Last year, the average daily trading volume for the most actively traded corn futures contract was about 166,000 contracts per day; for crude oil, 339,000 contracts; but for cocoa only 28,000 contracts; and for feed cattle only 7,000 contracts. (Diagram by Elaine Kub)
Just in time to torment anyone who has given up chocolate for Lent, the cocoa futures market is making headlines by hitting new all-time highs with each passing day. When the March contract closed at $7,057 a tonne on Monday, it was by far the highest cocoa price ever, double what it was just five months ago and surpassing $3,826 in 2011, or $5,104 the year 1977. Furthermore, it is a reminder of what can happen to commodity futures markets when trading volumes are low and when information cascades through a thin market and everyone is trying to trade in the same direction.
Unlike the market for Bitcoin, which is also experiencing a fragile uptrend this week as speculative traders all flock in one direction, the market for cocoa is real. The New York cocoa futures contracts traded on the ICE exchange must ultimately approximate the cash price for physical delivery of “exchange grade” products of various African, Asian, and Central and South American origins delivered to licensed warehouses in the port of the New York District, the Delaware River Port District, the Port of Hampton Roads, the Port of Albany or the Port of Baltimore.
As scarce as commercial traders' physical cocoa may be in these warehouses – after black pod disease and a fertilizer shortage limited production from West African cocoa trees – now that delivery notices are being delivered to traders for the futures contract expiring in March, it is the record-breaking one Futures price is really the price of real things. Traders with short positions in March, who came under pressure when the contract was put into action, will now have to pay to buy cocoa at these historic prices and meet their obligations.
The more actively traded May cocoa futures contract also continues to simmer, still at $6,330 a ton as of Wednesday morning, with 31% of open market interest represented by bullish fund traders (the money category under management in the Commitments of Traders report dated March 27). . February). from the CFTC). Funds hold three long futures positions for every short trade they have made in cocoa, and relative to population, these funds outnumber traders categorized as producers, traders or processors.
Compare that to the corn market, where it's the other way around. Bona fide commercial hedgers (564 traders) outnumber managed money funds (248 traders) and collectively represent approximately seven times as much trading activity as the cocoa market. More activity at more price points, more market opinions and more individual transactions mean a larger market is more resilient and less prone to hectic price swings like cocoa. If you have a short position in corn futures and want to buy it up to complete the trade, it isn't too difficult to find a counterparty among the many thousands of customers of the major traders. Someone would be willing to sell you a corn futures contract somewhere near the current market price at, say, $4.26 14, or at worst $4.26 1/2, and the rest of the market would barely notice or react.
However, if you're trying to exit a short position in a very thinly traded, fast-growing market like cocoa, the chances are much lower. When I checked early Wednesday morning, there may only be one or two contracts offered for sale as limit orders a few ticks above the market price, and if anyone were to actually trade them, the algorithms would certainly smell blood and immediately move on move up.
With this in mind, I evaluated the average daily trading volume for several commodity markets to illustrate the relative vulnerability of certain agricultural markets to this type of volatile trading. Below are the average daily volumes, rounded to the nearest thousand, for the most actively traded futures contracts for each of these markets over the past year – March 2023 to February 2024:
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