Cocoa Prices and Currency Measurement

Friday, October 23, 2009

3D moneyThe Wall Street Journal today reported “Cocoa Hits A 30-Year High,” and gains “… soar 70% in a year.” That’s true, if one looks at prices in US dollars. But, cocoa is a global commodity, so in other places that buy cocoa, the relevant price is in their currency. For example, the European chocolate manufacturers’ interest is the Euro price, which is up, but less dramatically.

Cocoa serves as a reminder that we, as global consumers, producers and travelers, need to be careful about thinking the world measure is the US dollar. With the recent declines in the US dollar, another currency can give quite a different perspective…

Before looking at the graphs below, let’s discuss measurement. In virtually every endeavor in life, there needs to be some accepted way of measuring something. In finance, the local currency is usually used. For globally traded commodities, the US dollar is typically quoted, but other countries use their own currencies as the relevant measure. Europeans look at oil prices in Euro terms. Now let’s look at how their view of world prices can differ from the US picture.

First, here are the trends we know well, using the US dollar prices of gold, oil and cocoa this decade. Everything is up significantly, with both gold and cocoa well above their previous highs.

US $ prices

Now, the European view. (I have used the same index scale on the graph so we can easily spot the differences.) Notice that the rises are much less. And cocoa is only just above its 2002 high. The whole picture is significantly muted compared to that of the US dollar. The reason is the Euro’s rise against the US dollar.

Euro prices

Any financial measurement discussion takes us into the age-old question of what makes a better financial measure: a paper currency or a valuable commodity, like gold. This issue has resurfaced because of today’s sizable government deficits. So, here is the price picture using gold as the base measurement. The upward trends in oil and cocoa disappear, and the US dollar and the Euro have significant downtrends.

Gold prices

No, I am not suggesting gold is the best measure. This discussion is just a reminder that measuring only in US dollars in times of shifting exchange rates can give a misleading view of the real trends and how the rest of the world sees things.

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John Tobey on Seeking Alpha

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October 2009