Cocoa breaks $10,000 record, followed by higher chocolate price

(Bloomberg) — Cocoa futures rose to an unprecedented $10,000 per metric ton, continuing a historic rally that has already seen prices double this year and which has pushed up the cost of chocolate.

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The market is being shaken by poor harvests among large farmers in West Africa, which has put the world on track for a third consecutive annual supply deficit. The industry is grappling with the legacy of poor returns paid to cocoa farmers and concerns are growing about the ability to obtain enough beans.

In addition to concerns about scarcity of physical supplies, pressures are also increasing in the financial market, with some traders selling futures contracts to hedge against physical possessions. But as they wait for contracts to come due, they need cash to meet margin calls on losses in derivatives, and in a bull market they could be forced to close short positions, helping to fuel the rally.

Futures jumped as much as 4.5% to $10,080 a ton in New York on Tuesday, a level that seemed unthinkable just a few months ago. The rally has pushed the technical price gauge into overbought territory for most of the past two months, although cocoa continues to rise.

“When we get to that price, it's hard to know whether these prices are justified,” said Paul Jules, an analyst at Rabobank in London. “Whenever we have a market down, it seems to go back up, which has more to do with the commercials, they've been net buyers.”

Read more: Chocoholics are not the only victims of high cocoa levels: Javier Blas

Reaching the $10,000 level could prompt some profit-taking, as price action has become “steep, and traders may be concerned that the rally has reached exhaustion,” analysts at Hightower Report said in a note on Tuesday.

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There is a risk that the supply situation will get worse. Upcoming EU rules – aimed at preventing products that destroy forests from being sold in stores – may make it difficult for chocolate makers in the bloc to secure supplies.

New harvest

The focus now turns to the next mid-crop in West Africa, the smaller of two annual crops. Bloomberg reported that the regulatory body for the largest producer in Ivory Coast expects a contraction in the season this season.

“The supply situation in West Africa remains very tight with the start of the intermediate harvest season next week,” the Hightower report said in a note.

Other growers, such as Brazil and Ecuador, are seeking to increase production, but it takes a few years before newly planted cocoa trees produce beans – delaying relief from strained global supplies. The International Cocoa Organization expected the ratio of inventories to milling operations to fall to its lowest levels in more than four decades this season, reflecting the unstable situation of the market.

Cocoa was trading 0.8% higher at $9,725 as of 10:18 a.m. in New York, more than doubling since the start of January. London's most active cocoa futures have more than doubled this year. Shares of chocolate makers including Hershey Co., Rocky Mountain Chocolate Co. and Mondelez International Inc. fell.

Rising cocoa costs are putting pressure on chocolate manufacturers' profits, and the advance of cocoa is also bad news for consumers if companies continue to pass on costs or sell products that are smaller or contain less chocolate. The looming Easter holiday is a peak period for sweet consumption, and the gap between commodity and retail markets means the brunt of the impact on shoppers is still to come.

–With assistance from Elena Peng and Diane Souza.

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