Speculators are adding to bullish cocoa wagers at the fastest pace in two years as dry weather threatens crops in parts of West Africa, the source of 70 percent of global supply.
About a fifth of the growing regions in Ghana, the top producer after Ivory Coast, got half the normal rainfall in the past 45 days, according to MDA Weather Services. Showers have also been sporadic in Nigeria, the region’s next biggest grower.
The International Cocoa Organization is already predicting that production will trail demand in the season that ends in September. Prices rose more than 7 percent from the depths of the bear market in February and net wagers that the rally has further to go expanded 73 percent in the past four weeks.
“What people have latched on to is there might be some disappointment on the supply side because of possibly weather-related issues in some of the larger producers,” said Sameer Samana, a senior global strategist at Wells Fargo Investment Institute in St. Louis, which manages $1.6 trillion. “Weather will be an unpredictable factor in the short-term and could drive further price increases.”
The net-bullish position in cocoa climbed 18 percent to 29,376 futures and options contracts in the week ended April 28, U.S. Commodity Futures Trading Commission data show.
Futures slid 0.3 percent last week to $2,877 a metric ton on ICE Futures U.S. Prices gained 9 percent in April, the second gain in three months. The Bloomberg Commodity Index rose 1.8 percent last week, while the MSCI All-Country World Index of equities slid 0.8 percent. The Bloomberg Dollar Spot Index fell 0.7 percent last week, before rising 0.2 percent on Monday.
Producers in Ghana are bracing for the smallest harvest in five years as a fungus that kills pods compounds the effects of dry weather. Ecobank Transnational Inc. cut its forecast for the nation’s output this season to as low as 730,000 tons last month, trailing governments estimates.
In Nigeria, southeastern parts of the country are the most stressed from a lack of rain, and if dryness persists, it will probably lower the quality for the mid-crop collected from June through August, according to World Weather Inc. Too little moisture could also lower yields for the main harvest starting in September, said Drew Lerner, the Overland Park, Kansas-based president of the forecasting company.
Ivory Coast could sustain supply even if production falls elsewhere. Bean deliveries to ports in the country are ahead of last year’s pace, arriving at the fastest speed in a decade, according to data compiled by KnowledgeCharts, a unit of Commodities Risk Analysis in Bethlehem, Pennsylvania.
While cocoa prices declined 1.1 percent in 2015, futures surged 38 percent in the previous three years. The gains prompted chocolate makers including Hershey Co. to boost prices in 2014 to cover costs. Bean processing, a sign of demand, fell in Europe, Asia and North America in the first quarter, separate industry reports showed in April.
“We’re expecting a little bit of a drop in cocoa” prices, Carlos Mera Arzeno, senior commodities analyst at Rabobank International, said by phone May 1. “There’s always crop concerns in the market. I think the market has already priced in a lower crop in Ghana.”
Even though bean processing fell last quarter, grindings were still higher than analysts expected in Europe and Asia, helping cocoa to bounce back from the price declines earlier this year, according to Aakash Doshi, a vice president at Citigroup Global Markets Inc. in New York.
Global consumption will outstrip production by 17,000 tons this season, according to the International Cocoa Organization. The market is swinging to deficit from a surplus of about 30,000 a year earlier, data from the group show.
Stockpiles monitored by ICE Futures slumped 27 percent in the past 12 months. While they rose in April, they’re still at the lowest since October, exchange data show. Lower inventories mean there will be less of a supply cushion if the dry conditions get worse in Africa.
The Ghana crop concerns “helped the story” for cocoa bulls, Doshi said by phone May 1. The better-than-expected grindings data meant “cocoa futures and spreads both really rallied on the European beat, and then the Asian beat was the bigger surprise.”