Cocoa prices: A chocoholic’s nightmare

A squeeze on the supply of cocoa has sent prices soaring.

"Cocoa futures are piping hot," says Alexandra Wexler in Barron's. Prices in New York and London have risen by 25% to two-year highs since June, amid a supply squeeze in the market. Demand is recovering in the largest chocolate markets, America and Europe.

Cocoa processing jumped 8% year-on-year in the US in the second quarter, and luxury chocolate consumption has recovered faster than expected, with Switzerland's Lindt reporting annual sales growth of 13% in North America in 2013's first half. European demand also looks more robust, now that the recession is ending.

Meanwhile, dry weather in West Africa, which accounts for two-thirds of the world's cocoa, is hurting supplies. Stocks in warehouses have fallen by 11% in a year, as processors concerned they won't be able to get beans from suppliers have resorted to them.

Demand is set to outstrip supply by 130,000-170,000 tonnes in the year ahead, says Emiko Terazono in the FT. And the rally has room to run: Derek Chambers of commodity trader Sucden says higher prices are needed to stimulate production.

Hedge funds have been piling in, and Citigroup's Sterling Smith expects the supply shortage to be bigger than markets currently expect.

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