Cocoa causing a stir

With gold in fever, it seems that hedge fund infection has also started spreading fast into the cocoa market. Growing interest of hedge funds investors into cocoa has lately lifted the price of the commodity to its 33-year high.
The price of Cocoa, one of the main ingredients used in chocolate preparation, is currently hovering around $3232 per ton, a jump of around 20 percent in the past one year, according to IMF data.
As Pakistan occupies a negligible position in global cocoa trade, its current price manipulation isn going to have any impact on the countrys trade bills, trivial at best. Pakistan imported around $7 million worth of chocolates and food products containing cocoa in FY08, just 0.02 percent of the total import bill.
Despite that, domestic candy manufactures are up in arms over high cocoa cost, as high prices of other ingredients used in chocolate making, such as sugar and milk powder, have already taken a toll on industrys margin.
Imported chocolates, targeting the higher end of the market will see a major upward revision in retail prices amid a weakening rupee. But, as consumers in this niche segment are relatively price inelastic, price alteration will do little to change current consumption patterns.
Local producers are divided into two broad categories - manufacturers of real chocolate and those of compound chocolate. Real chocolate sellers will take the major burnt of higher cost of cocoa beans than compound chocolate makers as the former use much higher composition of cocoa in their ingredient mix.
For manufacturers that use the just-in-time inventory model, costly ingredients have already started eating their bottomline. For those who maintain significant inventory levels, the impact will become more apparent after two to three months.
Even though cocoa accounts for a small portion of the price of most local compound chocolate producers, even a slight change in cocoa price can have significant impact on product demand owing to low purchasing power of consumers.
"We cannot change retail prices as buyers are accustomed to purchasing chocolates at Rs5 and Rs10. In some cases, we tilt the quantity of ingredients and sometime cut our own margins", said an official working in one confectionary company.
Besides this, the confectionary industry has been adopting product size and weight reduction tactics to protect their margins and keep prices intact.
As for those local producers who use various compounds to make chocolate, the impact of cocoa price hike is comparatively much lower. And since these producers target nearly 70 to 90 percent of the total chocolate market at home, global cocoa price hike comes as a blessing in disguise.
Yet costlier cocoa or not, local confectionary and chocolate makers, be it producers of real chocolate like Cadburys Dairy Milk or of those who make chocolate by compound materials like Mitchells Jubilee, are cushioned by Pakistans growing population. Chocolate, bring it on.