The coming cocoa correction

An improving political climate in the Ivory Coast could result in a cocoa production boom. Combine this with slowing economic growth in the U.S. and Europe and the commodity looks downright expensive.

Cocoa futures aren't looking so sweet these days.

We're short cocoa, mainly because of the potential for an improving political situation in the Ivory Coast – the world's largest producer of cocoa – and the potential for slowing demand as global growth slows sequentially.

From a consumption perspective, the U.S. and Europe are the largest consumers of cocoa. In fact, 16 of the 20 world's top consumers (on a per capital basis) are European countries; by some estimates Europe consumes more than 40% of the world's cocoa. In aggregate, developed countries consume more than 65% of the world's cocoa, with North America being the second-largest consuming region after Europe. In total, the world will consume somewhere on the order of 3.6 million tons in 2010.

Interestingly, while developing countries are growing demand at a slightly higher rate than developed countries, it is only marginal, as developing demand is expected to grow at under 2% this year. (This is in comparison to higher demand growth for more essential commodities such as oil, copper, etc.)

From a demand perspective, since chocolate is considered a specialty item and not a necessity, we would expect demand for it to wane in slower economic growth periods. As we've noted, we expect both U.S. and global growth to slow sequentially going into 2011, which will curb consumption patterns, particularly for nonessentials such as cocoa. (more)