Lots More on the Parabolic Surge in Cocoa Prices

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1:22Hi, Javier. Hey, how are you guys? We're good. How are you? Not bad. Can't complain. You know, olive oil prices are high, chocolate prices are high. I mean... You're in demand. Oh, well, I'm maybe in demand, but certainly I'm just going to be ruined at this rate. Oh, yeah. What's happening with olive oil prices? They have come down about 10%. I mean, we are at the peak of the crop has just arrived. So it's normal that the prices come down a bit. And demand is starting to react. I mean, it's just bloody expensive. This is like Javier's personal CPI basket, right? Olive oil, oil, and cocoa. Mind the weighting of those two items on my personal CPI basket.

2:06It's just cocoa and olive oil, probably 140 % of it. I did a deadlift. One, two, three. Hegemony. Okay, good. Hegemony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S.? Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching.

2:45The perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest. Tracy, do you have opinions on chocolate? Do you have favorite chocolates? I don't know. I've never asked. I've never heard you. Actually, I have. I'm expecting a long list of exotic flavors and names. Are you ready for my TED Talk? Yes. Well, you see, when people ask if you have a favorite chocolate, I feel like you have to divide that into different price baskets, actually. So my favorite cheap chocolate is actually and this is controversial I really like Hershey's oh interesting I actually think like there is there's a cheap tasting chocolate that is actually wonderful and it tastes cheap but it's still great and that's Hershey's and then my like mid-range is probably Milka which I feel like I have to say as a half Austrian person although that company is Swiss and I think it's produced out of Germany now and then expensive chocolate I like all of the Swiss ones, basically.

3:48There's that Swiss chocolate store that's right under our office. Yeah. What's your view on that? It's really good. But oh, my God, I went in there to buy a present for my husband for Valentine's Day. And I grabbed like a little candy chocolate heart thing. And I was like, oh, OK, I'll just leave without looking at the price. How bad can it be? And I got to the register,$37. And that was in February. So it's probably worse now. Yes. So as most people know by now, cocoa prices have soared. And when there's a commodity soaring, we talk with our colleague, Javier Blas. Javier, do you have a favorite chocolate?

4:26I grew up in Spain basically with nocilla, which is the Spanish kind of brand of Nutella. And yes, yes, yes, I know that that's a lot of milk and sugar and hazelnuts. But I still, I will buy a jar of, you know, the Spanish Nutella. And I will not do a spread over bread. I will just get a spoon, a big spoon, and then just eat it. And five minutes later, the Nutella is over. and I'm unhappy. And, you know, within 30 seconds, the guilt will come. But for about 30 seconds, I am the happiest guy on this planet. Eating Nutella with a spoon is one of those underrated joys in life, I think.

5:17so we've seen this massive run-up in recent weeks which has caused comparisons to nvidia of all things so chocolate outperforming nvidia lately which is kind of ridiculous because one of those things powers the collective brain power of the economy and the other thing is just semiconductors. The other one just helps bots make stuff up that are real. That's right. Okay, so why don't we start really simply. Javier, what's going on here? Well, there are two things going on simultaneously. The rally started about a year ago completely on fundamentals. This was supply and demand. First of all, demand has been increasing every year.

5:55It goes with GDP, more middle class, more people like chocolate. Who is going to complain about that. So global chocolate consumption has more or less doubled over the last 30 years. Then the main problem was a series of crop failures in four countries in West Africa, which account for roughly 75 % of the world's production. That's Ghana, Ivory Coast, Cameroon, and Nigeria. Crop failed there for a number of factors, one being that prices have been low for many years. Farmers are poor. They don't have money to plant new trees. They don't have money for fertilizers. They don't have money for pesticides.

6:32So trees are older. They produce less every year. And all trees are also more vulnerable to two issues, bad weather and diseases. And we got both of them over the last few months. The weather has been really bad in West Africa. I know that a lot of people talking about the drought note, what really mattered was the rains. It rained a lot last year and just when we didn't need rains. And that really depressed the crop massively. And also at the same time, we have had a disease spreading across Ghana and Ivory Coast that is called the swelling shoot. It's bad because once a tree gets it, you basically have to uproot the tree to get rid of it.

