Cocoa Prices – The Continuing Saga

The roller coaster of cocoa prices continues. Since the December 16 high of $3,636/ton, cocoa prices have dropped by almost $600/ton as measured by the ICCO Daily Price. There hasn’t been much in terms of news that might warrant this decline. Yes, production in the current year is higher than previously expected, but the surplus of 80,000 tons (as predicted by the ICCO according to a Bloomberg article) isn’t very much in light of previous four years of deficits.

So something else must be at work. The German Association of Candy Manufacturers seem to know the culprit–speculators. “The BDSI condemns the speculative investment by banks and funds in agricultural commodities which the food industry needs for its production,” said the organization in a press release. The current prices for cocoa are to high because manufacturers in Germany can’t pass these cost on to consumers. Food retailing in Germany is dominated by a small number of chains who use their bargaining power to push wholesale prices down. “All fundamental data indicate that the cocoa commodity bubble will soon burst,” the association concluded.

The bursting bubble also has to do with the rise in the dollar. Bloomberg points out that “Hedge-fund managers and other large speculators have slashed their net-long positions in cocoa futures” and to dollar speculation instead. Given the brave new world where banks can bet on a Greek default after helping the country hide its deficit from the EU watchdogs, it’s no wonder that lowly cocoa is no longer attractive.

So the German manufacturers will get their lower prices sooner rather than later. Prices are said to decline another 13 percent in the next two months. The countries and farmers who made planting decisions on the basis of the December prices will have a rough awakening when they realize their bet into the future was ill-advised.