This Valentine's Day, some lovebirds will try to impress their sweethearts with something shiny from Tiffany's (NYSE:TIF). The rest of us will undoubtedly reach for the traditional box of chocolate. Approximately $285 million was spent on chocolate for Valentine's Day in 2010, and analysts estimate that this year could see as much as an 11% increase in sales.

IN PICTURES: Baby Buffett Portfolio: His 6 Best Long-Term Picks

A Cup of Hot Cocoa
Many of the same long term fundamentals that apply to silver, wheat and oil are also relevant to cocoa. Rising populations, coupled with new sources of demand, are having their way with prices. Overall demand for the soft commodity has continued to outstrip supply. This is now the fourth year in a row that there has been a major supply-demand disruption, and the last time cocoa experienced a shortage that lasting so long was in the 1960s. Analysts estimate that demand will exceed supplies again throughout the 2011 season - an event that has never happened in the 50 years of recordkeeping in cocoa market.

In the short- and medium-term, cocoa is facing a potentially tumultuous political situation. The Ivory Coast in Africa, which accounts for more than 40% of global supplies of cocoa and is the world's largest cocoa bean producer, is on the cusp of civil war. Elections held in late November had the Ivory Coast selecting a new leader in Alassane Ouattara. Sitting President Laurent Gbagbo, along with the nation's military, has refused to leave office. In an effort to remove Gbagbo, Ouattara has pledged a one month ban on all cocoa exports. The idea is hit the former leader where it hurts, namely the pocket book, and cause the military to expedite his release. The Ivory Coast has only seen relative peace since 2003 and could very easily erupt into a civil war, and any negative events in the nation could push cocoa prices even higher.

Adding Some Chocolate Bars
With both the long and short term fundamentals favoring the rise in cocoa prices, investors may want to take this often ignored commodity for a spin in their portfolio. The popular PowerShares DB Agriculture ETF (NYSE:DBA) includes an 11% weighting in cocoa futures, while the UBS E-TRACS CMCI Food ETN (NYSE:FUD) provides a 3% exposure. These broad-based funds are a perfect way for investors to play overall food price inflation. However, for investors just wanting chocolate exposure, there are other plays.

The iPath DJ-UBS Cocoa ETN (NYSE:NIB) offers a pure-play vehicle with regards to cocoa prices. The fund should to do well longer term, as demand continues to increase. Similarly, investors can play cocoas complement in sugar via the iPath DJ-UBS Sugar ETN (NYSE:SGG).

Hershey's (NYSE:HSY) represents one of the only pure publicly traded confectioners left on the market, and has been pretty successful at passing along rising commodities costs to consumers. The company also benefits from higher promotional pricing during the holidays. Shares of the chocolate giant yield 2.7%.

Finally, investors wanting to play the rise in chocolate and cocoa prices, can do so geographically. Switzerland leads the world in chocolate grinding, and saw sales rise by 2.4% in 2010 and Africa leads the world in production. Ghana recently reported a 43% increase in demand for it cocoa beans in the first weeks of 2011. Investors can bet on these nations via the Market Vectors Africa Index ETF (NYSE:AFK) and iShares MSCI Switzerland Index (NYSE:EWL).

The Bottom Line
Cocoa represents an interesting long-term option. Following a similar demand trend as many other popular commodities, cocoa should be considered as a portfolio play. The previous funds and stocks like Tootsie Roll Industries (NYSE:TR) offer a way for investors to tap into that growing demand. (For related reading, also take a look at Trading The Soft Commodity Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!