Cocoa Futures Surge in 2024

LONDON (Reuters) – Futures markets have witnessed a record-breaking run in cocoa prices in 2024, with hedge funds exiting the market contributing to the surge.

Cocoa Futures vs. Cocoa Beans

Cocoa beans are essential for chocolate production, primarily sourced from the Theobroma cacao tree, native to the Amazon rainforest. Today, most cocoa is produced in West African countries like Ghana and Ivory Coast, and in parts of Latin America.

Large trade houses such as Cargill, Olam, and Barry Callebaut purchase most cocoa beans. In the top two producing countries, Ghana and Ivory Coast, these trading houses secure beans through government contracts before the growing season, ensuring delivery between October and September.

Some traders also process cocoa beans into powder, butter, and liquor, supplying chocolate manufacturers.

The Role of Futures Markets

Futures markets are pivotal for setting commodity prices. They allow investors to trade contracts for future delivery of various goods, including cocoa.

These markets help commodity buyers, like traders and food producers, manage risks associated with price fluctuations. For instance, a trader may order cocoa at a certain price, hoping to sell at a higher price later. To protect against price drops, they take short positions in futures.

Ultimately, cocoa futures affect the cost of cocoa beans, influencing chocolate prices, revenues for cocoa-producing countries, and farmers’ income.

Involvement of Speculators

Speculators, particularly hedge funds, also engage in futures trading. They don’t handle cocoa beans directly but profit from price changes in financial markets. Some hedge funds analyze data, like weather patterns, to predict supply fluctuations, while others use algorithms to gauge market risks.

Hedge funds typically close their futures contracts before expiration to avoid receiving physical cocoa beans.

2024 Trends in Futures Markets

Cocoa supplies reached historic lows last year due to poor weather and diseases affecting West African trees, compounded by issues such as sector mismanagement and illegal gold mining, which drove prices to record highs.

As hedge funds exited the market to book profits amid increasing risks, liquidity decreased, leading to greater price volatility. Following a poor 2023/24 harvest, Ghana postponed bean deliveries, further driving prices upward.

As hedge funds withdrew capital over the past five months, cocoa futures prices in New York have reached unprecedented levels.