Major producer Ghana’s failure to deliver cocoa beans this year has led to trading houses facing losses of at least $1 billion on cocoa derivatives.
Forced to liquidate short positions in a rising market, traders have been hit hard, according to six industry sources reported by Reuters.
This year, global cocoa prices surged due to adverse weather, diseases affecting the beans, smuggling activities, and illegal gold mining, which have all contributed to a decline in production and availability of beans from Ghana, the second-largest producer in the world.
Global chocolate prices have also increased, prompting manufacturers to downsize products like chocolate bars in response to the significant rise in cocoa prices.
Officials in Ghana, who manage all cocoa sales, are contemplating a delay in the delivery of up to 350,000 metric tons this season, approximately half of their total sales, due to significant crop damage.
Five sources informed Reuters last month that Ghana’s cocoa regulator mentioned a desire to roll over “some volumes”, though not in such large quantities.
According to the sources, a postponement of 350,000 tons could result in cocoa traders and processors facing losses of approximately $4,000 per ton on cocoa futures they purchased to hedge their physical bean acquisitions, totalling around $1.4 billion combined.
Companies like Cargill, Olam, and Barry Callebaut engage in the futures market to hedge or lock in prices for cocoa that remains unsold to chocolate producers.
“We’re just looking at our screens, hardly making any trades,” said the head cocoa trader at a global trading firm focused on agricultural commodities, who spoke on condition of anonymity due to restrictions on media communication.
He indicated that activity in the global cocoa physical and futures markets has almost ceased because of substantial losses and ongoing uncertainty.
A significant portion of Ghana’s cocoa is purchased by large, diversified trading firms with considerable financial resources, including Sucden, Olam, Barry Callebaut, Cargill, Touton, and Ecom.
Traders usually negotiate contracts to buy cocoa beans well in advance, much like other commodities, aiming to resell them later at a profit.
This strategy involves assuming a long position in the physical market. As they wait for delivery, which can span weeks or months, they need to shield themselves from possible price drops.
To protect against losses on their long position, they typically take short positions in the futures market.
By betting on declining prices, short trading allows traders to mitigate risk. When the physical commodity is delivered, the long and short positions effectively cancel each other out, which secures a fixed price and protects against market fluctuations.
However, this strategy falls apart if there is a delay in physical delivery, such as cocoa beans, during a rising market.
In such cases, traders must liquidate their short positions for the month they anticipated the commodity’s arrival and establish a new short position for the month of the revised delivery date.
According to traders, acting in April 2024 after the market recognised that Ghana would postpone bean deliveries to 2025 would have been expensive.
The six sources indicated that traders who purchased physical beans for delivery in May 2024 would have established equivalent short positions in May 2024 futures at approximately $3,000 per ton.
As the market surged in April 2024, those traders were compelled to liquidate their May 2024 shorts or buy back the futures at $11,000 per ton, resulting in losses of $8,000 per ton.
With traders still aiming to secure cocoa and protect themselves in the physical market, they needed to take on new short positions for May 2025 delivery, which was trading at approximately $7,000 per ton in April 2024.
This implies that if traders obtain their physical cocoa next May at $3,000 per ton, they will still experience a total loss of $4,000 per ton.
At present, the cocoa market is experiencing its third straight year of shortfall, with prices roughly doubling this year.
Traders are expected to recover some losses by increasing prices for products such as cocoa powder and butter sold to chocolate producers like Hershey and Mondelez, according to a senior trader at a global agri-commodity trading company.
It is expected that chocolate companies will face difficulties in passing these costs onto consumers, who are already tightening their budgets and buying less chocolate in response to price increases.
According to one trader, market liquidity has diminished as exchanges require traders to provide additional cash as collateral for their hedges.
This reduction in liquidity has contributed to increased price volatility, he noted.
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