FX168 Financial News (North America) - Cocoa bean prices are rising despite global supply tightening driving prices to record levels. According to data released on Thursday (April 18), “grinding” — converting cocoa butter and cocoa powder to make candy — fell only about 2% in the first quarter compared to the same period last year in Europe, and declined slightly in Asia. Prices more than doubled during this period as poor harvests in West Africa dampened supply. #2024宏观展望 #

Cocoa bean prices have repeatedly reached new highs and demand is still rising

The market is keeping a close eye on processing data to see if the unprecedented rise is starting to hurt demand and how difficult it is for chocolate makers to obtain cocoa beans. Traders and analysts expect grinding volumes to drop in the first quarter — although data may become less reliable as supply shortages make it more difficult to obtain cocoa.

Futures rose as much as 5.2% in New York, close to Monday's all-time high.

Rabobank London analyst Paul Joules (Paul Joules) said the grinding data “shows that demand will continue despite the current high prices,” he said: “I think demand disruption will occur, but obviously it will take longer to be reflected in the grinding data, and the market anticipates this situation.”

The first quarter grinding data for North America will be released later on Thursday. Jules said that if the data were better than expected, it could be “very bullish” for the futures market.

Global cocoa shortages and soaring prices are driving up the cost of chocolate and putting pressure on buyers and traders who are struggling to ensure the supply of beans but are worried about being hurt by volatile markets. From time to time, some processors are forced to stop production or pay premiums to order beans from small growers to ensure supply.

New York cocoa futures rose 4.9% to $10,558 per tonne. London cocoa futures rose as high as 11%, then retreated some of their gains.

The floods faced by Nigeria, the fifth largest producer in the world, are likely to put further pressure on the supply of cocoa beans, as they are expected to affect cultivation and mid-stubble harvests.

Why the chocolate world is in crisis

Hedge fund manager Pierre Andurand (Pierre Andurand), famous for betting on oil prices, pointed out that although the chocolate world is facing a huge shortage of cocoa beans, market chaos has led to an unlikely role.

By early March, prices had more than doubled in just 12 months. At that point, many speculators decided to quit and cut their bullish bets. However, Anduran saw a long-term opportunity.

Jules said that all signs point to a huge deficit: for decades, the world has enjoyed cheap chocolate, the trees are older, and crop diseases are rampant in West African countries (which account for about half of the market supply). A bit of bad weather from Côte d'Ivoire and Ghana became a turning point in production, and many traders are now worried that production in these growing countries has entered a long-term decline. Futures have risen rapidly by about 70% since the beginning of March, hitting a record high this week.

For the world's chocolate makers, a crisis has arrived. From Malaysia to Germany and Chicago, plants have been forced to stop production. The company caught by this rally is in the midst of a lawsuit. Now, lack of liquidity means that the next phase of the market is likely to be full of price fluctuations, which will raise concerns about the company going out of business.

Chai CEO Tristan Fletcher (Tristan Fletcher) said, “The threat of this crisis may be visible for a long time in the fluctuation of cocoa beans.” “Speculators are entering and leaving positions faster, which will increase market volatility,” he said. This means that the market is more likely to fluctuate drastically.” ChaI is a platform that uses artificial intelligence to analyze commodity markets.

The commodity market is notoriously volatile, but the speed and severity of the rapid rise in cocoa prices has caught even experienced market participants by surprise, causing chaos in the global supply chain, from struggling West African farmers to European commodity brokers to American candy makers.

This week, futures prices reached a record high of $10,760 per tonne, a level unimaginable for most traders before, and about double the previous peak set in the 1970s. Prior to this rise, the New York market had basically remained below 3,500 US dollars per ton since the 80s of the last century.

Citigroup expects the price to climb to $12,500 over the next few months. Anduran predicts that futures prices will break above $20,000 this year.

The rapid rise has forced many investors to leave the market; they don't want to be hit in the right direction. More importantly, many can no longer afford transaction costs — margin call fees to support company positions have skyrocketed.

Cocoa futures trading volume has fallen to an all-time low, and an indicator of the number of open contracts has fallen to its lowest point in 12 years. The market is now torn between extreme crop shortages and extremely low liquidity.

Pam Thornton (Pam Thornton), a senior commodity trader at Nightingale Investment Management, said, “It is the lack of actual activity — limited to rushing to close physical contracts — that has dried up normal futures activity and reduced liquidity.” She is best known for her position at Armajaro Asset Management, a former Cocoa hedge fund. “So if you have to buy futures, you can quickly influence the market quickly,” she said.

