Cocoa Breaks $10,000 Record, With Pricier Chocolate To Follow

Cacao products at a chocolate store in Cucuta, Colombia.

(Bloomberg) -- Cocoa futures surged above an unprecedented $10,000 a metric ton on Tuesday before erasing gains and taking a breather from a historic rally that has seen prices of the key chocolate ingredient double this year.

The market is being rattled by poor crops in key West African growers that has put the world on course for a third straight annual supply deficit. The industry is grappling with the legacy of poor returns paid to cocoa farmers and fears are mounting about being able to source enough beans.

As well as concerns about scarce physical supplies, pressures are also building in the financial market, where some traders have sold futures to hedge against physical holdings. But as they wait for the contracts to mature they need cash to meet margin calls on losses on derivatives, and in a rising market can be forced to close out short positions, helping to fuel the rally.

The most-active cocoa futures jumped as much as 4.5% to $10,080 a ton in New York before settling 0.3% lower at $9,622. Cocoa futures in London and New York have more than doubled this year.

The rally has pushed a technical gauge of prices into overbought territory for much of the last couple of months, though cocoa has continued to soar.

“When we're at this price, it's hard to tell whether these prices are justified,” said Paul Joules, an analyst at Rabobank in London. “Whenever we have a dip in the market, it seems to shoot straight back up, which is more to do with the commercials, they've been net buyers.”

Read More: Chocoholics Aren't the Only Victims of Cocoa Surge: Javier Blas

Reaching the $10,000 level could spur some profit taking, as price action “has gotten very steep, and traders could be concerned that the rally has reached exhaustion,” analysts at the Hightower Report said in a Tuesday note.

There's a risk the supply situation may worsen. Incoming European Union rules — aimed at stopping products that destroy forests from being sold in shops — may make it even harder for the bloc's chocolate makers to secure supplies.

New Harvest

Focus is now turning to West Africa's upcoming mid-crop, the smaller of two annual harvests. Top grower Ivory Coast's regulator expects that to shrink this season, Bloomberg has reported.

“The West African supply situation remains extremely tight going into the start of the mid-crop harvest next week,” the Hightower Report said in a note.

Other growers, like Brazil and Ecuador, are seeking to ramp up production, but it takes a few years before newly-planted cocoa trees bear beans — delaying the relief to strained global supplies. A ratio of stockpiles-to-grindings will fall to the lowest in more than four decades this season, the International Cocoa Organization has forecast, reflecting the market's precarious position.

Higher cocoa costs are pressuring profits of chocolate manufacturers, and cocoa's advance is also bad news for consumers if companies keep passing on costs or sell products that are smaller or have less chocolate in them. The looming Easter holiday is a peak period for candy consumption, and the lag between commodity and retail markets mean the brunt of the impact for shoppers still lies ahead.

--With assistance from Ilena Peng and Dayanne Sousa.

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