(BLOOMBERG) 5/16/24 And finally, here's what Joe’s interested in this morning The world could completely run out of cocoa inventories, according to the famed commodity trader and hedge fund manager Pierre Andurand. Pierre has built a successful career primarily based on his oil bets. But he also veers into other areas from time to time, including a successful long bet on cocoa back in March, right before the price of the commodity took off. We talked to Pierre for the Odd Lots podcast out today, and it was absolutely fascinating hearing how someone like him conceptualizes the market. Find the whole episode on Apple, Spotify or elsewhere. As he sees it, there are four factors greatly diminishing supply: Bad weather in West Africa Climate change Two separate disease outbreaks affecting the cocoa plants A shortage of fertilizer on account of Russia's invasion of Ukraine. But then what's perhaps even more interesting is how he conceptualizes demand. Basically, from a demand perspective higher prices just don't matter much. A typical chocolate bar might just be 10% cocoa, which means even a 10x increase in the price of the beans would only double the price. And since chocolate just isn't a big part of most people's spending, even a surge in prices at the end level might not affect the amount of chocolate people buy. Here's how he maths it out (edited for clarity): It's always about supply versus demand. But what has been capping the price between $2,500 a ton and $3,000 a ton was not demand because demand is extremely inelastic. You can study that historically when you have a recession or not, when prices go up a lot or not. Demand generally goes up. And that's because the amount in dollar terms that people consume in cocoa is very small. I did a back-of-the-envelope calculation the other day. You have 8 billion people on the planet and a market of 5 million tons of demand per year, so on average it means that people consume 1.7 grams of cocoa per day. At $10,000 a ton, which is four times the more recent historical prices, that represents 1.7 cents per day. Okay, that's the average person. Many people eat nothing and a few eat 10 times that amount. So, at these levels of spending — 1.7 cents per day per person — the swings just don't matter much and the only way to bring the market into balance is supply. Now he sees a possibility that the world could run out of cocoa inventories, which to be clear is different than the world not having any cocoa. Exchanges and producers hold stocks of cocoa, which is an important number to get your hands on, so you can get a “stocks-to-grinding” ratio, which gives you a sense of how much the world has on hand as a buffer relative to how much is processed at any given time. Right now we're at 21%, which is far lower than the past 10 years, when the world was closer to 35% to 40%. If we get another bad year of weather and disease, those excess inventories could just vanish.
Thanks for posting. It's great to hear fundamental analysis from someone like that. But the cocoa situation makes me think of wheat price back in 95-96. Price ran up fast to record highs and the price of a loaf of bread at the grocery store doubled. I can't remember the actual fundamental causes of it, but the bread price increase was viewed by growers as the processors taking advantage of the headlines and price gouging for a while. There might have been a nickels worth of wheat in a loaf of bread and doubling the price of wheat shouldn't have increased bread price more than 15 cents. I know that when raw material prices go up it effects other prices in the chain like insurance and interest costs, but he is right that the end cost of the product SHOULDN'T be affected that much. Even if the situation is as dire as portrayed the producers are most likely going to sell all the cocoa they have immediately. How could they turn down prices like this? They'll take the extra money and improve production practices like increasing irrigation capacity and increasing acreage. We'll see cocoa grown in areas next year that haven't grown it in the past. I'm looking at the short side myself.
https://www.foodfocusguelph.ca/post/revisiting-the-connection-between-wheat-and-bread-prices Revisiting the Connection Between Wheat and Bread Prices "The USDA estimate that the farmer share of the food dollar for bread is 4% and for flour is 19% which highlights the impact of processing."
True, but new wheat is harvested in less than a year. Cocoa takes years from planting to harvest. Cereal vs. tree. Just saying.
I totally agree and have to admit that I don’t know anything about cocoa production. But with record high prices you’ll see supplies materialize from places you never thought of. Maybe there’s abandoned established trees somewhere that don’t yield enough to mess with in normal years but now prices are high enough to finance extra fertilizer and water. High prices cure high prices, we just never find out how until afterwards.
May take longer to replenish supplies. https://www.barchart.com/story/news/29535942/cocoa-prices-surge-on-west-african-cocoa-crop-concerns
From Barchart again : "Carryover support from Thursday is supporting cocoa prices after the European Parliament voted to change its deforestation regulations. If the EU cannot agree on changes to the rules before next month's deadline, the EU Deforestation Regulation will be implemented, which could curb supplies of commodities, including cocoa, from countries where deforestation occurs. The EU's Deforestation Regulation measure, known as EUDR, says companies must ensure the products they bring into the EU weren't made in areas deforested or degraded after 2020."
Look at who is writing the article and the disclaimer at the end...LOL. https://www.ft.com/content/d6d5a37c-27cd-4892-8dea-9dae7ec9c9fc He is right though IMO
"Cocoa also has support after chocolate maker Hershey Co. said last week that it sought CFTC approval to buy a large amount of cocoa through the ICE Futures Exchange due to tight global supplies. Bloomberg reported that Hershey wants to take a position allowing it to purchase more than 90,000 MT of cocoa on ICE Futures US. The purchase size is more than nine times what the exchange currently allows. The amount also exceeds a federal position limit of 4,900 contracts, or 49,000 MT, set by the CFTC. Global cocoa shortages are so large that it's now cheaper to take delivery of supplies through the New York exchange than buying in the physical market." Barchart