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Voice of Cocoa

Cocoa Price to Hit New Records as Supply Deficit Protracts

Cocoa futures extended their surge to a record in New York as a shortfall gripped the market, threatening to make chocolate and other confectionery costlier.

Prices have doubled during the past year as growers in West Africa — who produce the bulk of global supply — are battered by extreme weather.

Earlier rains promoted the spread of crop disease and delayed harvesting.

That has been followed by a seasonal dry spell, which could further crimp production.

Consumers are already shelling out more for treats, and the cocoa rally is set to hurt results of chocolate makers like Hershey. High commodity prices will limit earnings growth this year, executives of the Hershey, Pennsylvania-based company said Thursday.

The worst may lie ahead as chocolate makers run out of supplies booked earlier and fully factor in the rally. While the gains have prompted some growers to expand production, new trees can take a few years to bear beans.

“We are in a very tight balance,” which will likely hold for another 18 months to three years, Paul Davis, the head of cocoa at major softs merchant Sucres et Denrees SA, said in an interview at the Amsterdam Cocoa Week. “There is no cavalry that’s coming to the rescue.”

Davis, who is also president of European Cocoa Association, said he wouldn’t rule out the potential for prices to scale $6,000 a ton. Global cocoa supplies are on track to fall short of demand for a third season.

The most-active cocoa futures contract in New York touched a high of $5,600 a metric ton on Thursday, surpassing a 1977 peak of $5,379 a ton.

That puts the contract at the highest in data compiled by Bloomberg spanning 65 years. The crop began trading in New York a century ago.

A key spread between March and May New York futures also surged to a record.

The cost of call options soared as futures jumped to record highs. Implied volatility for May at the money options has more than doubled since the middle of January, while the premium of calls over puts has blown out from near parity to more than 20 points during that time.

Although prices are surging, the industry has grappled with a legacy of poor returns for growers.

Better income is needed to spark investment in inputs and farm improvements, ensuring more reliable crops ahead, Joseph Boahen Aidoo, chief executive officer of the Ghana Cocoa Board, said at the Amsterdam event.

Deforestation regulations recently enacted in the European Union — which take force from late this year — may add to the price upside.

The bloc is the world’s biggest cocoa consumer, and it will take time for the market to adjust to the data and traceability requirements to meet the standards.

“Consumers will need to understand that it will cost a bit more in the near-term, but in the long-term it will be good for the environment,” Davis said.

Source Bloomberg
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