Cocoa and Coffee Prices Surge Amid Supply Concerns and Market Volatility

Key Takeaway

• Cocoa and coffee prices rally due to extreme weather and shortages, with cocoa's volatility impacting coffee trading.
• Severe drought in Vietnam and shortfalls in West Africa drive unprecedented market volatility, with cocoa facing greater long-term challenges.
• Despite supply concerns, coffee market shows resilience; growers invest in productivity, contrasting with fixed cocoa prices in major producing countries.

Cocoa and Coffee Markets Intertwine

Cocoa and coffee prices have experienced significant rallies this year, driven by extreme weather conditions and shortages. Both markets are facing severe shortages, with production concentrated in a few countries. Major traders dealing in both commodities are feeling the squeeze from soaring cocoa prices, impacting their ability to trade coffee. Carlos Costa, head of sales for Hedgepoint Global Markets LLC, noted that the coffee trade might have been "contaminated" by speculative buyers influenced by cocoa's troubles. Futures of robusta coffee rallied more than 70% over six months through April, reaching the highest price in over four decades, while cocoa prices more than doubled this year to a record last month.

Supply Concerns and Market Volatility

The world's supply of coffee and cocoa comes from a handful of countries, with Vietnam and Brazil accounting for more than half of global coffee bean exports. Severe drought in Vietnam and production shortfalls in West Africa's Ghana and Ivory Coast, the two biggest cocoa producers, have caused unprecedented volatility and record-high prices. Andre Acosta, a director at financial firm Marex Group Plc, mentioned that the cocoa rally had a "psychological effect" on coffee, drawing comparisons between the commodities. Both markets have seen aggregate open interest fall as prices rose, increasing volatility. However, the concentration of cocoa production in West Africa poses long-term challenges greater than those faced by coffee.

Coffee's Resilience Amid Challenges

Despite the supply concerns pushing up coffee prices, the market is expected to fare better than cocoa. Coffee growers are investing in new and more productive plants, supporting yields and fending off disease. Thiago Cazarini, who runs a brokerage firm in Brazil's coffee belt, highlighted the incentive for farmers to invest in coffee due to the immediate benefits from rising market prices. In contrast, cocoa prices in Ivory Coast and Ghana are fixed by governments, limiting farmers' ability to benefit from market rallies and invest in their crops. The upcoming European Union regulation aimed at preventing deforestation is expected to impact cocoa more than coffee due to the latter's global intake and easier substitution between arabica and robusta beans.

Street Views

• Carlos Costa, Hedgepoint Global Markets LLC (Neutral on coffee):

  "The coffee trade might have been 'contaminated' by a wave of speculative buyers betting prices would rise after the troubles in cocoa."

• Andre Acosta, Marex Group Plc (Neutral on cocoa and robusta futures):

  "The cocoa rally has had a 'psychological effect' on coffee, spurring comparisons between the commodities... Margins for companies sourcing both commodities might be 'hurting.'"

• Vanúsia Nogueira, International Coffee Organization (Cautiously Optimistic on coffee):

  "Cocoa’s large concentration in just two countries led to the problems we are seeing now, and we can’t let the same thing happen to coffee... While the situation of coffee markets may be less extreme, she said the commodity is 'following along the same lines' of cocoa."

• Thiago Cazarini (Bullish on coffee's future prospects compared to cocoa):

  "Coffee growers are replacing older plants with new and more productive ones at a set pace each year, supporting yields and fending off disease... The incentive for farmers to invest in coffee is 'significantly higher,' as producers can immediately benefit from the rise in market prices."

• Megan Fisher, Capital Economics (Optimistic about coffee under EU deforestation regulation compared to cocoa):

  "Coffee is likely to fare better than cocoa once European Union regulation aimed at preventing deforestation takes effect at the end of the year. That’s because coffee intake is more global than chocolate..."

• Guilherme Morya, Rabobank (Positive on Brazil's arabica production):

  "Brazil —the world’s top coffee grower—has ‘consistently improved’ arabica production in recent years."

• Trishul Mandana, Volcafe (Concerned/Warning about industry model due to market concentration similar to what happened with cocoa): > "A failure to diversify sourcing origins ‘can end up fundamentally changing the industry model and potentially breaking the trade.’ I believe we are witnessing this today in cocoa and the coffee industry has a lot to learn from these events.”