Cocoa prices eclipse copper amid West Africa's challenging harvests

Cocoa prices soared by over 50 percent in March on the New York commodity exchange, driven by poor harvests in West Africa caused by unfavorable weather and crop diseases. Analysts warn that cocoa prices could rise even further.

On Monday, futures contracts for cocoa in New York rose by 7.6 percent to $9,210 per metric ton (approximately $8,341 per short ton). Despite being in what many technical indicators suggest is an overbought condition for some months, prices continue to climb.

In just this month, cocoa futures contracts have surged about 50 percent, and since the beginning of the year, their value has more than doubled. Most of the world's cocoa, originating from West African countries affected by bad weather and crop diseases, has led to these skyrocketing prices. With no significant reduction in production elsewhere, the industry faces challenging times.

With cocoa prices nearing $10,000 per metric ton (about $9,072 per short ton), it has surpassed the price of copper, highlighting the extent of the price inflation.

This surge in cocoa prices could translate to costlier chocolate products within the year. Easter eggs, for instance, have seen a price increase due to last year's hike in cocoa prices, pushing some manufacturers to either reduce the size of their chocolate bars or promote products that use less cocoa.

Chocolate could become even more expensive by Easter 2025 if the climatic challenges and diseases affecting cocoa trees continue, coupled with high sugar prices, as noted by Bloomberg Intelligence analyst Diana Gomes in her report.

Despite these increases, Bloomberg has observed a withdrawal of speculators from the market, with a noticeable reduction in open contracts and fund managers decreasing their positions to the lowest in a year. This indicates that physical buyers could be behind the recent price escalation.

However, Reuters has highlighted that record cocoa prices have favored systematic strategy hedge funds, which outperformed other funds in the first quarter. These hedge funds use algorithms to identify potential market trends, a strategy that seems to have paid off with the biggest gains seen by the most aggressive strategies.

Barclays, after analyzing the performance of 40 hedge funds, noted that those using systematic approaches reported an average gain of nearly 9 percent in the first two months of 2024. This compares favorably to a growth of 2.6 percent across the broader hedge fund industry.

"The current macro environment is conducive to forming trends due to various sources of instability, including the impacts of El Niño, interest rate normalization, and heightened geopolitical risks," explained Razvan Remsing, Director of Investment Solutions at Aspect Capital.

The supply situation could deteriorate further. New regulations by the European Union aimed at halting the sale of products that contribute to deforestation could pose additional challenges for Europe's leading chocolate producers in securing supplies.

Attention is now shifting to the upcoming mid-year harvests in West Africa, which are expected to be smaller compared to the previous year. Earlier this month, Bloomberg reported that the Ivory Coast, a major cocoa producer, anticipates a weaker harvest.