How To Profit From The Chocoholic’s Worst Nightmare

by Tony Daltorio, Investment U Research

In the volatile world of commodity

investing, they're called "softs."

But we know them as commodities like

coffee, sugar, orange juice and cocoa.

And when it comes to investing,

the latter represents an excellent

opportunity right now.

Cocoa grows predominantly in the

West African nations of the Ivory Coast

and Ghana, which churn out 40%

and 20% of the world's production


Because of the particular growing

conditions for soft commodities,

prices tend to fluctuate due

to weather issues, political conflicts,

credit shortages and the

inability to respond to rising prices.

When any of those happen – as

they frequently do, companies have

to cope by charging more.

And that means investors

can do quite well…

A Sour Mix

Right now, things aren't so

sweet for chocolate lovers.

While analysts expect cocoa

demand to recover quickly from

the global economic downturn – growing

anywhere between 1.5% and 3%

between 2009 and 2010 – the market

cannot sustain that kind of pressure.

The increase in cocoa-craving

consumers will create a

growing market deficit for the

fourth year in a row, rising from

62,000 metric tons in 2008 to

73,000 this year according to

the International Cocoa Organization.

And with the industry forecasting

that consumption will outpace

supply yet again next year,

the cocoa market could very well

enter its worst period

of shortage in 40 years.

To make it worse, El Nino weather

patterns could affect production

in Indonesia, the world's third-largest

producer, and Ecuador,

the seventh-largest.

Meanwhile, in Nigeria – the

fourth-largest producer – political

problems lowered exports by

22% earlier this year and could

affect the crop at any point again.

But even with all of that, the real

reason cocoa prices should

soar is down to the Ivory Coast…

The Ivory Coast's Lagging Production

Thanks to too much rain and the

Black Pod Disease – a fungal

infection that can ruin

entire crops – the Ivory Coast

reported a poor cocoa harvest

this year. And even if it gets

perfectly favorable weather

in the months ahead, the country

could deliver a still smaller crop

due to too many aging trees.

And it's not simply a question

of planting new trees. That endeavor

requires time and money,

the latter of which small farmers

in that region – already among

the world's most heavily

taxed growers – simply don't have.

Under that kind of stress, Ivory Coast

output could decline as much as

15% in 2010 – some

100,000 metric tons.

And that's on top of a

200,000 metric ton drop in

the 2008-2009 season.

This has cocoa buyers such

as Cadbury (NYSE: CBY) and

Nestle (OTC: NSRGY) worried.

Both firms have launched programs

aimed at replanting trees,

in a desperate effort to avoid

a long-term decline in output.

The problem is, no one is certain

whether those efforts will succeed,

especially with the region's largest

cocoa workers' union threatening

to strike if its demands for

government subsidies and

farmers' co-operatives aren't met.

And finally, we have the fact that

many chocolate manufacturers

have yet to cover their needs

for next year…

Enrich Your Portfolio

Not good news for chocoholics.

But if you're an investor, it could be

a sweet ride, as prices move

to their highest levels

since February 1980.

With the problems in the Ivory Coast

looking like they could take

a while to resolve, investors still

have plenty of time to get

on board this upward trend

in cocoa prices.

Experienced commodities traders

could take advantage through

the cocoa futures or

futures options market directly.

But a simpler way is to invest

through an exchange-traded

note (ETN).

Trading on the New York Stock

Exchange just like a stock,

the unleveraged Dow Jones-UBS

Cocoa Subindex Total

Return ETN (NYSE: NIB) is

based on cocoa futures and will

mirror the performance

of cocoa, minus the fees.

Good investing,

Tony Daltorio

P.S. For more commodities

recommendations, take a look at

the Xcelerated Profits Report.

The advisory issues picks

on gold, natural gas, sugar

and other everyday commodities

that could prove extremely

lucrative for savvy investors.

For more information,

take a look here.

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