Lots More on the Parabolic Surge in Cocoa Prices | Odd Lots

Summary

In this Bloomberg podcast, hosts discuss the recent surge in cocoa and olive oil prices, impacting consumers and the chocolate industry. They delve into the supply-demand dynamics, exploring factors like crop failures in West Africa and weather conditions affecting cocoa production. The conversation touches on the financial aspects of commodity markets, including speculation and hedging practices that can exacerbate price volatility. The discussion also highlights the disparity between farmers' earnings and the profits made by intermediaries and chocolate companies, suggesting potential long-term solutions to balance the market.

Takeaways

• 📉 Olive oil prices have come down by about 10% due to the arrival of the peak crop season, which is normal for the market.
• 🍫 Chocolate prices are high, and global consumption has doubled over the last 30 years, indicating a strong and growing demand.
• 🌱 Crop failures in West Africa, which accounts for 75% of the world's cocoa production, have been caused by low prices, poor farming conditions, and adverse weather and diseases.
• 🌤️ Weather conditions in West Africa have significantly impacted cocoa crops, with excessive rain and diseases like swollen shoot affecting production.
• 💸 The cocoa market has seen a significant rally, with prices soaring due to a combination of supply and demand factors, and more recently, financial market dynamics.
• 🔄 The financialization of the cocoa market has led to a loop of margin calls and hedging activities, which have further driven up prices.
• 🌱 Cocoa trees are difficult to cultivate and require specific climatic conditions, limiting large-scale commercial production outside of certain regions.
• 💰 The profits from cocoa and chocolate are distributed unevenly, with farmers often receiving a small percentage of the final product price.
• 🏢 Big chocolate companies participate in both physical and financial markets to hedge their positions and manage price risks.
• 🌟 High-end chocolate products are less affected by cocoa price fluctuations due to higher margins, while everyday chocolate bars see more impact.

Q & A

What factors have contributed to the rise in olive oil and chocolate prices?

The rise in olive oil and chocolate prices is due to a combination of high demand, poor weather conditions, crop failures in key regions, and financial factors driving up commodity prices.

How have weather conditions in West Africa impacted cocoa production?

Bad weather, including excessive rains, and a disease called the swollen shoot have severely affected cocoa production in West Africa, causing crop failures in Ghana, Ivory Coast, Cameroon, and Nigeria, which account for about 75% of global cocoa production.

Why are cocoa farmers in West Africa earning so little despite rising cocoa prices?

Cocoa farmers in West Africa are only receiving 20-30% of the market price for their produce. This is due to heavy government taxation and a lack of investment in farms, which limits their ability to plant new trees or use fertilizers.

How does financial speculation impact the cocoa market?

Financial speculation, including margin calls and over-hedging by traders, has exacerbated the recent rally in cocoa prices. As traders face large margin calls due to price increases, they are forced to buy back their hedges, further driving up prices.

What are the key differences between cocoa farming in West Africa and other countries like Ecuador or Indonesia?

In countries like Ecuador, Brazil, and Indonesia, farmers receive market prices for their cocoa due to less government involvement and lower taxation. In contrast, West African farmers deal with government-controlled prices and heavy regulation, which limits their earnings.

Why haven’t we seen more large-scale commercial cocoa production?

Cocoa trees require very specific climatic conditions to thrive, typically within 20° north and south of the equator. Additionally, commercial plantations are not viable due to the low prices that farmers historically receive, making it unprofitable for large-scale operations.

How do chocolate companies manage the volatility in cocoa prices?

Large chocolate companies hedge their cocoa purchases through financial markets to manage price volatility. However, with recent price surges, many companies face difficulties in passing these costs to consumers, resulting in thinner profit margins.

What impact does the rising price of cocoa have on consumers?

Consumers are likely to see smaller or lower-quality chocolate products, such as fewer pieces in a box or reduced cocoa content in chocolates. Prices at the supermarket for regular treats may increase, especially for items with smaller margins.

What is the role of weather in resolving the current cocoa supply-demand imbalance?

If there are several consecutive years of favorable weather, cocoa production could increase, which would help balance the market. However, current weather patterns and crop diseases remain a challenge for producers.

How do government policies in West Africa affect cocoa farming?

In West Africa, particularly in countries like Ivory Coast and Ghana, governments buy cocoa from farmers at fixed prices. This protects farmers from market fluctuations but limits their income potential during times of high cocoa prices.