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Hedge funds have been pouring into the cocoa market since late last year, exacerbating a record price rise triggered by poor harvests in West Africa.
Speculative traders have placed an $8.7 billion bet on cocoa futures contracts in London and New York that prices will continue to rise, the largest bet ever measured in dollar terms, according to positioning data from Commodity Futures Trading Commission shows.
The bet, which has delivered record profits for trend-following hedge funds in 2024, helped the London price rise to a record closing price of £4,757 a tonne last Friday, more than double the level a year ago. New York cocoa futures rose to $5,888.00 a tonne, also an all-time high.
While bad weather and disease affecting cocoa trees in the world's major cocoa-producing regions of West Africa sparked the rally, the rush on hedge funds contributed to its ferocity, according to analysts, traders and brokers.
Hedge funds probably have the “biggest risk they have ever had on cocoa,” said Martijn Bron, who was global head of cocoa and chocolate trading for agricultural commodities giant Cargill until 2022. “Hedge funds are not the cause of the increase,” he said, “but in a market environment with lower liquidity they can amplify fundamentally justified market movements to extreme levels.”
Justin Grandison, director of cocoa brokerage at ABN AMRO Bank, said there was “an influx of money into agricultural commodities” in the wake of the global financial crisis. Many of these funds were “retired approximately six to eight years ago” after unexpected weather events and geopolitical crises threatened their prospects. “Now they’re coming back,” Grandison said.
Today, the majority are systematic funds that use algorithms to manage market trends, he said.
Cocoa has been the biggest contributor to profits in such funds this year, according to a portfolio compiled by Société Générale that is designed to mimic a typical strategy in the sector.
“Various speculative traders who haven’t traded in cocoa for a long time have now jumped in,” said Harold de Boer, managing director of Transtrend, a quantitative hedge fund based in Rotterdam.
Major cocoa processors that turn beans into cocoa butter are scrambling to find enough supply to meet demand from chocolate makers, analysts and traders warned.
The concentration of hedge fund bets and the resulting market volatility have made it harder for processors to hedge against price fluctuations, said Darren Stetzel, vice president of Asian soft and agricultural commodities at brokerage StoneX.
Higher prices in futures markets do not flow directly to growers in Ghana and Ivory Coast, which together produce the majority of the world's bean supply.
According to Fuad Mohammed Abubakar, head of the Ghana Cocoa Marketing Company, part of the government-controlled organization that sets farmgate prices, Ghanaian farmers receive between $1,800 and $1,900 per tonne of cocoa and Ivorian producers receive about $1,600. In Ivory Coast, Le Conseil Café-Cacao plays the same role.
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Today’s farmgate prices reflect sales made between 12 and 18 months, Abubakar said. “The current [market] The prices will be reflected in farmers’ pockets when the new season begins in early October.”
However, according to Grandison, these price-fixing measures could impact the market's ability to respond to the current higher prices and reach a new balance between supply and demand.
“In previous years, higher prices were seen as an advantage for the producer and enabled reinvestment. However, since prices are set by governments based on forward sales for the year, [farmers] miss,” he said.
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