chocolate bar © image100/Corbis

Extra3/21/2007 2:57 PM ET

World chocolate shortage ahead?

Cocoa futures are near three-year highs as a drought in Africa combines with changing consumer tastes to pressure the chocolate supply.

By Elizabeth Strott

It's every chocolate lover's nightmare: a chocolate shortage.

A drought in Western Africa and unrest in the Ivory Coast -- the world's biggest cocoa producer -- has combined with rising consumer taste for cocoa-rich dark chocolate to raise concerns about a shortage in supply.

As a result, cocoa futures have been trading at three-year highs, with prices rallying since the beginning of the year.

"In the last few months, cocoa prices have rallied on expectations for a smaller crop from the Ivory Coast and Ghana," said Boyd Cruel, a senior analyst at Alaron Trading who covers the cocoa market.

World production of cocoa is down 5.5% on a year-over-year basis from 2005-2006, according to the International Cocoa Organization -- and cocoa's price has risen 44% since November 2005.

But don't fret over $5 Snickers bars just yet: Cruel said that markets have already factored in the supply issue. The highs reached this week are technical in nature, he said, because news of the drought has been out for months.

Another commodities analyst agrees.

"On the fundamental side, we don't expect to see changes in demand," Barclays' Sudakshina Unnikrishnan told Bloomberg News from London. "Going into the second quarter, the real wild card continues to be based on the conditions and political situation in Ivory Coast."

Blame the trend?

Part of the problem, say chocolate experts: As customer taste has shifted from milk chocolate to dark, demand for cocoa has risen; the darker the chocolate, the more cocoa is required for production.

Dark chocolate has recently been considered the "healthier" of the chocolates, with high levels of flavonoid antioxidants; it has also been found to lower blood pressure.

Chocolate manufacturers have been happy to encourage the trend, as dark chocolate is also a higher-margin product.

"Consumers are very interested in the goodness benefits of chocolate, including the antioxidants found naturally in dark chocolate," said Michele Buck, Hershey (HSY, news, msgs) chief marketing officer, in a statement today. "This interest is driving explosive growth in dark chocolate."

In the U.K., dark chocolate bars are outselling their milk chocolate relatives in the retail chain Woolworths for the first time ever. In the United States, retail sales of chocolate have climbed about 3% every year since 2000, the National Confectioners Association has reported, with dark chocolate one of the fastest-growing categories.

"Two years ago the hot thing in chocolate was white. Now dark is the flavor of the month," Woolworths CEO Trevor Bish-Jones told British paper The Independent. "Consumers are doing the same thing in chocolate as in the rest of the food market. They are trading up and being more discerning about what they buy," Bish-Jones said.

Should candy companies worry?

In the short term, candy companies like Hershey and Cadbury Schweppes (CSG, news, msgs)should be able to absorb the boost in price as they hedge aggressively for the volatile cocoa market.

"In terms of resell prices, this won't have a major impact immediately," Alaron Trading's Cruel said.

But there could be problems down the road if the drought continues.

Nestle, Hershey and Cadbury did not return calls for comment.

Three million tons of cocoa, worth $5.1 billion, are produced around the world each year.

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