CEO Morning Brief

Cocoa Price Swings Are the Craziest Since the 1970s

Publish date: Thu, 25 Apr 2024, 09:41 PM
TheEdge CEO Morning Brief

(April 24): Cocoa resumed gains in New York, with prices the most volatile in almost five decades amid uncertainty over a historic crunch and as traders pull out of the market.

Futures have soared about 160% already this year as poor West African harvests leave the world desperately short of beans. But the rally has made it more expensive to maintain positions, prompting investors to close out trades, draining liquidity and making the market more vulnerable to large price swings.

Cocoa jumped as much as 4.5% on Wednesday, snapping an almost 9% two-day slide. That helped push a 60-day measure of volatility to the highest since 1977.

Cocoa’s rally to a recent record above US$11,000 (RM52,558) a tonne means traders — including those who’ve hedged against physical holdings — have to come up with more money to pay margin calls, which work as an insurance policy to cover potential losses. When they can’t do that, they’re forced to close out their positions. That’s pushing down open interest, the number of outstanding contracts.

There’s still much uncertainty over global supplies. Still, a shift from the El Nino weather phenomenon to La Nina will likely help global production recover next season, and that weighed on prices early this week, The Hightower Report said in a note.

Traders will also keep a close eye on short-term weather and crop conditions in the crucial West Africa region.

“Rainfall over West African growing areas this week is expected to benefit the region’s upcoming production and is the first positive news for crop prospects in quite a while,” ADM Investor Services wrote in a note. The region’s mid-crop harvest is expected to ramp up by the middle of May and reach full speed by the mid-June.

Source: TheEdge - 25 Apr 2024

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