Cocoa prices fall as improved weather in West Africa alleviates crop fears. Hedge funds adjust positions amid changing market conditions.
Cocoa prices are falling and have experienced a significant decline, marking the longest streak of losses since 2022. This downturn is driven by improved weather conditions in West Africa, which have alleviated fears about the region’s cocoa crop production.
Weather Brings Relief to West African Crops
For six consecutive days, cocoa futures have tumbled, with New York’s most active contracts dropping by 5.6% to $7,361 per tonne, and their London counterparts falling by 10.3% to £7,010 per tonne. This shift comes as hopes rise that the cocoa crops in Ghana and Ivory Coast, the two primary producers, may see recovery in the upcoming season.
Eric Crittenden, Chief Investment Officer of Standpoint Asset Management, noted, “The years-long bull market in cocoa may have finally ended as prices fell by enough to trigger our risk-management liquidation rules.”
Surge in Cocoa Prices and Its Causes
Earlier this year, cocoa futures in New York and London had doubled in value, reaching record highs. In April, New York prices surpassed $12,000 per tonne due to adverse weather and disease that severely impacted crops in Ghana and Ivory Coast. These countries are responsible for two-thirds of the world’s cocoa production. Hedge funds had heavily invested in the market, contributing to the price surge.
The situation was exacerbated by Ghana and Ivory Coast’s inability to meet forward contract commitments, selling more cocoa than they could deliver. Carlos Mera, Head of Agricultural Commodities at Rabobank, explained that the price peaks were driven not only by low crop yields but also by the overestimation of available cocoa, saying that price peaks had been driven “shockingly low” and that “more cocoa had been sold than there was in existence”.
Economic Strain on Farmers
Years of low cocoa prices have left many farmers financially strained, hindering their ability to invest in improving aging plantations. This financial strain contributed to Ghana producing only 500,000 tonnes out of the 800,000 tonnes it had contracted to sell to major food processors. Consequently, these unmet contracts were deferred to the next season.
Mera pointed out that as prices increased, many buyers had to purchase back their short positions. However, the market now anticipates some recovery due to the onset of seasonal rains. New plantations in other cocoa-growing regions, such as Ecuador, are also expected to help meet global demand.
Hedge Funds Adjust Positions
As prices decline from April’s highs, hedge funds are scaling back their bullish bets on cocoa. Net long positions in New York dropped to 25,675 contracts by June 18, down from 70,661 in late January, according to data from the US Commodity Futures Trading Commission.
However, ADM Investor Services, a UK brokerage, cautions that the situation remains uncertain. “The crop is not out of the woods yet,” stated Mark Bowman, an analyst at ADM. He highlighted that the results of upcoming pod counting surveys, due later this summer, are still awaited. Additionally, the weekly tally of fresh crop arrivals in Ivory Coast remains low, with recent figures showing a decline compared to previous weeks and last year.
While the improved weather in West Africa has brought some relief and led to a decline in cocoa prices, the market remains cautious. Future crop assessments and ongoing monitoring of production levels will be critical in determining the stability and direction of cocoa prices in the coming months.
Implications for GCC Markets
The recent fall in cocoa prices presents both opportunities and challenges for the Gulf Cooperation Council (GCC) markets. As major importers of cocoa products, GCC countries might benefit from lower prices, potentially reducing costs for local manufacturers and consumers. However, the volatility and uncertainty in the cocoa market require careful monitoring. Companies in the GCC need to stay informed about weather patterns, crop forecasts, and hedge fund activities to make strategic decisions that leverage the current market conditions.
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