Cocoa prices and related exchange traded notes were hovering around a three-year high. However, a surge in production could begin to temper price gains.
Trading near its highest level since September 2011, the iPath DJ-UBS Cocoa TR Sub-Index ETN (NYSEArca: NIB) touched an intra-day high of $43.08 Friday before giving back its morning gains. NIB was down 0.1% at mid-day Friday and has increased 18.6% year-to-date.
ICE Cocoa futures were trading around $3,227 per metric ton. According to the CME Group, cocoa contracts are trading in a backwardated market where near-term contracts trade at a higher price, compared to later dated contracts.
According to the International Cocoa Organization, cocoa farmers will harvest a record 4.345 million metric tons for the current season ending September 30, or 10% more cocoa year-over-year, the Wall Street Journal reports.
Consequently, the group projects production will outstrip demand by 40,000 tons, downwardly revising its previous prediction of a 75,000 ton deficit.
For instance, Ecuador, the top cocoa producer in the Americas, expects cocoa output to rise 9% to 240,000 metric tons in 2014 on government assistance programs, new plantings and easing concerns over potential El Nino weather damage, Bloomberg reports.
Nevertheless, confectionery companies have already begun hiking prices to make up for the quickly rising cocoa prices. For instance, Mars Inc. stated that U.S. chocolate products will see a7% price increase to offset the higher costs.
“That’s the one soft [commodity]we’re real bullish on,” James Cordier, president of brokerage Liberty Trading Group, said in the article. “I just don’t think the supplies are there to meet demand.”
Leading the demand side, emerging markets are revealing a sweet tooth. The emerging middle class has made chocolate into an affordable, everyday treat. Meanwhile, new products, improved transportation and better infrastructure have eased the distribution of confections. [Emerging Markets’ Chocolate Craze Bolsters Cocoa ETNs]
iPath DJ-UBS Cocoa TR Sub-Index ETN
For more information on the chocolate market, visit our cocoa category.