Cocoa Prices Are On a Wild Ride
After the sugar rush comes the crash.
Cocoa prices plunged almost 30% in the past week after a rally that pushed prices nearly 80% higher to start the year. And yet prices are still so elevated that chocolate-maker executives see the market as detached from reality. Or as Mondelez CEO Luca Zaramella poetically put it on a recent conference call: “The current market structure does not warrant the current market prices.”
Hot Chocolate
As with any asset class that starts to look like a bubble, the initial runup seemed legitimate: As a recent JPMorgan report noted, climate change-induced drought has ravaged crops in West Africa, which supplies about 80% of the world’s cocoa. And then add to the mix that the crop is still mostly cultivated by small farmers without resources for proper reinvestment to boost yields. But the wild swing has more to do with who’s betting on prices:
- A JPMorgan commodities strategist noted in the report that non-commercial investors now hold more than 60% of total open interest across futures and options in the New York market, a historical high.
- The runup in prices meant that speculative commodities traders, including those hedging against physical holdings of cocoa, have either had to pay more to meet margin calls (an insurance policy to cover potential losses) or close out their positions. That’s led to a drop in the number of outstanding contracts, which has curbed liquidity in the market, exacerbating price moves beyond what’s explained by simple supply and demand.
Make The World Go Away: Big Chocolate had largely locked in cocoa bean prices before this year’s surge, since hedging the future is an essential part of their strategy. Most companies are now eyeing their plan for 2025, but even Mondelez’s Zaramella suggested that a fundamental correction in prices could be two years out. So go ahead and eat all the chocolate you can now — by next year, it’ll give your budget heartburn.
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