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Should you invest in cocoa or chocolate stocks this Easter?
With Easter just around the corner, we explore whether chocolate makes a good ingredient to build your nest egg.
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Cocoa can act as a diversifier in a portfolio, in that its demand-side pricing is cyclical (so tends to be higher during periods of economic growth) but its supply is mostly dictated by climatic conditions, so is uncorrelated.
“What’s really unique and interesting about cocoa is that its supply is so concentrated, primarily from the West Africa region, that disruption in that geography that can have a big impact on the overall long term price of cocoa,” said Aneeka Gupta, director of macroeconomic research at asset manager WisdomTree.
(Image credit: Bloomberg Creative via Getty Images)
The impact of weather conditions on harvests can have a far greater bearing on cocoa pricing than any macroeconomic factors, as the last two years have shown.
As recently as December 2024, cocoa futures (contracts to buy cocoa at a future date) traded above $10,000 per metric ton.
Prices fell substantially over the last year, to just over $2,000 in late February. But they then crept back up again as the Middle East crisis has pushed up agricultural costs, with cocoa prices rising 17% in the month to 27 March.
These high cocoa prices have put pressure on chocolate stocks.
Should you invest in chocolate stocks?
Shares in Cadbury’s owner Mondelēz (NASDAQ:MDLZ) fell 11% in the year to 30 March, while Lindt and Sprüngli’s (ZURICH:LISN) share price fell 2.2% over the same period.
High cocoa prices are a headwind for chocolate producers because they push up their main input cost.
It can be difficult for chocolate companies to pass these higher costs onto consumers without hurting sales, especially during periods of high inflation, though there are ways in which they can try to reduce their impact.
“Some of the chocolate companies had a dent in their price performance, and that eventually picked up as they started to either incorporate a bit of thrifting [reducing the cocoa content of the chocolate using substitutes like solidifiers and emulsifiers] or they bought ahead to hedge some of that risk,” said Aneeka Gupta, director of macroeconomic research at asset manager WisdomTree.
But tricks like thrifting, or ‘shrinkflation’ – where prices remain the same but portion sizes shrink – can provoke consumer backlash.
Normalising cocoa prices are therefore positive for chocolate stocks. Unfortunately, the war in the Middle East has the potential to push cocoa prices higher again.
How has the Middle East conflict impacted cocoa prices?
Climate conditions had been leading cocoa prices to settle over recent months, but the war in the Middle East has reversed that trend for now.
“There’s a fear being embedded into the markets that we could get a food crisis,” said Gupta.
The effective closure of the Strait of Hormuz hasn’t just driven up oil prices; it has also increased agricultural costs because around 30% of the world’s internationally-traded fertilisers pass through the strait.
“Since the conflict started, we’ve seen urea prices surge about 50%,” said Gupta. “That is very relevant to cocoa, because West African farmers already underused fertiliser. Now that we have spiking prices, that’s going to make it even harder for them to maintain yields on some of the aging trees in cocoa growing areas.”
This could negatively impact cocoa harvests in 2026 and 2027. A relatively poor crop would exert upward pressure on cocoa prices up over the longer term.
How to invest in chocolate
There are two ways to invest in chocolate and cocoa, and they are largely opposite to each other.
If you think cocoa prices are going to rise in future, then buying an exchange-traded fund (or, to be specific, an exchange-traded commodity) that tracks cocoa prices is the best approach, as this will gain in value when cocoa prices rise.
The only cocoa ETC available to UK-based investors is WisdomTree Cocoa (LON:COCO), which replicates the Bloomberg Commodity Cocoa Subindex 4W Total Return Index. For adventurous, risk-seeking investors, there is a leveraged version, WisdomTree Cocoa 2x Daily Leveraged (LON:LCOC), which doubles the daily gains (and losses) of the Bloomberg Cocoa Sub Excess Return Index.
You could also buy shares in chocolate-makers, like Mondelēz, Lindt and Sprüngli, Hershey’s (NYSE:HSY) or Nestlé (ZURICH:NESN). Since high cocoa prices are a headwind for chocolate makers, these stocks ought to perform better when cocoa prices fall – though they bring added risks, such as the risks that the businesses themselves might be mismanaged.
Note that some of these, Mondelēz and Nestlé especially, are diversified food and drink companies, so don’t necessarily represent a pure play on chocolate.
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Dan is a financial journalist who, prior to joining MoneyWeek, spent five years writing for OPTO, an investment magazine focused on growth and technology stocks, ETFs and thematic investing.
Before becoming a writer, Dan spent six years working in talent acquisition in the tech sector, including for credit scoring start-up ClearScore where he first developed an interest in personal finance.
Dan studied Social Anthropology and Management at Sidney Sussex College and the Judge Business School, Cambridge University. Outside finance, he also enjoys travel writing, and has edited two published travel books.
