Cocoa: A 50% farmgate price boost a step in the right direction

Key points

• Cocoa's record-breaking parabolic rise has paused around USD 10,000 per tons
• Producer short covering seen as key driver behind the recent extension
• A 50% jump in Ivory Coast farmgate prices potentially supporting a bigger crop from October 

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.