Source: Golden Ten Data
Star trader Andurrand continues to be optimistic about cocoa, and also shared his views on crude oil and copper.
Crude oil is long, and the “god of crude oil trading” Pierre Andurand (Pierre Andurand) successfully bet on one of the strongest commodities this year — cocoa. The hedge fund manager, who is betting heavily on cocoa, said that the rise in cocoa prices is likely to continue this year. He now believes that the world's cocoa stocks may be completely exhausted.
Andurand, the founder of Andurand Capital Management, is famous for his oil and energy transactions. Thanks to years of commodity bullish markets, he increased his clients' investment capital by more than seven times in three years.
However, recent developments in the cocoa market have drawn this energy market veteran's attention to soft commodities in commodity trading. Andurand's hedge fund went long on cocoa futures in early March. This bet seems to have paid off. Over the next month, the price of cocoa futures soared to a record high of more than $12,000 per ton, but then regained some of the gains.
Note: Soft commodities mainly refer to products closely related to agriculture and animal husbandry.
In the new episode of the Odd Lots podcast, Andurand shared his views on soft commodities such as cocoa, crude oil, and copper.
cocoa
Andurand said that as financial markets clash head-on with real-world restrictions, he believes there is room for further increases in cocoa prices. He pointed out that bad weather, climate change, fertilizer shortages, and the outbreak of two plant diseases, combined with long-term underinvestment, have limited supply in major African producers. Andurand predicts that if the weather doesn't improve, the price of cocoa futures could soar above $20,000 this year or next.
Cocoa futures prices are booming this year
The supply shortage is so severe that it could lead to a complete depletion of cocoa bean stocks, he said.
“Basically,” there is a severe shortage of cocoa this year. I mean, we're seeing a 17% drop in production compared to last year. Most analysts gave an 11% drop, but that's because they tend to be very conservative. You know, they have lots of customers, and they don't want the world to worry, so they gave relatively conservative estimates,” Andurrand said. “The current situation is that stocks of cocoa may be completely exhausted.”
Although cocoa futures prices have fallen from April highs to below $9,000 per ton in recent weeks, the structural pressure faced by this industry known for its long planting cycle is expected to continue for several years. Andurand estimates that due to supply shortages in Ghana and Côte d'Ivoire, this year's cocoa supply gap will reach 800,000 tons, which is equivalent to about 17% of total global production during the current planting season.
He said, “We expect the ratio of cocoa stocks to processors' expected demand to reach 21% this year. By contrast, over the past 10 years, this ratio has remained between 35% and 40%. Around the time the price of cocoa reached its previous peak in 1977, this ratio was 19%.”
Raw cocoa stocks tracked by the International Cocoa Organization (International Cocoa Organization) can act as a buffer when there is a shortage of supply. The lower the ratio of cocoa stocks to the processor's expected demand, the lesser the buffering effect. When the ratio of cocoa stocks to the expected demand of processors plummeted in 1977, the price of cocoa soared to more than 5,500 US dollars per ton, and after adjustment for inflation, the price exceeded 28,000 US dollars per ton.
Andurrand said that this percentage could drop to 13% by 2025. “That's when there's a real shortage of cocoa. If consumers can't buy it, then prices will really skyrocket.”
Since there are few signs that cocoa bean stocks will improve significantly in the short term, only the consumption side of balancing supply and demand can curb price increases. Some analysts say they've seen signs of a decline in consumption, and big chocolate makers are taking steps to offset price increases by cutting production or using low-quality cocoa and other alternatives.
However, for Andurand, since cocoa accounts for relatively few ingredients in most chocolate products, and chocolate itself is not a big expense for most people, demand does not respond much to the price of cocoa.
“What historically limited the price of cocoa to between $2,500 and $3,000 per ton? It's not a demand, it's a demand that's extremely inelastic,” he said. “This is because people consume very little cocoa in dollars.”
“So people don't reduce their consumption of chocolate because of it. This means that the price of cocoa is really limited by supply,” he added. “If not enough supply is available, prices will rise substantially until more supply is released. So when will we get more supplies? Uh-huh, this depends on the weather to a certain extent. If the weather is much better, then we may have more to supply next year.”
Unstable weather patterns have also contributed to a sharp rise in the prices of other soft commodities. Orange juice futures prices jumped to record highs this week as markets expect Brazil, the world's largest exporter of orange juice, to experience its worst harvest in 36 years. Meanwhile, Vietnam's drought has pushed Robusta coffee futures prices to their highest level in more than 40 years.
Orange juice futures price and Robusta coffee futures price
Extreme volatility in soft commodities is likely to expand trading opportunities for Andurand hedge funds.
“Generally speaking, changes in weather patterns due to climate change will have some structural effects on soft commodities,” he said. “So we have to pay more and more attention to these soft goods because it's not just about going from one year to another.”
oils
According to people familiar with the matter, Andurand's hedge fund, Andurand Commodities Discretionary Enhanced rose 25.6% in the first quarter, while in 2023, the fund fell 55% due to the failure to fulfill its forecast of a sharp rise in oil prices.
Speaking about the oil market, Andurand said, “While we consider all possible supply disruptions, in the end we find that no supply disruptions have occurred. Production in Russia and Iran eventually increased significantly compared to expectations. Moreover, US supply last year also surpassed expectations. However, since the beginning of this year, US crude oil production has been disappointing and lower than people expected. Obviously, four months isn't enough to form a trend, but it's worth noting. Is US shale oil production about to peak? We'll only know in hindsight, but so far, it looks like U.S. crude oil production hasn't actually increased much, at least in the past four months.”
Andurand also mentioned the tense situation in the Middle East. He pointed out that what could actually lead to an interruption in crude oil supply to the Middle East is an attack on Iran's oil facilities. “But I don't think America would want that, so Israel wouldn't do it. Because if they do, then Iran might try to close the Strait of Hormuz, and then we'll be in a huge supply outage. But this is a low probability event.” he said.
Also, according to Andurand, Ukraine's attack on Russian oil facilities could also cause supply disruptions. Ukraine has mainly attacked Russian refineries in the past six months, but it has yet to attack oil pipelines and ports. I think they should attack ports and oil pipelines if they really want to influence Russia's crude oil revenues. But at the same time, it will also have an impact on oil prices, and the Biden administration does not want to see oil prices rise during the election year. Therefore, the US will undoubtedly put pressure on Ukraine to stop attacking the port. But if Ukraine becomes more desperate and needs more help, then they may attack ports. This could lead to supply disruptions.
copper
Andurand believes that in addition to cocoa, copper is another commodity experiencing similar structural shortages. Copper has long been hailed as the winner of the global electrification movement. Its price soared again this week, and Luntong hit a two-year high.
“Copper prices should rise sharply,” the hedge fund manager said. “Producing solar panels and windmills requires more copper, and all data centers need lots of copper. As demand for electricity surges, large amounts of copper are needed.”
He further stated, “Demand [for copper] will increase, and supply will not increase. As a result, the gap gets bigger and bigger every year. And the price hasn't responded, mainly because I don't think there are enough funds or companies in the market to actually trade and hold positions in the futures market for a long time. Since the market isn't really playing its part, sending out price signals to address the supply deficit, this impending deficit erupts after years of accumulation.”
For copper, “we'll soon see a non-linear trend in price,” he concluded.