Montreal, Canada

Cocoa Puffs enthusiasts rejoice: your favorite cereal is getting cheaper.

One of the biggest bull markets over the last few years has been in the cocoa sector where supplies plunged following big cuts in Ivory Coast production. After four years of protracted supply deficits, cocoa prices are about to head into surplus this year.

West Africa, which supplies about 70% of the market (mostly produced in the Ivory Coast), has recently been the beneficiary of favorable weather and the resultant boost in cocoa crop forecasts in 2010. The prospect of increased production and a supply glut has sent cocoa prices down by almost a third since last December’s peak.

It’s not just General Mills, the manufacturer of Cocoa Puffs cereal since 1958, that’s rejoicing as prices decline. Nestle, Kraft, Mars and other candy bar companies will also benefit as cocoa prices decline, lifting margins.

Forecasters believe cocoa supplies will hit a surplus of between 50,000 and 250,000 tons over the next 12 months compared to a deficit of 75,000 tons in 2009-2010. If accurate, that forecast will turn the cocoa market into surplus for the first time in four years, ending the worst production bottlenecks in the West Africa in more than thirty years.

Historically, soaring raw materials prices has resulted in production increases to meet rising demand of commodities. Cocoa appears to be no different.

As prices went through the roof heading into late 2009, production increased in the Ivory Coast. Also, some manufacturers, like Nestle of Switzerland, have started to harvest their own cocoa crop in an effort to reduce their dependence on politically unstable Ivory Coast.

But of all factors determining crop output, Mother Nature holds the wildcard. Just ask Russian farmers after they suffered one of their worst wheat harvests in decades this past summer amid scorching summer heat. Grains prices have rallied sharply this year led by wheat and corn following lower than expected yields in the United States and overseas.

When commodities soar, producers boost output. The problem, however, is that demand can continue to grow and in some cases, exceed existing and new supplies for years to come as production increases assume a time-lag. And many commodities face shortfalls heading into the latter part of 2010 – but cocoa is unlikely to be among them.