Cocoa Set to Join Surge in ‘Breakfast Club’ of Commodities

Willy Wonka and the senior management at the Chocolate Factory won’t like this one bit.

Harvested cocoa beans
Jeremy Horner | Photographer's Choice |Getty Images
Harvested cocoa beans

Cocoa — the main ingredient for Kit Kats, Hershey’s bars and Snickers — may rally into the second-half of this year as low rainfall and drier weather forecast for Ivory Coast, the world’s leading cocoa supplier, threaten to reduce yields and deplete global stockpiles.

A classic weather market is already underpinning gains in the ‘breakfast club’ of commodities with benchmark corn and wheat futures surging to multi-month highs on the Chicago Board of Trade as a heat wave in the U.S. Midwest wilts crops.

And the same trend could also send cocoa prices higher this year.

“Low farmer prices, erratic rainfall in West Africa and the potential risk of an El Nino weather pattern developing all threaten our baseline production forecast” for cocoa, Rabobank analysts led by Luke Chandler said in a report released Thursday. “Any reduction to our crop expectations increases the forecast new season deficit and tightens inventory levels.”

Tight cocoa stockpiles are a key upside driver for prices, Rabobank warned. The bank’s current forecast for cocoa grindings-to-use ratio forecast for 2012/13 is 39.5 percent, the second-lowest in 25 years.

“With stocks low, there is little buffer available to offset further supply reductions. We consider the reduced stock-to-grindings ratio and the risk associated with downward revisions to production expectations underappreciated in the current curve.”

The prospect of tight supplies and possible crop shortages is starting to be reflected in benchmark cocoa futures markets.

September delivery cocoa futures quoted on the IntercontinentalExchange, or ICE, on Thursday hit their highest since March 28 at $2,375 a ton while Liffe cocoa futures, traded in London, hit a five-month high on Thursday at 1,619 pounds a ton.

But there are no signs of the rising price of cocoa and confectionery impacting demand so far.

Latest numbers from Barry Callebaut AG, the world’s leading manufacturer of high quality cocoa and chocolate products, show demand remains robust. Sales volume increased 6.6 percent to 1,037,313 tons in the first nine months up to May 31, 2012 with sales revenue up by 8.4 percent.

Cocoa prices could be headed even higher as the year progresses. According to Rabobank, Benchmark ICE cocoa prices will average $2,400 a ton this quarter, rising to $2,600 in the fourth-quarter and $2,650 in the first-quarter of 2013. Rabobank expect Liffe cocoa prices to average 1,600 pounds in the third-quarter, rising to $1,750 in the fourth.

- by CNBC's Sri Jegarajah