Your Easter eggs later this month may be pricier than ever thanks to a run on cocoa contracts in recent weeks. The chocolate ingredient is in short supply due to difficult growing conditions in West Africa, and a rush of financial manoeuvring by major players has forced the price up further in recent weeks.
In New York, cocoa prices rose close to $7,000 (£5,489) a tonne at the start of this week, a new record. That is a two-thirds increase since the start of the year. The initial driver was poor weather conditions in Cote d’Ivoire and Ghana, the biggest production sources, with heavy rain at first last year and more recently dry conditions limiting the current crop.
In reaction to this weaker supply, major chocolate companies waded into the futures market with an eye to buying up more cocoa and covering short positions. These shorts are held to hedge against exposure to spot prices.
Cocoa’s recent rise is unusual given how futures are commonly traded: contracts are used to bet on prices and either sold or rolled over before delivery. This dynamic previously broke down in 2020 as the pandemic cut demand for oil, and some contracts went negative as storage in the US ran out. With supply low and demand high, prices now face the opposite situation.
This is the result of a vicious circle, in the words of Ole Hansen from Saxo Bank. “[In West Africa] harmful intense dry winds [lowered cocoa] production. Meanwhile small-lot farmers struggle to receive an income large enough for them to afford much-needed but expensive pesticides and fertilisers to combat diseases, while maintaining production from ageing trees,” he said. That’s a lot to handle, especially for farmers who are paid according to a farmgate price determined a year ago by the government.
Agricultural markets are often impacted by growing conditions – cooler weather in Brazil can send arabica coffee prices way up, for example – but cocoa is unique in that there are not huge farming conglomerates pumping out supply. As Hansen points out, these farmers will not see the full gains from this record cocoa price.
Other highly traded agricultural products are bought and sold in a more similar fashion to energy or mined products. It is in these areas that retail investors can get some exposure to this risk-on area of investment.
Others in the ‘soft’ category include soy, wheat, corn and sugar. Agricultural specialist Peak Research says hedge fund short positions in soy have climbed, and note the various soy products are among the “most cheap and oversold agriculture futures markets”. The most direct soy investment would be an exchange-traded commodity (ETC), although this is also susceptible to swings based on Chinese demand given pork farmers are significant buyers of soy products for feed.
Coffee connoisseurs can also opt for arabica over robusta for ETC investment, with the former currently experiencing lower prices due to a consistent run of good production. Climate change and growing demand are likely to support this market in the future.