7:16It's really bad. And that has been endemic in the area, but this season has really spread everywhere. That was the beginning of the rally and why we went from like$2 ,500 to$5 ,000,$6 ,000. But we are now at$10 ,000 and more has happened. Is there any lever that can be pulled on the supply side, like in other commodities? It's like, oh, we're going to drill some new wells or whatever it is. Is there anything that can be done on the supply side, even in the medium term? Well, yes and no. I mean, we are going to have a reaction from farmers everywhere where they're actually getting market prices.

7:55That's particularly true in Latin America, in Indonesia. And we are going to see them buying fertilizer, buying pesticides. And next year, provided that the weather is better, production should recover a lot and grow in those countries. But to grow production, the main problem is it takes time. It takes five years since planting a new tree to get the first decent crop from that tree. and that also requires money. But also, importantly, farmers in West Africa, particularly in Ivory Coast and Ghana, which, you know, they are the main producers, are not getting anywhere the market prices. I mean, at best, they're getting 20 to 30 % of the market price.

8:34So their incentive for planting more is just very limited to say none. Wait, Javier, I need you to do something very important right now. I need you to walk me or talk me off the ledge of buying a cocoa plant and putting it in a greenhouse and trying to grow cocoa beans. Why shouldn't I do this? Well, it's kind of a serious question, though. Well, it's a greenhouse, but why isn't there more commercial production of cocoa beans? Why hasn't someone said, like, oh, we can make tons of money by setting up some massive hydroponic farm or something? For two reasons. One, cocoa trees are not easy to cultivate.

9:10You need to basically have a very particular kind of climatic conditions. So that's roughly 20 degrees north and south of the equator. I think that you're going to struggle in New York, even if you use a glass house, or you're going to spend a lot of money in heating on that glass house, which is probably not good for your wallet, neither for the environment. But, you know, maybe we can convince someone at Bloomberg to let us just grow a cocoa tree on a glass house in New York. That would be quite fun. But we need five years to get the first cocoa production. and I have first dips on whatever you get.

9:47But why is it not commercial? Well, that's a lot of the problem. I mean, on most agricultural commodities, you have commercial plantations, you have plantation business. Here is all the smallholders. And the reason is that no one really makes money on cocoa. I mean, the only reason that we get a lot of cocoa is because it's the only kind of exit strategy for millions of poor farmers in West Africa to make some money. But it doesn't really develop into a commercial plantation business just because until now, prices were so low that, you know, it didn't make any commercial sense to make it. Who gets the money?

10:22I think you mentioned you said the farmers maybe are only getting 20 to 30 percent of the price of cocoa. Like, how does it divide up, sort of walk us through when cocoa is bought or when chocolate is bought, where the profits are accruing? Well, everyone makes money other than the farmers. Let's put it that way. So the intermediaries make money. The governments make money, in particular in West Africa, because they tax cocoa very, very heavily. So governments are making money. Some of the commodity traders, certainly they make money. The processors make money. And then, you know, the chocolate companies, the confectionery companies also make money.

11:00They're going to make a bit less money because there is no way this year that they're going to be able to pass all the increasing cocoa costs to the consumers because their sales will really slump. And I suppose that they are going to have to accept lower, thinner margins in the next few months. But just as a rule of thumb, you basically say everyone makes money barring the farmers. And some of the governments in West Africa make a lot of money.

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12:58It's built to grow with your business, whether you are just starting out or already scaling up. Plus, it's easy to use, customizable, and designed to streamline every process. So you can focus on what really matters, running your business. Thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. So one of the things I wanted to ask you is we've seen a lot of headlines, obviously, about the price of chocolate, you know, cocoa breaking that$10 ,000 barrier. You know things are bad when people start using standard deviations. And I saw someone say that cocoa prices had risen 125 % above their 200-day moving average, ranking it as the seventh most profound deviation above the long-term average for any commodity since 1959.

13:49So we have these insane numbers, insane stats. You can look at the charts, and it's basically a straight upwards arrow. But how much of that feeds into the actual price that people are paying at the grocery store? Like how much of it is financialization and being squeezed upwards by things like margin calls? We know this is a commodity with a lot of speculation attached to it. So I guess I'm just curious, like how real is that number? Well, so two questions there on, you know, one is how much cocoa is on the chocolate that you actually buy on the supermarket? And the other one is how much of the last few weeks of the rally is actually financial factors more than supply.

