A prominent commodities trader, known for their successful energy market bets, has recently turned their attention to the cocoa market. Their hedge fund took a long position in cocoa futures in early March, a move that seemed to pay off initially as prices surged to record highs.
In a recent podcast interview, this trader voiced concerns about the future of cocoa, citing a “massive supply shortage” this year. They predict a significant drop in production, a figure exceeding even the most conservative estimates of other analysts. The trader goes so far as to warn of a potential complete depletion of cocoa stocks.
Several factors are contributing to this dire outlook. Adverse weather conditions, the ongoing effects of climate change, fertilizer scarcity, and the outbreak of plant diseases are all hindering supply from major African producers. The trader suggests that if the weather doesn’t improve, cocoa futures could skyrocket to unprecedented levels in the near future.
While cocoa futures have retreated somewhat from their April peak, the underlying pressures on the cocoa industry are expected to persist. The trader forecasts a substantial deficit this year due to shortages in key producing regions. This could lead to a historically low inventory-to-grinding ratio, a metric that measures the availability of cocoa relative to demand from processors. Such a low ratio could trigger a significant price explosion, similar to what occurred in the 1970s.
Some analysts have pointed to signs of reduced consumption as a potential counterbalance to rising prices. However, the trader argues that demand for cocoa is relatively inelastic due to its small proportion in most chocolate products and the overall low cost of chocolate for consumers. In their view, it’s the supply side of the equation that will ultimately dictate prices.
This volatility in the cocoa market is not an isolated incident. Other soft commodities, like orange juice and coffee, have also experienced recent price surges due to weather-related disruptions. This trend could present new trading opportunities for hedge funds that are adept at navigating such volatile markets.
While the trader’s predictions for oil prices didn’t materialize last year, they remain confident in their analysis of the cocoa and copper markets. They anticipate a similar structural shortage in copper, driven by the increasing demand for the metal in renewable energy technologies and data centers.
In the trader’s view, the market has yet to fully price in this impending deficit. They predict a significant and rapid price increase for copper in the near future, once the market catches up to the reality of the supply-demand imbalance.
