Cocoa futures have surged beyond an unprecedented threshold of US$10,000 per ton, marking an extension of a historic rally that has already seen prices double this year.
This surge is significantly impacting the cost of chocolate production.
The market turbulence is primarily driven by poor crop yields in key West African cocoa-producing regions, setting the stage for a third consecutive year of supply deficits worldwide.
The cocoa industry is contending with the enduring repercussions of low returns paid to cocoa farmers, while concerns mount regarding the ability to procure sufficient cocoa beans.
In addition to worries surrounding limited physical supplies, financial markets are experiencing mounting pressures. Some traders have resorted to selling futures contracts to hedge against physical holdings.
However, as these contracts approach maturity, traders find themselves in need of cash to meet margin calls stemming from losses on derivatives. In a market that continues to ascend, traders may be compelled to close out short positions, further fueling the ongoing rally.
On Tuesday, futures spiked by as much as 4.5 percent to reach $10,080 in New York—a level that was scarcely conceivable just a few months ago. Despite a technical gauge of prices indicating overbought conditions for a significant portion of the past several months, cocoa prices have persisted in their upward trajectory.
“When we’re at this price, it’s hard to tell whether these prices are justified,” said Paul Joules, an analyst at Rabobank in London. “Whenever we have a dip in the market, it seems to shoot straight back up, which is more to do with the commercials, they’ve been net buyers.”
Cocoa’s advance is bad news for consumers if chocolatiers keep passing on costs or sell bars that are smaller or have less chocolate in them. The looming Easter holiday is a peak period for chocolate consumption, and the lag between commodity and retail markets mean the brunt of the impact for shoppers still lies ahead.
There’s a risk the supply situation may worsen. Incoming European Union rules — aimed at stopping products that destroy forests from being sold in shops — may make it even harder for the bloc’s chocolate makers to secure supplies.
New harvest
Focus is now turning to West Africa’s upcoming mid-crop, the smaller of two annual harvests. Top grower Ivory Coast’s regulator expects that to shrink this season, Bloomberg has reported.
“The West African supply situation remains extremely tight going into the start of the mid-crop harvest next week, and that continues to underpin cocoa prices,” The Hightower Report said in a note.
While other cocoa growers, such as Brazil and Ecuador, are endeavoring to increase production, the process of planting new cocoa trees and waiting for them to yield beans typically spans a few years. Consequently, any relief to the strained global cocoa supplies is expected to be delayed.
The International Cocoa Organization has forecasted that the ratio of stockpiles to grindings will decline to its lowest level in over four decades this season, underscoring the market’s precarious situation.
On Tuesday, cocoa prices in New York surged by 3.5 percent to reach $9,991. In other softs markets, raw sugar saw a one percent increase, while arabica coffee experienced a slight uptick.
Similarly, in London, cocoa futures for the most active contracts have also more than doubled in value this year.