Cocoa Outshines Nvidia and Bitcoin with Over 130% Surge: Here Is Why

Since the beginning of this year, while AI stocks and Bitcoin continue to hit new highs, cocoa, the most important raw material for chocolate production have quietly skyrocketed by over 130%. The outstanding performance has even surpassed that of the former two, which has caught the attention of numerous hedge funds.

Most of the world's cocoa comes from West Africa, where the major cocoa producers Ivory Coast and Ghana, which contribute nearly two-thirds of the global cocoa bean output, have suffered from widespread crop failures due to adverse factors such as Severe El Niño-induced extreme weather, the outbreak of cocoa swollen shoot virus disease (CSSVD), and aging trees. This has led to the largest global cocoa supply shortage in over 60 years. The International Cocoa Organization (ICCO) estimates that global cocoa bean production will decrease by 10.9% to 4.45 million tons in the 2023/24 harvest season starting from last October, and the market supply shortfall will expand by 405% to 374,000 tons from the previous quarter's 74,000 tons. The supply shortage has fundamentally pushed up cocoa prices.

Hedge funds have been buying cocoa futures on a large scale since the end of last year. According to the February position data from the US Commodity Futures Trading Commission (CFTC), speculative traders have placed bets worth $8.7 billion on London and New York cocoa futures contracts, marking the largest cocoa risk exposure ever recorded in US dollar terms. Given the lower liquidity in the cocoa futures market, a significant amount of speculative funds has become a crucial force driving cocoa prices to extreme levels.

According to Jeff Kilburg, CEO and Founder of KKM Financial:

At the same time, the surge in cocoa prices may trigger panic buying by commercial buyers, such as chocolate manufacturers who may purchase cocoa beans in advance to avoid bearing higher prices in the future, further pushing up the prices.

Despite efforts by other cocoa-producing countries such as Brazil and Ecuador to increase their output, cocoa trees take at least three years to bear the first crop. Besides, the EU's upcoming new deforestation regulation (EUDR) will soon prohibit the trade of forest-related products such as cocoa and coffee within the EU, limiting the expansion of cocoa tree cultivation, which made things worse. This means that the global cocoa bean supply shortage is hard to be resolved in the short term, thus continuing to support high cocoa prices for a period of time.

Driven by the surge in cocoa prices to historic highs, cocoa futures in New York and London have surged strongly since the beginning of this year. As for ETFs that are linked to cocoa bean prices, WisdomTree offers pure-play cocoa ETFs in the UCITS ETF market in Europe, while similar products like iPath Bloomberg Cocoa Subindex Total Return ETN (NIB) have been delisted from the US market. Nevertheless, the Teucrium AiLA Long-Short Agriculture Strategy ETF (OAIA) includes some cocoa exposure, with a cocoa futures position dated September 24, representing around 1.68% of the fund's portfolio as of March 27.

The sustained rise in the cost of this key raw material could hurt chocolate-related companies. Although manufacturers usually purchase cocoa beans several months in advance, Wall Street expects these companies to struggle to pass on the rising costs to consumers to maintain profit margins, especially against the backdrop of weak candy demand.

According to John Plassard, a director at Mirabaud Group, the pricing power has its limitations, and the rapid rise in cocoa prices will undoubtedly affect the profits and sales of all producers in the industry.