Choccy-Horror Show: Hedge Funds Pile In As Cocoa Soars To Record High

The biggest squeeze in the cocoa market in more than a decade has pushed prices of the commodity to record highs in recent sessions as hedge funds have piled into cocoa futures since the start of the year.

This has been great news for the speculative investors and funds at the heart of this trade, but bad news for chocolate consumers and manufacturers, such as Hershey Co. HSY.

In speculative positioning across commodity markets in New York and London, traders — including hedge funds — have built up a massive $8.7 billion position, the largest ever in dollar terms, according to data from the Commodity Futures Trading Commission.

Also Read: Valentine’s Day Chocolate This Year Isn’t So Sweet As Cocoa Inflation Tops 100%

Prices Rise As African Growers Hit

Cocoa prices were already moving sharply higher in the final quarter of 2023 as poor weather and disease affected harvests in chief growing areas in West Africa, such as Cote d’Ivoire — the world’s largest producer — and Ghana.

Between October and the end of December U.S. Cocoa futures had already gained 23%, surpassing the previous record high of $3,826 per tonne, set during the so-called commodity super-cycle of 2011.

Since the beginning of the year, hedge funds, whose equity short bets have underperformed during the recent stock market rally, have wanted a chunk of the cocoa market.

They have pushed the price further still. Starting the year at $4,196 a tonne, new volume in the market drove the price 43% higher to a record $6,030 last week. The price on Friday stood at $5,503.

Hedge Funds Enter For Their Cut

“The squeeze appears to have been driven by commercial players, where the gross long position has increased from around 119k lots in February last year to more than 290k lots currently,” said Warren Patterson, senior commodity strategist at ING.

“Whether this is an intentional squeeze or not is less clear. If it is, it wouldn’t be the first time the cocoa market has experienced one,” he added.

Indeed, the most notorious squeeze on the cocoa market happened in 2002 when London-based hedge fund Armajaro, under the direction of its founder Anthony Ward, cornered 7% of the global cocoa harvest in a move that earned him the nickname “Chocfinger.”

Prices don’t appear to be about to make a significant move lower either. As production levels fell in 2023, the market was already in deficit in the 2021/22 and 2022/23 seasons according to the International Cocoa Organization.

The market is now set for a sizeable third-successive deficit in 2023/24, which would take global stocks to their lowest in a decade.

As for prices: “They need to go to levels where we start to see significant demand destruction,” said Patterson.

He added: “We are already seeing some of that, but clearly not enough to bring the market back into balance and ease tightness concerns.”

Confectioners Feel The Pain

The biggest impact has been on brands such as Hershey, which last week missed market earnings forecasts as the company reported rising costs. This prompted a rating and target price downgrade from Morgan Stanley. Hershey’s shares are flat on the year, but are down 30% since peaking at around $270 last May.

Confectionary rival Mondelez International Inc. MDLZ is down nearly 8% since January 30 when it reported stronger-than-expected results, but its outlook was marred by rising costs.

Shares in Rocky Mountain Chocolate Factory RMCF are down around 15% since the start of the year.

Now Read: Hershey’s Mixed Bag: Stable Q4 Earnings Amid Slow Sales Growth And Rising Cocoa Costs