14:29As I said, more than supply and demand. As I said at the beginning, supply and demand were really the main factors at the beginning of the rally. I will say that probably since kind of mid-January, early February, financial factors have really been a big driver. And here, in particular, two things that in some ways, they are not bad. That is not a speculation. It's actually what you use a financial market for, but it has really exacerbated the rally. So we need to look at how the market works. Basically, one-on-one commodity markets. Just imagine a commodity trader, which is getting cocoa beans, and therefore it has a long position on the physical side of the cocoa, and therefore wants to ensure against price variation.

15:12It wants to hedge. So it will take the opposite position on the financial market. It will go short. All fine. The price of Coco goes up. He's losing money on the futures market because he's short, but he's making money on the physical side because he's long physical. So one another upset, all here, no problem. That's exactly why you use the market. Obviously, you need to sustain that short position on the financial market. And for that, from time to time, as you are losing money on that position, the exchange, the brokers are going to be demanding margin, variation margin. And obviously, when the market goes to those insane levels of$10 ,000, which is double the previous record, the margin calls are just staggering.

15:57And companies that otherwise will just keep going, they have no option. They run out of money for margin calls, and they have to buy back their hedges. And they buy back those hedges at the worst potential moment. These are at a record high. That's what's happening now. And that's why prices have just really ballooned. I mean, we have seen days, the market moving$600,$700. That's the typical price range that in the past will take one or two years to see. And here it happened just literally in eight hours of market trading. That's how bad it has been. There are also a number of participants that they seem to be overhatched.

16:36They thought that they were going to get an X amount of beans, say 100 beans. So they sold 100 beans on the futures market. But because the crops have been so low, everyone on the physical side, the farmers are defaulting on the contracts. And so some traders, some processors are finding that they are getting only, say, 20 beans. But they have 100 beans short position on the financial market. They are massively overhedged. They are needed to buy back those overhedging positions or rolling them over. and that is just costing a lot of money to everyone. And that's also, at the end of the day, pushing up prices.

17:16And it's just a loop. The more they buy, the more it goes up, the more margin calls. And it's a circle. We have been here before. We were here in nickel. We were here in natural gas. We were here in cotton in 2008, 2011. And we know how this goes. The market will go up until something breaks. Right. Yeah, definitely. Certainly your description there, which was excellent, reminded me of the nickel. I guess that was in 2021 and those contracts that had to be broken. Who participates in these markets? The big chocolate companies, how much do they play in the futures market versus how much do they have direct relationships with farmers or distributors that allow them to avoid some of these price swings?

17:59There is a bit of everything. I mean, big players. We have the big commodity traders in Cocoa, like Cargill, Olam of Singapore, Barry Kallebut, which is a trader and a processor. And then we have a specialty commodity traders in Cocoa, the likes of Ecom Microindustrial, the likes of Tuton, Suckden, and a few others. We have obviously the chocolate companies, the Nestles, the Hershey of this world, that they all participate buying, selling on the physical side and also on the financial side as a hedge, not to speculate, but to hedge their positions. So it is a very active market with all kinds of different participants.

18:41And it's also no participants that use hedge cocoa beans, which is the first kind of element, the feedstock of the industry. But there are some semi-processed cocoa products that they need also to hedge. I mean, you get cocoa liquor, which is the kind of the really flavor-y stuff when you press the cocoa beans that you get. You get cocoa butter. You get cocoa powder. And those kinds of cocoa products that they go into the products that we then buy on the supermarket. And to go back to what Tracy was asking earlier, you know, how much of this cocoa price rally then just feed into the shelf of the supermarket?

19:19It very much depends on what you are buying. If you are buying like a high-end chocolate box, the kind of thing that you may just not even go to the supermarket, but one of these boutique, chocolate boutiques, chocolate hotels. Well, you know, there is a lot of margin there. You are paying probably more for the box and the actual car box or even wooden box or metal box that you are buying, the kind of the service, the kind of glamour or buying it in a very fancy location on a high street. Probably that's more important than the cocoa. If you go to the supermarket and you are buying just a regular treat, my kind of, you know, a small bar, the kind of things that I feed while I'm working at the Bloomberg Newsroom, I go upstairs into the pantry and get some chocolate bars, and then I can just put a few more hours onto my desk.

