Chocolate is a popular luxury food that is produced in a wide variety of recipes and forms. In view of the recent price trend for the raw material for chocolate, the impression could arise that this treat is mutating into a luxury item. Since the turn of the year, the price of a tonne of cocoa has more than doubled. At one point, the next futures contract on the Intercontinental Exchange (ICE) was trading at almost three times the closing price in 2023. After the contract reached an all-time high of USD 12,261 per tonne in mid-April, the price turned downwards. The setback comes as no surprise given the previous rally. However, little has changed in terms of the fundamental drivers of the rally: The bean filled with the seeds used to make cocoa butter is in danger of running out.
In a forecast presented at the end of February, the International Cocoa Organization (ICCO) assumes that 4,449 tonnes of cocoa beans will be harvested worldwide in the 2023/24 cocoa year (as at 30 September). This means that a good tenth less of the chocolate raw material will be available to the market than in the previous period. Although the organization also expects a 4.8% decline in grinding, the amount of cocoa processed is likely to significantly exceed supply at just under 4.8 million tonnes. The deficit could therefore increase by around 300,000 tonnes to 374,000 tonnes compared to 2022/23. At the same time, less than 30% of the cocoa milled within 12 months would be available as stocks at the end of the current marketing year (see chart). As with other agricultural commodities, the El Niño weather phenomenon is wreaking havoc on cocoa plantations. The trees are also affected by diseases. The oval bean is grown in regions around 15 degrees north and south of the equator. This is where the optimal tropical conditions for this plant prevail - actually. In the wake of El Niño, there was no rain.
No factor can reduce the cocoa yield as much as a lack of water. The two most important suppliers, Côte d'Ivoire and Ghana, in particular, had to contend with drought. As a result, harvest volumes in West Africa are declining. While the ICCO anticipates a decline of a good 11% for Ghana in the 2023/24 cultivation period, it expects yields in Côte d'Ivoire to be almost a fifth lower. This outlook is unlikely to change much, as the main harvest has already been harvested. Farmers, analysts and chocolate manufacturers are already looking ahead. Whether the supply situation improves in the 2024/25 marketing year depends crucially on the weather. It should not rain too heavily during the current flowering phase. The pods then form, where drought can have a particularly negative impact. As soon as the cocoa beans ripen, excessive rain is harmful. It can trigger diseases. But it should not be too dry either.
The ICCO will present its revised outlook at the end of May. The picture for the current cultivation period should then become clearer. What is certain is that the recent fluctuations in the cocoa price have led to a significant increase in volatility. On a one-month horizon, the price fluctuation margin of the next futures contract due is more than 70%. By comparison, the historical volatility of Brent North Sea oil for this period is less than 20%. Investors can take advantage of the nervousness on the cocoa market with a "writer strategy". They act as de facto sellers of volatility. This approach can be implemented with the help of a soft callable barrier reverse convertible. The USD-denominated structured product pays a coupon of 12.40% p.a. regardless of the further performance of the cocoa futures. The barrier is a low 55% of the initial fixing. As the BRC is structured with a European option, the protection threshold is not tested until the expiry date. It is then important for the underlying to be above the barrier. What the commodity price does until then is irrelevant. Important: The strong price fluctuations are accompanied by a correspondingly increased risk of the barrier being breached. This risk is compensated for by the particularly attractive conditions. Please also note that early termination and redemption of this issue is possible due to the soft callable feature.
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