A chocolate blueprint for oil

Stop me if you’ve heard this already but chocolate is about to get a lot more expensive. Global stocks are at a dangerous low compared to demand and they’re going to get even lower as production declines.

The reasons for the decline given in a number of recent analyses include persistently low prices for years, a bad crop in the latest year because of bad weather – duly attributed to climate change by the FT – and the structure of the cocoa market.

Essentially, however, it all boils down to one thing: underinvestment. Persistent, chronic, difficult to reverse underinvestment. Kind of like the underinvestment that’s been going on in oil.

Now, cocoa and oil are vastly different commodities in terms of production. Growing cocoa is a weather-dependent endeavor, like all farming, while oil extraction is almost entirely independent of the weather.

Most of the world’s cocoa is grown by individual farmers, concentrated in Western Africa, while oil is being produced all over the world.

Those individual farmers are not really getting a lot of money for their cocoa. In fact, most of them are barely making ends meet, not least because their governments – the Ivory Coast and Ghana – set an official forward price for their crops and they have no opportunity to take advantage of higher market prices when these occur.

In oil, the bulk of global production is in the hands of big companies, national and private, and they are not bound by state-set prices.

In cocoa, everyone missed the danger of a deficit because supply used to be steady and growing, and nobody, for some reason, thought that this may change, especially if prices for farmers were being kept low for decades while demand soared.

In oil, it’s anticipation of lower demand that’s is keeping prices depressed – and investments lower than they should be.

Despite the many differences between cocoa and oil, it seems to me that there are parallels to be drawn between the state of the cocoa market and the state of the oil market – and the future state of both.