Commodities in general have had mixed performance this year, but cocoa continues to trend up. The most recent catalyst has been the potential spread of the Ebola virus from Liberia and Guinea. These countries border top cocoa producers Ivory Coast and Ghana, who are responsible for about 60% of the world’s cocoa.
Cocoa prices have been increasing over recent years as demand across emerging nations has surged. A supply/demand imbalance has supported prices. However, the current health scare in Africa could amplify a supply shortage dramatically.
The issue lies in that the transport of cocoa beans from the farms to coastal ports in these critical markets is done by couriers on motorbikes. If a quarantine is put into effect due to Ebola, these transport lines could be dramatically affected and supply disrupted. Such risks have caused prices to surge in the last week even though no actual cases of Ebola have been reported in either Ivory Coast or Ghana. An outbreak in these countries could realize speculator fears.
From an asset allocation standpoint, commodities can be an important driver in risk-adjusted returns; and we feel a targeted approach is better than broad exposure to the asset class. Even though commodities in general are negatively impacted by a rising U.S. Dollar, investors can find pockets of opportunity by drilling down to look at fundamentals and macro issues for individual commodities like cocoa.
Thomson Reuters Eikon
Wexler and Jerving, “Cocoa Surges on Ebola Concerns”, Wall Street Journal, 9/20-21/2014