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2024-04-20 16:56:00
The world of chocolate is facing a shortage of cocoa so huge that the wild trade attracted an unusual player: Pierre Anduranda hedge fund manager best known for his bets on oil.
By early March, prices had more than doubled in just 12 months. At that point, many speculators gave up and reduced their bullish bets. That was it then Enduring He saw the opportunity to go long.
Everything indicated a massive deficit: the world had rejoiced cheap chocolatethe trees were old and diseases abounded in the lands i West Africawhich supplies almost half of the market.
Slightly bad weather was the turning point for the production of Ivory Coast y Ghana, and many traders now fear that production in these countries has entered a long-term decline. Futures rallied nearly 70% since early March to hit record highs this week.
For the world’s chocolate producers, the crisis has arrived. Factories have been forced to close since Malaysia for Germany y Chicago. Companies caught on the wrong side of the rally find themselves embroiled in lawsuits. And now the lack of liquidity also means that the next phase of the market is likely to be plagued by erratic price movements that raise the specter of corporate bankruptcy.
“The scars of this crisis may long be visible in cocoa volatility,” he said. Tristan Fletchermanaging director i CHAI, a platform that uses artificial intelligence to analyze commodity markets. “Speculative traders enter and exit positions much more quickly, which will add to this turmoil. This means markets are much more likely to swing wildly,” he added.
Commodity markets are notoriously volatile, but the speed and severity of the cocoa rally has surprised even the most seasoned traders and unleashed chaos across the crop’s global supply chain, from struggling West African farmers to European commodity brokers and US candy makers.
This week, futures hit an all-time high of $10,760 a tonne, a level unimaginable to most traders and roughly double the previous high in the 1970s.Before this rally, the New York market had remained virtually below $3,500 since the 1980s.
Citigroup Inc. expects prices to rise to $12,500 in the coming months. Andurand expects futures to exceed $20,000 this year.
The dizzying pace of the increases has driven out dozens of investors who don’t want to be caught off guard. More importantly, many can no longer afford to trade: the cost of margins to support a company’s position has skyrocketed.
Cocoa futures trading has hit historic lows, with a measure of the number of outstanding contracts falling to a 12-year low. The market is now caught between extreme crop shortages and dangerously low liquidity.
“It is the lack of physical activity – limited to desperate hedging of nearby physical contracts – that has caused its normal futures activity to dry up, reducing liquidity,” said Pam Thornton, a veteran commodities trader at Nightingale Investment Management in her role at the former cocoa hedge fund Armajaro Asset Management. “So if you have to buy futures, you can easily move the market very quickly.”
When companies can’t afford the margins to support their hedges, they are forced to buy futures once more, driving prices up even more and driving more people out of the market. The vicious cycle of distress was also seen in recent years during the nickel collapse and when European natural gas prices spiraled out of control following the Russian invasion of Ukraine, affecting consumers, manufacturing, currencies and economies.
“That’s what worries me the most,” said Jacques Torres, founder and CEO of Jacques Torres Chocolate, a New York-based artisan confectioner. “If this is the future, we’re going to see a lot of people out of business.”
Double-digit production declines are expected in the cocoa crops from Ivory Coast and Ghana, which account for around 50% of supplies. The shortage is so serious that both countries are renewing contracts for future harvests.
The International Cocoa Organization (ICCO) predicts that production will fall short of demand by 374,000 tonnes in the 2023-2024 season, the third deficit in a row. The chocolate manufacturer Barry Callebaut AG predicts a deficit of 500,000 tonnes, equivalent to a tenth of the world market, and the company predicts another downfall next year.
“We have almost nothing else to offer for the rest of the season,” said Nicholars Quartey, 67, who grows 12 acres of the crop in the town of Suhum, regarding 100 kilometers north of Accra, the capital of Ghana.
Production is highly concentrated in the Ivory Coast and Ghana, which makes the market very vulnerable to what happens to the crops in these countries. Production in Nigeria and Cameroon has long stagnated in a narrow band, and their Asian rivals have recorded declines. What is happening in cocoa is now a wake-up call for the coffee industry, which has seen production concentrated in just two countries: Brazil and Vietnam.
The historic cocoa shortage also reveals other problems that have plagued the region.
For decades, farmers in Ivory Coast and Ghana have been chronically underpaid. Although futures have risen in nominal terms, they have not kept pace with inflation. This comes even 12 years following Ivory Coast nationalized its cocoa sector to improve farmers’ livelihoods, a condition for receiving debt relief from the International Monetary Fund following the 2011 civil war.
The prices offered to growers are set by the authorities in both countries, which block sales a year in advance. As a result, growers charge much less than international market prices and cannot respond quickly to changes in supply and demand.
“What you need to do is give the farmer the signal that when the next main crop comes, it’s worth investing in his farm and a lot more than he has done in recent times,” says Steve Wateridge, head of research for Tropical Research Services.
Ghana y Ivory Coast Some prices for farmers increased recently, but it remains to be seen whether the increase was enough to stimulate greater supply.
Few producers have access to irrigation or modern agricultural techniques, making them vulnerable to weather conditions. Nor have they had enough money to invest in fertilizers and other chemical products for crops following the rise in prices in recent years.
Meanwhile, there has been a lack of innovation for plants. Since cocoa is a tree crop that can last for 25 years and is not planted every harvest like corn or soybeans, there is little incentive for companies to Syngenta AG invest in producing better seeds. And already in 2018, when the world faced a surplus, Ivory Coast stopped the distribution of a new seedling that would offer trees with greater performance and resistance.
“I know many farmers who leave the cocoa sector: They leave their cocoa plantations and dedicate themselves to rubber plantations; others are dedicated to coconut plantations, says farmer Issifu Issaka cocoa of 48,000 square meters in Ghana. It also points to the rise of small-scale mining in the area, locally known as galamsey, which has polluted the water.
“The bodies of water in the cocoa-producing regions have disappeared, we have lost them,” says Isaka.
Consumers have yet to see the full impact of the demonstration. The parent company of Godiva, Pladis Foodslocated in Londonis still finalizing its pricing plans, but expects global percentage increases to be around “single digits,” according to Salman AminCEO.
The manufacturers of Cameroon, Nigeria, Ecuador y Brazilwhere prices are not controlled by governments, take steps to increase production.
“With this price on cocoa“The fever has come,” he said. Laerte Moraesmanaging director of the food ingredients unit for South America of Cargill Inc.
But the new deforestation rules for The European Union, one of the main consumers, exacerbates the difficulties of expanding the farm. It is also unclear how much cocoa will be able to reach European shores, which increases the pressure on already declining share certified stocks. It is these grains that underpin benchmark futures traded in London.
It will take some time before new production hits the market. It can take between three and five years for cocoa trees to start producing crops. By then it may be too late for some candy manufacturers to recover.
“A lot of the smaller companies, the chocolate makers, are more than stressed,” he said. Judy Ganespresident i J Ganes Consulting. “For them, it is possible that they will disappear,” he concluded.
(C) 2024, Bloomberg
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