by driving up prices as buyers rush to secure supply. Cocoa recently hit $2,141 per metric ton (1,000 kilograms or 1.1 tons) on the New York Board of Trade -- a four-year peak.

 

The price of cocoa -- seed of the cacao tree, whose botanical name means "food of the gods" -- has climbed 12 percent in five weeks and is up by a third so far this year, according to Thomson Financial data.

 

Prices surged in 2001 as civil war broke out in the Ivory Coast, rising from about $1,000 to a high of $2,380 per metric ton in early 2003. That was the highest since 1989, according to CPM Group analyst Rohit Savant. The West African nation ships 40 percent of the world's cocoa supply.

 

The risk that political violence will reduce supply from the Ivory Coast remains, at this point, psychological. But it overlays the real risk of a supply crunch caused by weather. Analysts on average forecast a world cocoa deficit of some 100,000 to 200,000 metric tons this year after dry weather earlier this year in the West African growing region hurt the crop, Savant said.

 

Meanwhile, arrivals of cocoa at ports in the Ivory Coast, Nigeria and Brazil are running 15 percent to 25 percent behind year-ago levels, according to David Hightower of Hightower Futures Research in Chicago. That has left buyers increasingly nervous about supplies.

 

Although he doesn't expect prices to return to the peaks of 2003, Hightower said "there is no reason for the market to not grind its way higher until we get a resolution: Are we going to get the crop out of the Ivory Coast? We're not seeing the proof of supply."

 

It's not clear whether the recent run-up in cocoa futures will trickle down to the candy aisle. But the price of a chocolate bar is already poised to rise, thanks to sharply higher milk prices. Hershey Co. announced earlier this year it would raise prices 4 percent to 5 percent on roughly a third of its products. Other candy makers have announced price hikes, as well.

 

"Although cocoa prices get a lot of attention, they are a relatively small part of the overall cost of a chocolate bar at the supermarket," said S&P equity analyst Tom Graves. "Dairy prices have been more of problem than cocoa prices."

 

Source: yahoo.com

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