20:05Those are really more affected by cocoa prices because the margin is a lot smaller. Hmm. So my takeaway from this is that I need to start stockpiling more expensive chocolate, I guess, in bulk, not in packaging. You should have done this like two months ago when I wrote first about this. I mean, I have. No, I'm not going to tell you what is on my kitchen. That's a secret. Can you do me a favor? Can you just send me an email right before you write your columns and just let me know what commodity I should be stockpiling? That's insider trading. This is insider trading. We cannot do this. Come on.

20:39Ethics. Okay. Even for chocolate, that seems strict. I think that is. No, no, no, no. I remember very well the statute and on the CFTC. It really clearly said that you cannot use inside information on the exception, with the exception of the chocolate market. Everything is fine. It's there. I mean, just check with the CFTC chairman. We'll confirm. Phew. OK. On a serious note, though, it sounds so I take the point about what's going to arrest the sort of short term cycle is something breaking in the financial market. But what arrests the long-term dynamic of a mismatch between supply and demand?

21:16Because as you mentioned, it doesn't seem like there's a lot of appetite out there for further investment, which is really what's needed. Well, first of all, you know, these markets are cyclical and weather is a big pattern. If we get a couple of years, three years in a row of decent good weather, that could really resolve a lot of the problem. And demand is going to do a lot of work. I mean, we are going to see really a big slowdown in demand. It's not just going to be because we are going to be priced out. It's going to be, unfortunately, we are going to find srim flaxion juice all over the boxes.

21:51Rather than having 10 pieces of chocolate, they're going to have eight. The tablerons are going to be thinner at the top. I mean, all of these things, the quality of the cocoa probably is going to come down. There's going to be more Hassel Nudes on the cocoa mix. My Nutella maybe just be a bit lighter on cocoa. All of those things are going to be at play. And that's going to rebalance the market. But yeah, I mean, weather is going to be really, really important. And then there are a number of countries where farmers right now are getting market price. Ecuador, Brazil, Indonesia. And if you are a farmer, a cocoa farmer in those three countries, you are going to try to produce as much as you can.

22:28You're going to fertilize. You're going to take care of the cocoa trees as almost as they were your children because you don't want any diseases. You don't want anything happening to them. And then next year, we get good weather. We get a good crop and the market really comes down. What is it? Just last question for me. What is it structurally about Ecuador, Indonesia and elsewhere that allows those farmers to get a market price in the way the West African farmers do not? Mostly the structure of taxation, the structure of the market in places like Cocoa. Sorry, in places like Ivory Coast and Ghana, the government effectively is buying from the farmers at a fixed price.

23:05So the farmers know in advance this is the price that the government is going to pay. So they don't suffer the ups and downs of the market. It's good when the market goes down. Obviously, it's not great when the market goes up like now. But for those countries, cocoa is so important for the economy that the governments are deeply regulating and deeply controlling the market. In some cases, you talk to people in the market will say it's a lot of corruption within those governments. In places like Ecuador, Indonesia, Brazil, cocoa is another commodity. It's not important for the national economy.

23:36so the governments are not that involved. Prices are free. Whatever the market says, when the price is low, the farmers are not happy. But when the prices are very high, the farmers are celebrating right now. That's the big difference.

24:00I'm looking forward for that cocoa plantation business. That will be quite a lot of fun. You'll all see. Just wait. I have an olive tree on my garden in London. And I have been there for two years. It has produced not a single f***ing olive. But it's beautiful there. And I'm still hoping that three to five years from now we will get about six olives. Well, so I hear like the London environment is supposed to be turning more Mediterranean, right? So maybe you just need to wait for more climate change. That's probably my hedge against climate change. Exactly. Exactly.

24:40Lots More is produced by Carmen Rodriguez and Dashiell Bennett with help from Moses Andam and Kale Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts. Please rate, review, and subscribe to OddLots and Lots More on your favorite podcast platforms. And remember that Bloomberg subscribers can listen to all our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening. This podcast is brought to you by FedEx, the new power move. Hey, you know those people in your office who are always pulling old school corporate power moves? Like the guy who weaponizes eye contact.

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