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Why Chocolate? Surprise Your Valentine With Cocoa ETF Instead!

Sanghamitra Saha

A growing U.S. economy, solid labor market, cheap oil and soaring stock market should make your Valentine’s Day merrier this year. About 55% of Americans plan to celebrate the day, up from last year’s 51%. Total spending should touch a record $27.4 billion, up 32% year over year, per National Retail Federation.

The chocolate industry normally benefits from this celebration. About 52% of Americans are expected to spend $2.4 billion on candies, per National Retail Federation. But this year, the cocoa ETF could spread more love than chocolates.

Why Cocoa, Not Chocolate?

Cocoa – the key ingredient of chocolates – is a hot bet from an investing point of view. iPath Bloomberg Cocoa Subindex Total Return ETN NIB has gained about 34.2% in the past year (as of Feb 11, 2020). In the past month, NIB tacked on a stellar 14.6% gain despite the coronavirus scare.

Cartel Formation in Africa to Support Prices

Cocoa prices are now around a level not seen since August 2016, as below-average rainfall across most of Ivory Coast and Ghana (which are key producing regions) has affected cocoa output.

Cocoa prices have been battered previously as evident from the 11.6% loss in NIB in the past five years (as of Feb 11, 2020). The price has declined from $3.47 in 2011 to less than $2.5 per kilogram, per an article published on seekingalpha.

To counter the issue, Ghana and Ivory Coast formed a cartel last year to fix a price premium of $400 a ton over the benchmark cocoa futures price to offer farmers a better deal. This new payment plan will begin from the next 2020/21 production season. This makes cocoa investing appetizing.

Solid Demand

Along with the robust supply-side, the demand for cocoa has been strong. Both Hershey HSY and Mondelez MDLZ have come up with upbeat results for the fourth quarter. Hershey’s earnings per share of $1.28 surpassed the Zacks Consensus Estimate of $1.24 and rose 1.6% year over year. Consolidated net sales of $2.068 million improved 4% year over year, marginally beating the Zacks Consensus Estimate of $2.067 billion. Hershey expects net sales to rise in the range of 2-4% for 2020.

Mondelez’sfourth-quarter 2019 results beat the Zacks Consensus Estimate for earnings and sales for the second and fifth successive time, respectively. Net revenues advanced 2.1% year over year to $6.913 billion and surpassed the Zacks Consensus Estimate of $6.836 billion while adjusted earnings of 61 cents per share beat the consensus mark by a penny.

Overproduction In the Cards? Don't Look for Long-Term Gains in Cocoa

While there are analysts who believe production will stay moderate in the medium term as cocoa plants take time to mature, some traders and analysts are betting big on a slump in cocoa prices by the end of 2020 due to a spike in output. London cocoa futures will likely fall 6% by the end of the year, a poll done by Reuters revealed in late January.

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Hershey Company (The) (HSY) : Free Stock Analysis Report
 
Mondelez International, Inc. (MDLZ) : Free Stock Analysis Report
 
iPath Bloomberg Cocoa Subindex Total Return ETN (NIB): ETF Research Reports
 
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