Cocoa Shortage Will Prove Sweet News for Top Makers

Resource investors worry about Peak Oil and Peak Gold. Now they can start worrying about Peak Chocolate. Certified fair-trade cocoa growers are abandoning the business:

Political unrest in the Ivory Coast, where 40 per cent of the world’s cocoa beans are grown, has ‘significantly’ depleted the number of certified fair trade cocoa farmers.

Cocoa beans, unlike minerals or hydrocarbon deposits, are a renewable resource but the ideal conditions for their growth are limited. Like the best wine-growing regions, cocoa harvesting is a special source of supply subject to localized disruptions.

Reduced availability of cocoa means smaller producers will face margin pressure before large producers. Companies with global supply chains – like Nestle (NSRGY.PK) and Hershey (HSY) – can rapidly adjust their sourcing. Furthermore, their brand strength gives them pricing power as demand for their well-known candy bars is probably price inelastic. A Hershey chocolate bar is a known entity far more likely to retain its consumer appeal than a boutique fair-trade bar. Hershey doesn’t disclose its suppliers but has a supply base in the hundreds, diverse enough to weather disruptions. That gives it flexibility that your favorite overpriced fair-trade certified organic candy maker does not have.

Rising prices for commodities are already compressing margins for producers in every sector. Now chocolate makers will experience the same pressure. Those with the most flexible supply chains will be left standing when the dust settles. High-minded fair-trade protest campaigns won’t hurt larger producers if fair-trade growers aren’t in business anymore due to political instability. The surge of boutique fair-trade chocolate makers in the last decade has likely run its course.

Full disclosure: No positions in NSRGY.PK or HSY

About Anthony Alfidi 128 Articles

Affiliation: Alfidi Capital LLC

Anthony Alfidi is the Founder and CEO of Alfidi Capital. His firm publishes free investment research with honesty and humor.

Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame (cum laude) and an MBA in finance from the University of San Francisco. He is a life member of Beta Gamma Sigma, the academic honor society for business majors. He has been a private investor since the 1990s.

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