Coffee and Chocolate Holding Up in Down Economy

By Martin Zimmerman, Los Angeles Times
Friday, December 5, 2008 12:44 PM CST

In the United States, the true comfort foods are chocolate and coffee -which may provide relief for investors battered by plummeting prices for oil, gold, wheat and other products.

The prices of most commodities have tumbled this year as recession has spread around the globe, hammering consumer demand for the raw materials that go into a loaf of bread, your car’s gas tank and much more.

But cocoa and, to an extent, coffee have bucked that trend, and some analysts think they can keep doing so.

Whereas oil prices have plunged 51 percent this year and wheat prices are off 41 percent, coffee -currently trading around $1.10 a pound -has fallen a comparatively modest 17 percent in the futures markets, according to Brad Zigler, managing editor of HardAssetInvestor.com.

Cocoa prices, now at $2,372 a metric ton, are actually up 15 percent for the year.

“This is the only good news we can find at the moment” in commodities, said Mark Hansen, director of trading at CPM Group.

Historically, coffee consumption tends to hold up well during hard economic times, Hansen said. What changes is where it’s consumed.

“Instead of going to Starbucks, you buy the 2-pound drum of Maxwell House and make it at home,” he said.

That isn’t good news for Starbucks, which is closing stores amid declining sales, but it is “a positive for the overall volume of coffee on the market” and could help put a floor under coffee prices, Hansen said.

In a report last month, Zigler noted that coffee consumption rose an average of 2.2 percent during recent recessions.

Zigler estimates that an 8-ounce cup of joe brewed at home with Folger’s from the local grocery store costs less than a quarter. A 12-ounce (“tall”) cup of Pike Place Roast at Starbucks runs $1.25.

Hansen and Zigler note that coffee supplies are tight, the result of frozen credit markets making it tough for growers to finance purchases of fertilizer and pesticide. Coffee inventories in Brazil, the world’s biggest producer, are at 50-year lows, U.S. officials estimate.

“A bad production year would raise a distinct possibility of shortage,” Zigler wrote in the report.

The outlook for cocoa prices is more semi-sweet than sweet for sellers of the beans.

Chocolate sales appear to be holding up in the face of hard economic times, but that could change if things get markedly worse. In particular, sales of pricier dark chocolate -which uses a much higher percentage of cocoa than milk chocolate does -could melt along with the economy.

“You don’t see a dramatic decline in candy consumption in the early stages of a slowdown. People see it as an affordable luxury,” Zigler said. “The real diminution in demand for cocoa and chocolate products is a little further down the line.”

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