Ebola & Cocoa: Telegraphing Forthcoming Global Volatility?

The rapidly accelerating spread of Ebola in West Africa has justifiably captured the global media’s attention. The World Health Organization reported last month that the devastating disease could affect up to 20,000 individuals before it is contained, but reports emerged last week that the US Center for Disease Control is forecasting the number could be more than 25x that estimate, with 500,000 people infected by January. While the CDC report has not yet been released, almost all informed analysts and global health professionals agree – there is likely massive under-reporting of the disease to date and actual cases are probably much higher than reported.

Many have addressed the local economic devastation within West Africa (~$800mm is the World Bank’s estimate of potential lost economic activity), but for the most part, investors and corporate leaders alike have viewed it as a predominantly African human tragedy. Very few have looked beyond the local implications to evaluate possible global economic ramifications. It’s true that Guinea, Liberia, and Sierra Leone are not that important to the global economy, but those countries do share a porous border with the Ivory Coast, which is adjacent to Ghana…and the Ivory Coast and Ghana together produce approximately 60% of the world’s cocoa.

So what? As the number of Ebola cases spirals upward, it’s becoming increasingly likely that the disease will find its way into the Ivory Coast and possibly Ghana, resulting in lockdowns similar to those imposed in today’s affected areas.  Cocoa beans are primarily grown by individual farmers and then collected by aggregators who travel from town to town. Quarantines, lockdowns, and limitations on travel are likely to rapidly disrupt the flow of cocoa…at a time when cocoa demand is booming due to rapidly increase chocolate consumption in the emerging markets.

Although obvious, it’s worth restating what I said in plain economic terms: demand is booming, and supply may be disrupted.  Such a scenario implies significantly higher cocoa prices for global chocolate manufacturers like Hershey’s, Mars, Nestle, or even Turkey’s Yildiz Holding, owner of Godiva Chocolate.  In fact, the WSJ reported that cocoa traders are already considering recent price increases an “Ebola premium.”  Some traders fear prices could rise an additional 25% if supply is disrupted.

The impact of global economic ripples emanating from West Africa can be very destabilizing.  In fact, NY Fed President William Dudley made this exact point while being interviewed by Bloomberg’s Matt Winkler, noting that developments in West Africa “are horrible for the people involved, but there is not a lot of connectivity in terms of economic mass back to the rest of the world, and so long as things are contained in those areas and financial markets are aware of them, it doesn’t actually lead to a whole lot of volatility.”

Might rapidly rising chocolate prices serve as a leading indicator of forthcoming volatility in global asset prices?