Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favorite stories in this weekly newsletter. Hedge funds have recently flocked to the cocoa market following poor harvests in West Africa, driving prices to record highs. Speculative traders have placed an $8.7 billion bet on rising cocoa prices, the largest ever in dollar terms. This surge has been fueled by poor weather conditions and disease affecting cocoa trees in West Africa, as well as the involvement of hedge funds. These funds, utilizing algorithms to ride market trends, have seen cocoa as a profitable investment in 2024.
Justin Grandison, director of cocoa brokerage at ABN AMRO Bank, noted an influx of funds into soft commodities following the global financial crisis, with many now returning after facing losses due to unexpected events. Cocoa has become a major source of profits for systematic funds using algorithms to track and capitalize on market trends. However, this surge in speculative trading has made it difficult for cocoa processors to hedge their exposure to price fluctuations, further impacting the market.
Despite the rising prices in futures markets, growers in Ghana and Ivory Coast, the world’s top cocoa bean producers, are not seeing direct benefits. The farmgate prices in these regions have not yet reflected the current market prices, with Ghanaian farmers receiving $1,800 to $1,900 per ton and Ivorian growers about $1,600. These prices are set by government-controlled bodies and are based on sales made between 12 to 18 months ago. This fixed pricing system may hinder the market’s ability to respond to current price increases and reach a new supply and demand balance.
While some analysts argue that higher prices historically benefit producers by allowing reinvestment, Grandison suggests that government-set prices may be limiting farmers’ potential gains. With prices determined based on forward sales, farmers may be missing out on the full benefits of the current market conditions. This situation highlights the complex interplay between market trends, speculative trading, and government intervention in agricultural markets like cocoa.
Overall, the surge in cocoa prices driven by hedge funds and poor harvests in West Africa has raised concerns about market volatility and its impact on farmers. While speculative trading can amplify market movements, it also poses risks for processors and growers who may struggle to adapt to sudden price changes. As the cocoa market continues to evolve, stakeholders must carefully consider the implications of increased speculative activity and government intervention on the industry as a whole.
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