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updated: 4/18/2014 7:55 AM

Chocolate egg Easter surprise is sticker shock after cocoa surge

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Bloomberg

The world's growing love of chocolate means more expensive treats for the Easter holiday.

Demand is rising at the fastest pace in three years, according to Euromonitor International Ltd., and farmers in West Africa aren't growing enough cocoa to keep up. The cost of beans used to make chocolate reached a 30-month high in March, forcing confectioners to charge their customers more.

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Lucy Armstrong, who sells sweets online from Chichester, England, said the cost of a 10-kilogram (22-pound) pack of bulk chocolate she uses to make champagne truffles, pralines and salty caramels surged 18 percent this year to 59 pounds ($98). She's raised the price of chocolate Easter eggs by 50 percent from last year, just before demand picks up for the holiday on April 20, and she plans another increase in the next six months.

"It's definitely the first time where the chocolate has gone up quite noticeably," said Armstrong, who started Lucy Armstrong Chocolates three years ago and now charges 7.5 pounds for a 170-gram Belgian milk-chocolate egg containing six hand- made chocolates, up from 5 pounds in 2013. "It is hard to try and work out what you can sell and at what price. The problem is it's only going to go up and up and up."

Cocoa may rally to $3,210 a metric ton on ICE Futures U.S. in New York by the end of December, the highest since July 2011, according to the average estimate of 14 traders and analysts surveyed by Bloomberg News. That would be up 6.3 percent from yesterday's closing price and top this year's high of $3,039, reached on March 17.

Ingredient Costs

The U.S. price of cocoa butter, the byproduct of crushed beans that accounts for 20 percent of the weight of a chocolate bar, rose 86 percent in the 12 months through April 11 and is the highest on average for any year since at least 1997, data from the Cocoa Merchants Association of America show. The cost of other ingredients also are rising, after milk reached records this year in the U.S. and Europe and sugar futures rallied 20 percent from a 43-month low in January.

While global bean production will rise for the first time in three years, reaching 4.104 million tons in the 12 months that end Sept. 31, that will be less than demand for a second straight year, with processors set to use 4.178 million tons, the International Cocoa Organization in London said. Supply concerns are being compounded by increasing prospects of an El Nino weather pattern, which can bring dry winds to West Africa, including top growers Ivory Coast and Ghana.

Long-term output deficits are fueling "bullish momentum" for prices, according to an April 3 earnings statement from Zurich-based Barry Callebaut AG, the world's top processor and biggest maker of bulk chocolate. The "significant" increases in cocoa and milk-powder costs were passed on to customers, so profitability wasn't affected, Chief Executive Officer Juergen Steinemann said on a conference call the same day.

Seasonal Sales

Even with higher prices, global demand is growing, especially in developing markets including Asia. Seasonal sales of chocolate on holidays including Easter and Christmas will jump 5 percent this year to $12.7 billion, Euromonitor said.

"The underlying concern is that there will not be enough cocoa available to satisfy the appetite of consumers," said Andreas Christiansen, managing director of Hamburg Cocoa & Commodity Office GmbH, a consultant to the confection industry. "The growing appetite for cocoa or cocoa-based products in emerging markets is what is driving expectations that consumption will outpace production."

More Bunnies

In Germany, where per capita chocolate consumption is the highest in the world at 9 kilograms a year, confectioners will produce 206 million bunnies for Easter this year, 8.4 percent more than a year earlier, according to the Association of the German Confectionery Industry, or BDSI. Pre-Easter sales of confectionery products as of April 14 at U.K. grocery chain Waitrose Ltd. rose 14 percent this year from a year earlier, said Meg Ogilvie, a spokeswoman in London.

The value of chocolate confectionery consumption in emerging markets including Asia, Latin America, the Middle East and Africa will grow more than 5 percent annually in the five years through 2018, more than double the rate of the world average, according to Euromonitor.

Consumers in the Asia Pacific region will eat 1.096 million tons by 2018, a 27 percent increase from 2013, compared with a 5 percent gain over that period in western Europe, the biggest buyer, Euromonitor forecasts. By 2018, eastern Europe will become the world's No. 2 consumer, displacing North America, where demand will be unchanged, the researcher said.

Ivory Coast

Cocoa's gains may be limited as supply prospects improve in West Africa. Ivory Coast, which supplies about 40 percent of the world's output, may see a 14 percent jump in its mid-crop, the smaller of two annual harvests, to at least 417,000 tons, according to a Bloomberg News survey of five traders and analysts. Farmers started collecting beans this month. Ivory Coast's total output may be about 1.55 million tons, 7 percent more than the previous year, according to the ICCO.

"We're looking at a strong mid-crop in West Africa, after a good main harvest," said Sterling Smith, a futures specialist at Citigroup Inc. in Chicago. "Assuming we have no weather problems, prices could ease amid increased supplies."

European demand was weaker than expected during the first quarter, which may indicate higher prices encouraged grinders to use inventories and delay buying, said Edward George, the head of soft commodities research at Ecobank Group in London. Processors used 340,753 tons in the quarter, up 0.4 percent from a year earlier, the European Cocoa Association said April 10. Analysts surveyed by Bloomberg expected a 3.5 percent gain.

Asia Demand

While farmers are harvesting larger crops now, production in the season that starts in October may be threatened if El Nino develops, Ecobank's George said. The meteorological phenomenon characterized by warming equatorial waters in the Pacific Ocean can bring drying so-called Harmattan winds to West Africa, parching cocoa crops. The U.S. Climate Prediction Center says the odds are now 65 percent that El Nino will develop.

Increasing chances of an El Nino raises the risk of higher prices for commodities, including cocoa, Goldman Sachs Group Inc. said in a report dated April 13.

Demand continues to grow in Asia, spurring expanded grinding capacity in Indonesia. Cocoa processing in the region rose 3.7 percent during the first quarter from a year earlier to 159,617 tons, the Singapore-based Cocoa Association of Asia said yesterday. The figures are for Malaysia and members in Singapore and Indonesia, according to its website.

In North America, processing rose 1 percent in the quarter to 129,007 tons, the National Confectioners Association said yesterday. Analysts surveyed by Bloomberg expected 128,138, on average. The industry surveyed processors including Hershey Co., Mars Inc. and Nestle SA.

Bullish Bets

Money managers are betting the cocoa rally isn't over. With prices already up 30 percent from a year ago, hedge funds and other large speculators held a net-long position of 67,994 futures and options contracts as of April 8, up from 11,061 a year earlier, U.S. Commodity Futures Trading Commission data show. Holdings have been bullish since July 2012.

"In the long term, if we do see more and more cocoa beans sucked into the Asian market, and they become scarcer, then inevitably prices will go up," Ecobank's George said. "It could be that cocoa becomes again a real luxury product, like champagne."

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