Yahoo Finance Investing for (Chocolate) Lovers: How to Buy Cocoa Stocks
With Valentine's Day coming up, store shelves typically fill up with boxes of chocolate waiting to be given to significant others.
The key ingredient for this chocolate is cocoa, a commodity whose market is growing just like waistlines on February 15. Here are some thoughts on mixing a little into a portfolio.
Cocoa beans are grown in equatorial regions in West Africa, Latin America and Southeast Asia before they are roasted, ground and made in to chocolate. In the U.S., the world's biggest market for the sweet treat, chocolate confectionery sales reached $21 billion last year, up 24 percent from 2009. Sales are projected to hit $25 billion by 2019, according to market research firm Mintel.
The Standard & Poor's GSCI Cocoa TR index gained 5.7 percent in the last year, while the wider S&P GSCI Agriculture TR index slid 13 percent.
U.S.-listed confectioners with exposure to the chocolate market include Hershey Co. (HSY), Tootsie Roll Industries (TR), Mondelez International (MDLZ) and Rocky Mountain Chocolate Factory (RMCF). Of course, with chocolate, the Swiss are huge players, with companies such as Chocoladefabriken Lindt & Spruengli, Barry Callebaut and Nestle.
Some offer more exposure to chocolate than others -- Nestle sold $6 billion in confectionary products in the first nine months of 2015, but that's only 9.3 percent of its total sales, which also include pet care products and water.
Erin Lash, an equity analyst who covers Hershey for Chicago-based analysis and data firm Morningstar, says Hershey is a purer play on chocolate than Nestle.
It also may be a bargain. A number of headwinds -- higher cocoa and other commodity prices, as well as its difficulty with business abroad -- may have pushed HSY stock to an undervalued level, Lash says. Hershey stock is down 13 percent in the last year.
But Hershey has significant pricing power and a cost edge over competitors, she says, and it's a key partner with retailers and has good market share in the U.S. Lash thinks sales growth will accelerate.
To attempt to hedge price risk, Hershey invests in cocoa futures -- contracts setting a certain price for a commodity at a determined point in the future. Those instruments tend to be the purview of production companies and sophisticated speculators rather than everyday investors.
Jack Scoville, vice president of Chicago-based futures brokerage Price Futures Group, says exchange-traded products that can be bought like stocks but track futures prices have been a good way for many people to invest in commodities because they offer less risk than direct futures purchases.
Two exchange-traded notes that track the cocoa futures market are the iPath Pure Beta Cocoa (CHOC) ETN, which is up 4 percent over the past year, and the iPath Bloomberg Cocoa Subindex Total Return (NIB) note, which is up 1.63 percent over the past year.
Liquidity is certainly an issue in the small cocoa market, Scoville says.
That also holds true for these exchange-traded notes, according to ETF.com, a news and analysis service that tracks exchange-traded products. "NIB is the most liquid choice in the cocoa segment, which is perhaps damning the note with faint praise," the website says. "Although only around $250,000 worth of NIB changes hands most days, that figure is still 5 times the volume attracted by its lone competitor, CHOC."
As with any commodity, volatility is a risk.
Last year, jitters ahead of elections in the world's largest producer Ivory Coast and dry weather in West Africa helped push prices up. In December, cocoa prices reached multiyear highs, around $3,400 per metric ton. This year, amid improving cocoa deliveries to ports, prices have been falling to near $2,800. Also, as many other commodities fell during 2015, speculators have been withdrawing funds from the sector, including from cocoa.
Whether this dip is a good time to buy remains to be seen.
Scoville thinks now could be a buying opportunity, at least in the futures market. But it may only prove to be a short-term bounce over the next few weeks before another West African crop in May and June, he says.
Carlos Mera Arzeno, senior commodity analyst with Netherlands-based Rabobank, says the market is not settled at these prices, and volatility has been increasing.
Demand contracted 2 percent last year as a trend of smaller portion sizes in the U.S. and Europe coupled with slower economic growth. But Rabobank is projecting 1 percent growth this year as global demand is expected to increase.
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