Supply problems in the cocoa market are pushing the price to record levels

Tuesday's session brought minor changes to the main currency pair, which dropped slightly yesterday, but still oscillates between 1,0850 and 1,08. Wall Street indexes closed the day with moderate losses. Dow Jones, SP500 and Nasdaq Composite fell by 0,1% and 0,3%, respectively. and 0,4 percent

In Europe, the session looked better, DAX gained 0,7%. and CAC40 increased and reached a result of 0,4%. The zloty lost against the euro and the US dollar, but this change is symbolic. Today there is no significant macro data from the US. However, the cocoa market is interesting. Yesterday, contracts on the NYMEX exchange reached the value of 10 for the first time in history. USD. The impressive price rally ignites the senses of investors.

Weather conditions are the reason for the increase in cocoa prices

When in most markets there is not much happening in the pre-Christmas period, cocoa market it is red hot. Yesterday, for the first time in history, the price of this raw material reached 10. USD per metric ton. This means that this year the prices have already increased by over 130%. Of course, such a strong price reaction did not come out of nowhere. As a rule, this happens when there are significant disruptions in the supply and demand relationship. This time, the impressive rally is the result of difficult weather conditions and diseases occurring in West Africa, which is responsible for approximately 70 percent. global supplies of this raw material. Intense rainfall and then severe heat hit Côte d'Ivoire and Ghana.

According to a November report by the International Cocoa Organization, heavy rains and the spread of black pod disease (caused by a pathogen that can destroy entire crops) in these two countries late last year affected agriculture. Poor road conditions also made it difficult to deliver available grains to the port. Due to the fact that these two countries play a key role in global production, any disruptions in agriculture significantly affect the cocoa market, mainly the price.

Correction coming soon

According to the February ICCO report, the number of arrivals at ports in Côte d'Ivoire and Ghana decreased by 28% and 35% respectively. and XNUMX percent since the beginning of the season compared to the same period last year.

Estimates indicate that cocoa supply will decline by 8%. in the 2023-2024 season compared to the previous twelve months. The intermediate harvest, which will begin in April, is also expected to be successful lower than last year. Trees affected by the virus must be cut down, while newly planted trees take three to five years to develop new seeds, so supply in the coming years is likely to be lower than the average over the past 15-20 years.

Of course, the price rally in the form we are currently seeing is unsustainable in the long term and we will probably see a downward correction soon. However, the fundamental situation indicates that increased prices will persist for some time.

The futures market has experienced a "backwardation" phenomenon, i.e. one in which the spot price is higher than the level of the derivative, which indicates a shortage of supply.

Source: Łukasz Zembik, OANDA TMS Brokers