cocoa prices have hit their highest since 1977 -- FT

Crop failures push cocoa to 33-year peak

By Jack Farchy and Javier Blas in London
Published: June 4 2010 03:00 | Last updated: June 4 2010 03:00


Spot cocoa prices in London yesterday jumped above the £2,500 a tonne level for the first time in more than three decades as a disappointing crop in west Africa left cocoa buyers scrambling to cover their positions.

Liffe July cocoa rose 1.5 per cent to a peak of £2,558 a tonne yesterday, the highest front-month price since November 1977.

The price of the July contract has leapt 15 per cent in the past three weeks.

The second-front month contract, usually seen as the industry benchmark, rose 0.4 per cent to £2,402 a tonne - just below the near- 33-year high of £2,430 that it set in early May.

Traders said that cocoa inventories at exchange-registered warehouses had fallen to very low levels after a poor crop in the Ivory Coast, which accounts for nearly 40 per cent of the world's supplies.

The rally has being exacerbated by technical factors, traders said.

As prices rose, industrial consumers of cocoa, the bean used to make chocolate, bought protection against even higher prices by buying call options, which give the right but not the obligation to purchase the commodity at a predetermined price.

But as the price of the spot contract, which expires on July 15, continued to rise, the banks who sold those call options have been scrambling to hedge themselves by buying futures.

"There is a very large open interest in July call options," a senior cocoa trader explained. "The dealers who sold the options are now rushing for cover, buying futures."

In addition, some cocoa processors have been struggling to roll their hedges from July to the September contract. The processors transform cocoa beans into cocoa butter and liquor, the intermediate materials used to produce chocolate.

But since neither butter nor liquor can be physically delivered to settle the contracts, processors are forced to roll their contracts and settle the price difference.

Usually, the rolling process is an easy affair but it has been complicated by the low stocks and the high volume of options trading.

Beside the technical factors, traders said that supply and demand fundamentals are robust.

Years of poor crops in West Africa have been lifting cocoa prices from a low of less than £600 a tonne in 2000.

In Ivory Coast in particular, the trees are old and disease-prone and industry executives said that, without investment in new trees and fertilisers, production will continue to fall.

Many believe that, as demand for chocolate picks up, cocoa demand will outstrip supply for the fifth successive year in the 2010-11 season, putting further pressure on prices.

Elsewhere in commodities, the gap between the European and US oil benchmarks reopened as the US government reported an increase in inventories at the hub of Cushing, Oklahoma, the delivery point of the Nymex West Texas Intermediate contract.

Stocks at Cushing rose by 270,000 barrels, reversing the previous week's drawdown, the US Department of Energy said.

But overall, US crude and gasoline stocks fell more than expected last week.

Nymex July WTI rose $1.75 to to $74.61 a barrel, while ICE July Brent advanced $1.66 to $75.41.

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