Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Key points
Cocoa’s record-breaking and parabolic rise culminated around Easter when cocoa futures in New York and not least London broke above the USD 10,000 per metric tons level, a near four-fold increase during the past year. The main driver being an adverse weather-related slump in supply from West Africa, a region that accounts for around 70% of global production, strengthening a growing gap between falling supply and rising global demand for chocolate and cocoa-related products.
Normally we find money managers, also called speculators, standing accused of creating such situations, but in this case where money managers have been net sellers for several weeks, in the process reducing their net long to a one-year low. Instead, the focus has turned to chocolate producers, who normally as part of their risk management sell futures in order to hedge price swings before the eventual delivery of cocoa. However, as prices soared, the cost of holding short positions became increasingly challenging with daily margin calls to cover losses. As port arrivals of cocoa bags for export in Ivory Coast began to slow, producers were left holding short positions that potentially would not be met by the exporters, and as a result they were forced to cover their positions, inadvertently driving prices even higher.
The old saying, often used in commodities, assumes that high prices will support rising production while lowering demand. However, with demand so far showing signs of being relatively inelastic to the explosive rise, the focus has been turning to farmers and the prospect of higher production. Exceptionally low farmgate prices in Ivory Coast where the government sets the price, regardless of international price changes, have for several years created supply problems with farmers struggling to make ends meet, let alone earning enough income to buy fertilize and pesticides needed to maintain production from ageing trees.
The recent contracts with farmers in Ivory Coast had been set at 1,000 CFA francs per kg USD 1,650 per tons), less than a fifth of the price traded on the futures markets. However, after responding to pressure from farmers and the West African nation's president, Alassane Ouattara, the country’s Ministry of Agriculture has announced a rise that will see the farmgate price jump 50% to USD 2,470 per tons, still a far cry from international prices but a step in the right direction, and while the short-term tight supply issue remains, it raises hope for next seasons. In the coming weeks it will be interesting to see whether the price improvement could trigger a pick-up in port arrivals from farmers that may have been holding back stock in anticipation of higher prices.
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Previous "Commitment of Traders" articles
2 Apr 2024: COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: COT: Hedge funds zoom in on crude, copper and silver
18 Mch 2024: COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
26 Feb 2024: COT: Record corn short, cocoa surge no longer supported by speculators
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024:COT: Speculators chase false crude break; grain short extends further