When companies are unable to pay the margin to support their hedging transactions, they are forced to buy back futures, driving up prices, and causing more people to exit the market. This vicious cycle of predicament also occurred in recent years when European gas prices got out of control after the nickel crash and the Russian-Ukrainian crisis, which affected consumers, manufacturers, currencies, and the economy.

“This is where I'm most concerned,” said Jacques Torres Chocolate, the founder and CEO of New York-based company that makes candy by hand. “If this is the future, then we're going to see a lot of people go bankrupt,” he said.

Cocoa crop production is expected to drop by double digits in Côte d'Ivoire and Ghana, which account for about 50 per cent of supply. The shortage is so severe that the two countries are extending contracts until the future harvest season.

The International Cocoa Organization (ICCO) predicts that in 2023-2024, production will be 374,000 tonnes less than demand. This is the third year in a row that there has been a deficit. Chocolate manufacturer Barry Callebaut AG is expected to have a deficit of 500,000 tons, equivalent to one-tenth of the global market, and the company expects another deficit next year.

Nicholas Quartey (Nicholas Quartey), who grows 12 acres of cocoa in the town of Suhum, about 100 kilometers north of Accra, the capital of Ghana, said, “We have almost nothing to supply this season.”

Production is highly concentrated in Côte d'Ivoire and Ghana, making the market very vulnerable to crop conditions in these two countries. Production in Nigeria and Cameroon remained in a very small range for a long time, and rivals in Asia also declined. The cocoa industry is now warning the coffee industry, whose production is concentrated in Brazil and Vietnam.

This historic cocoa shortage also revealed other problems plaguing the region.

Farmers in Côte d'Ivoire and Ghana have had meager incomes for decades. Although futures surged in nominal terms, they didn't match the pace of inflation. This is even 12 years after Côte d'Ivoire nationalized its cocoa sector as a condition for improving farmers' livelihoods, a condition for the International Monetary Fund to provide debt relief after the 2011 civil war.

The two countries' governments set prices to be paid to farmers, which locked in sales a year in advance. As a result, growers' incomes are far below the prices set in international markets, and are unable to respond flexibly to changes in supply and demand.

Steve Wateridge (Steve Wateridge), head of the research department at Tropical Research Services, said, “You have to give the farmer a signal that in the next major harvest season, it's worth investing in his farm, far more than he has invested in recent years.”

Ghana and Côte d'Ivoire have indeed raised some prices for farmers recently, but it's unclear whether this increase will be enough to incentivize more supply.

Few producers have access to irrigation or modern agricultural technology, which makes them extremely sensitive to weather changes. They have also not had enough money to invest in fertilisers and other crop chemicals due to sharp price increases in recent years.

At the same time, plants are under-innovating. Since cocoa is a tree crop that lasts 25 years, and is not grown every time it is harvested like corn or soybeans, there is little incentive for companies such as Syngenta AG to invest in producing better seeds. In 2018, when the world faced an oversupply, Côte d'Ivoire stopped distributing a new plant that could provide more productive and resistant trees.

Ithaca, Ghana planted 12 acres of cocoa. He also pointed out that small-scale mining activity has increased in the region, which has polluted water sources.

Many consumers have yet to see the full impact of this rise. Pladis Foods, the London-based parent company of Godiva, is still developing pricing plans, but CEO Salman Amin (Salman Amin) expects an average increase of “high single digits” worldwide.

Growers in places such as Cameroon, Nigeria, Ecuador, and Brazil are taking steps to increase production.

Laerte Moraes (Laerte Moraes), managing director of Cargill's South American Food Ingredients Division, said, “As cocoa prices have risen, the fever has begun.”

Despite this, the EU's new logging regulations, which are a major consumer country, are making it harder for farms to expand. The amount of cocoa beans on the European coast is unclear, putting more pressure on already declining exchange-certified stocks. These beans underpin benchmark futures traded in London.

It will take some time for any new production to enter the market. Cocoa trees take three to five years before they begin to bear fruit. By then, some candy makers may have been unable to recover.

Judy Ganes (Judy Ganes), president of J Ganes Consulting, said, “Many of the smaller players — from bean to bar people to chocolate makers — are under pressure.” “For these participants, they may disappear,” she said.