Chocolate Gain

Maybe your 401(k) is a shadow of its former self but restoring your financial health could be as close and convenient as a candy bar: Both sugar and cocoa have been trading near historical highs this October.

Cocoa’s prices spiked this week as reports that world’s largest producer of cacao, the Ivory Coast, would be harvesting 14% less cacao in 2009 than 2008. With predictions of El Niño weather patterns affecting Indonesia’s crop - accompanying drought conditions could curtail the harvest from the world’s third largest grower. Prices spiked to a generational high of $3000 + per metric ton as dealers compete to secure a piece of a predicted shortfall.

While speculation and pre-programmed ‘buy orders’ are additionally responsible for the rise in the chocolate's price; the spike in sugar’s cost may be more attributable to the more classic economic formulation of supply and demand. Rain in Brazil, drought in India, protected markets in the US are partially to blame for demand exceeding supply by as much as 5 million tons in 2010.

Added to the production woes, many beverage and confection companies are placing greater demands on the sugar supply as they return from using the price stable, heavily subsidized corn syrup to sugar. Many analysts see value in products that are made of pure cane sugar – these foods are bizarrely thought of as healthy/healthier alternatives to those fueled by corn syrup. Along with the ability to add value to their products in the short term, companies are currently returning to sugar in order to prefect formulas/recipes and secure long-term contracts before an inevitable so called fat-tax is enacted on corn-based sweeteners.

An economic downturn might mean budgeting away pints of Ben & Jerry’s but candy bars along with alcohol and lottery tickets seem to be pretty recession proof. The same forces that are brutally punishing Starbucks and massively rewarding McDonalds seem to be at play here. A combination of low-cost indulgence coupled with the understanding sugar is pretty comforting have fueled candy makers profits over the last 2 years. Confectioners by in large remained profitable for the duration of the Great Depression as candy was both a low-cost source of caloric energy and a comfort in uncertain times. People intuitively understand this phenomenon, as candy has been used to treat countless smaller, more personal depressions.

Rising profits for confectioners, soaring prices for the raw commodities and a market that remains willing to pay for small comforts makes this year’s trick or treat windfall all the more precious. My advice, something you will never hear from Jim Cramer, this Halloween, hand out bundled derivative mortgage futures to the young ghouls and goblins - Save the snickers for yourself, you’ll be holding on to the more valuable investment.