(Bloomberg) — Cocoa posted its biggest slump ever – plunging as much as 27% in just two days – with price swings becoming more extreme as fewer investors and companies can afford to maintain their trading positions.
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Futures fell as much as 13% in New York on Tuesday before paring some of the loss after plunging the previous day in the data by the most since 1960, hitting a record above $11,000 a ton due to a historic supply shortage , which drove up the cost of chocolate production.
Despite the recent decline to its lowest level in a month, cocoa prices have still roughly doubled since the start of the year. The rally made it more expensive to hold positions and caused investors to close out trades, leading to a loss of liquidity and making the market more vulnerable to large price swings.
Cocoa’s rally made it more expensive than copper, and the big question was how much further prices could rise. Pierre Andurand, a hedge fund manager best known for his oil bets, bet on higher cocoa prices ahead of the recent massive rise. He predicted futures would break $20,000 this year.
Read more: Andurand’s bet shows the appeal of trading wild cacao markets
The magnitude of the recent decline is a surprise, although the declines may be short-lived as the underlying picture has not changed, said Fuad Mohammed Abubakar, head of Ghana Cocoa Marketing Company UK Ltd., an affiliate of the country’s regulator.
“The market movement over the last three days shows that the decline is always easier and faster than the rise,” he said.
West Africa’s harvests have been hit by crop diseases and bad weather this season, putting the world on track for a third straight supply deficit and forcing both Ivory Coast and Ghana to extend supply contracts. In addition, the amount paid to farmers there is well below world market prices, making it difficult for producers to invest in plantations and boost production.
Lower prices would provide some relief to chocolate makers who have seen costs rise and are scouring the world for cocoa beans. Shares of Barry Callebaut AG, which supplies some of the biggest consumer chocolate brands, rose as much as 6.6% on Tuesday. Lindt & Spruengli AG shares also rose.
Hold positions
Cocoa’s rise this year has left traders – even those who have hedged against physical inventory – having to put up more money to pay margin calls, which act as an insurance policy to cover potential losses. If they fail to do so, they are forced to close positions. This has helped reduce open interest, or the number of outstanding contracts, and reduced liquidity.
Looking ahead, the end of the El Niño weather phenomenon could help harvests recover next year, said Marijn Moesbergen, procurement director at Cargill Inc., at the recent World Cocoa Conference in Brussels. Prices may have skyrocketed and the market needs to find a new balance between supply and demand, he said.
Why cocoa prices have skyrocketed and what that means for consumers: QuickTake
– With assistance from Megan Durisin.
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