The real reason cocoa prices have soared
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First nickel, now cocoa. The commodities world is again being rocked by a short squeeze.
Why it matters: Just as with nickel in 2022, arcane financial contracts are taking on a life of their own and hurting those you'd think the price spike would help — companies that own large amounts of cocoa.
The big picture: The commodities market provides a way for buyers and sellers of cocoa to lock in prices.
- Confectioners and other manufacturers are the natural buyers of cocoa futures: They go long cocoa.
- Producers of cocoa are the natural sellers. They go short.
Driving the news: As Axios' Deena Zaidi has reported, El Niño has hurt cocoa production in West Africa just as the Ghanaian financial crisis has made it hard for farmers to get the hard currency they need for pesticides. That in turn created further shortfalls due to black pod disease and swollen shoot virus.
- In an efficient market, when production falls, prices rise commensurately — that's just basic supply and demand. But right now the cocoa market isn't efficient.
What we're reading: Bloomberg's Javier Blas has an excellent explanation of how the current short squeeze works.
- "The last few weeks of daily record highs have more to do with financial factors than fundamentals," he writes.
- When contracts come due, cocoa producers generally have the physical beans necessary to close out their position. What they don't have is the financial liquidity needed to meet margin calls against them as the spot price rises in the short term.
- Eventually, those companies are forced to close out their short positions at a loss — by buying contracts, sending the price even higher, and squeezing the other shorts even further.
The bottom line: Fundamentals caused the cocoa price to rise. Then technical factors took over and caused it to spike.
