The weather for cocoa

Nowadays it seems perfectly reasonable that the chances of an El Niño weather pattern enveloping the tropics should help fashion an investment decision. After all, we live in an era of global warming, chaos theory and the connectedness of all things - if even the beating of a butterfly's wings in the Amazon basin can cause a hurricane to surge up the eastern seaboard of the US, then El Niño can easily affect cocoa prices.

And, clearly, it would be nice if my global fund, which takes long-term views on global investment themes mostly via ETFs, got a helping hand. Its performance has been handicapped by cocoa prices, which fell heavily in 2011. So much so that its cocoa investment - ETFS Cocoa (code: COCO) - is the fund's worst-performing holding. It had lost 33 per cent of its value by the start of 2012 and was still 28 per cent down in June, when, belatedly, I resolved to formulate a view.

Since then, things have looked up. Influenced by lowish rainfall in Côte d'Ivoire and Ghana (respectively, the world's first and third biggest cocoa producers), the outlook was for global production in 2011-12 to fall by around 8 per cent on the year. True, this was partly balanced by dull demand for cocoa. Between May and August, the International Cocoa Organisation (ICCO), a producers' and buyers' trade body, revised down its forecasts for 2011-12's global 'grindings' by 1.3 per cent. As a result, it now expects this year's grindings to creep ahead by just 0.4 per cent. Still, the net effect of dull demand yet even duller production - coupled with worries about agricultural output throughout the northern hemisphere - means that the cocoa price surged in the summer and ETFS Cocoa is up 26 per cent from its low point.

Then there is El Niño. According to the National Oceanic and Atmospheric Administration - part of the US Department of Commerce - there is likely to be a 'weak' El Niño beginning this month and running to next February. However, if you give extra credence to the Niño watcher's 'dynamic' models - as opposed to its backward-looking statistical models - then it's more likely that the coming El Niño will be moderately strong.

The stronger the resulting warm water swelling the eastern Pacific around Christmas time, the wetter and more disruptive the weather to follow. That would be bad news for cocoa production because the crop is famously vulnerable to any number of factors, but especially the weather. The ICCO believes that typically El Niño knocks about 2.4 per cent off global cocoa production. Predictably, South American growers suffer the most. On average, Ecuador, the world's seventh biggest producer, loses 6 per cent of its crop. But the major producers suffer, too. Indonesia, the second-biggest producer, loses 2.4 per cent; Côte d'Ivoire loses 2.0 per cent and Ghana loses 1.7 per cent.

Loss of production on that scale should be good news to anyone long of cocoa - especially considering that demand for the commodity seems to be growing smartly, however dull it is this year. For the nine years from 2002-11, grindings have grown at the rate of 3 per cent a year (that, purists please note, is the geometric mean) from 3.1m tonnes to 3.9m. Meanwhile, production - although keeping pace with demand - has been more volatile. It has fallen in three of those years, including a 10 per cent drop in 2006-07. Steady demand reliant on variable production - perhaps especially variable in 2012-13 - may be sufficient to sustain the cocoa price in the coming months. As I said at the outset, it's enough to persuade me to persevere with ETFS Cocoa.

Nor are any other changes imminent in the global portfolio. With my usual inefficiency, I pretty well forgot about it during the summer, and its performance seems little the worse for that. True, the performance of its biggest holding - iShares Emerging Markets SmallCap ETFS (code: SEMS) has been disappointing. That, presumably, is a function of doubts about domestic growth in the world's emerging economies. Yet, whatever the short-term worries, I still believe that, in the long term, that's the best area in which to be heavily weighted. Never say 'never', but of the portfolio's holdings, that one is the least likely to be ejected in the coming years, let alone months.

Bearbull Global Portfolio