Chinese Chocolate Isn't Tasting So Sweet

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Would chocolate by any other name taste so sweet?  Since Shakespeare lived several centuries before the commodification of chocolate, he never penned a sonnet on the delicacy, but we can assume that he'd enjoy sweet treats given his literary affection for other vices like drinking and gambling.  Love of chocolate, however, does not come universal, a lesson that major manufacturers like Hershey's have come to realize regarding certain major markets.  The Chinese market, much more notorious at the moment for other commodities like oil and gold and even beef, has seen their consumption of chocolate drop by a significant margin in the past year.  While the Chinese don't gobble down candy bars and ice cream quite like the average American, consuming less than half a pound per year per person compared to our intake of about seven pounds per person, the raw numbers of the market suggest trouble.  Can cocoa survive the same tremors that metals and energy are experiencing from the Chinese slowdown?

A Slow Burn

Look at a map of the world's leading cocoa producers and then compare their position with China to see why it took a very long time for any type of chocolate to gain a foothold in the nation of 1.2 billion people.  China lies farther away from major cocoa nations like the Ivory Coast than any other nation on Earth with the exception of South Korea, Japan, and a few tiny nations in the Pacific Ocean.  Indeed, for most of the 20th century the Chinese never even knew such a delicous commodity existed despite the astronomical growth of chocolate's popularity.  Not until the advent of panda bear diplomacy and the Nixon administration did American food and drink manufacturers get to sell their products to the largest market in the world.  Once they did, however, they found a steady stream of revenue, to say the least.  China chocolate consumption grew to the point that they entered the top 20 list, a list otherwise exclusively full of European nations as well as the United States, Australia, and Canada.  Indeed, by 2014 the Chinese taste for chocolate had accelerated to the point that economists predicted a fully-developed market worth $20 billion (the UK, by comparison, consumes only $10 billion of chocolate per year) that would outstrip available supply of chocolate and create a "crisis" by 2020.  Such predictions raised fears of "peak chocolate", but what goes up must come down, and in the past six months China has come down as hard as a nation can.

It's The Economy, Stupid

There's enough hysterical news articles on the Web about the Chinese stock market's fall to paint a grim picture of the state of the nation, but all anyone has to know is that the Shanghai Composite over the past twelve months resembles the state of Virginia, and not in a good way.  The loss of capital quickly hit chocolate makers in the wallet: Hershey's announced that sales of their popular Shanghai Golden Monkey candies would meet only half the expected figure of $200 million.  While economics usually dictates that "small luxuries" such as tobacco, alcohol, and certainly chocolate all rise during recession, as consumers seek ways to enjoy themselves on the cheap, the China market plays by different rules -- most notably, the rules of bribery.  Americans have so little experience with bribery (at least, outside of Congress) that many tourists experience a culture shock in China due to the rampant culture of bribery; in one famous case, a Chinese executive bribed a police department to shut down a highway to search for his lost wallet.  Chinese president Xi Jinping launched a massive anti-bribery campaign upon reaching office in 2013, one that has hit the chocolate industry hard due to the prevalence of using sweets as kickbacks.  Indeed, the Chinese Association of Bakery and Confectionary Industries -- yes, such a thing actually exists -- voiced their opinion that the majority of chocolate, and almost all expensive chocolate, sold in China goes towards gifts rather than personal use. 

Supply and Lack of Demand

So long as the Chinese economy grows by only about two percent, rather than the blistering ten percent they enjoyed from 2008 to 2013, cocoa will see a major market all but fizzle out.  Asian cocoa grinding fell by twelve percent during Q2, representing three-year lows.  China will consume about a quarter of a million tons of cocoa in 2015, a slight increase from the prior year but nowhere near comparable to year-by-year increases through the preceeding decade.  Although cocoa prices spiked between April and July, gaining no less than 20% in sixty days, they've been all downhill since thanks to the Shanghai stock debacle.  At the moment, it looks like it will take a lot to swing that lever back up again.

  • The Takeaway: if you have shares of cocoa commodities in your portfolio, sell them now.  You'll get very close to peak value, since the price has dropped by less than ten percent since reaching historic highs in July.  With the escalation of a failing market, cocoa will suffer in the short term for certain and possibly into the long term if the Chinese economy cannot reverse their stock bubble. If you have non-food commodities trading above the 52-week average, sell them as well, since the factors that affect the consumption of cocoa will also affect consumption of coffee and sugar.
  • Is there hope on the horizon for cocoa?  It's unlikely thanks to its current high point; few commodities ever enjoy four successive years of gains.  With the commodity headed for a correction, consider short-selling delivery of cocoa for immediate delivery; less than 4 weeks and certainly prior to October, when Halloween (and to a lesser extent Christmas) spending will likely boost cocoa back up for a brief while.  Long-term holds for cocoa aren't recommended, since there's too many factors that could come into play within just the next few months.

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