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Unfavorable Weather in West Africa Drives Cocoa Prices

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Cocoa prices rise

Cocoa futures contracts on the Intercontinental Exchange (or ICE) for March delivery rose by 0.98% and settled at $2,791 per metric ton on January 28, 2016. Cocoa futures prices rose due to unfavorable weather conditions in key West African countries.

The iPath Pure Beta Cocoa ETN (CHOC) rose by 1.4% on January 28, 2016.

The weather conditions in key cocoa-producing West African regions are unfavorable. Harsh Saharan weather conditions have brought high temperatures in crucial cocoa-producing regions due to harmattan winds. Harmattan winds are sand storms that negatively affect the soil moisture and pod development of crops. Due to harmattan winds, soil dries out to the extent of soil erosion.

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These winds have started earlier than expected, bringing dry weather with them. They are expected to be the hardest of the last two decades according to the reports of the International Cocoa Organization (or ICCO). Due to unfavorable weather conditions, top cocoa-producing country Ivory Coast has estimated crop damage of about 12% in its second production season. Unfavorable weather speculation continued to negatively affect cocoa output consensus on January 28, 2016.

According to the ICCO report, cocoa stockpiles have risen to 1.5 million tons as of January 28, 2016, compared to the September 2015 report of 1.5 million tons. The report reflected a lower-than-anticipated 36,000 tons of surplus in November 2015.

ICCO continued to anticipate the same level of surplus before its February 2016 report. Inventories in producing countries have fallen from 413,000 tons last year to 316,000 tons. However, cocoa inventories in importing countries have risen to 1.1 million tons compared to the previous year’s 1.0 million tons. The lower-than-anticipated surplus indicated slower supply versus expectations. This resulted in cocoa prices rising on January 28, 2016.

Concerned cocoa businesses

The rise in cocoa prices negatively affected food and beverage companies on January 28, 2016. Businesses such as Mondelēz International (MDLZ), The Hershey Company (HSY), and Starbucks (SBUX) rose by 1.0%, 3.0% and 2.9%, respectively, on January 28, 2016, despite the rise in cocoa prices. However, Dean Foods (DF) fell by 0.56% on January 28.

The iShares MSCI Brazil ETF (EWZ) rose by 1.7% on the day.

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