Chocolatiers Burned by Cocoa Rally Still Need to Rebuild Hedges

It looked like cocoa supplies were improving earlier this season after the worst deficit ever, giving chocolatiers paying through the nose for beans an incentive to sit out and wait for lower prices. That respite proved short-lived.

After a brief stint of softening prices, cocoa has rapidly resumed its upward climb. On Tuesday, New York futures rose as much as 3.5% to $9,282 a ton. Since their recent October low, cocoa prices are up more than 45%.

Companies that drained their cocoa stockpiles now face the expensive task of rebuilding at costly levels, while those that let their hedges slip in hopes of snagging cheaper deals are finding themselves short on protection at a risky time. Normally, chocolate makers hedging with futures are covered eight to nine months out; today, it’s around five and a half months for the industry, according to Marex Group.

“Many aren’t really interested in covering at these levels,” said Vladimir Zientek, a trading associate at financial services firm StoneX Group Inc. “Clearly everything that’s being hedged now is hand to mouth.”

That’s not how bean buyers expected it to go. After cocoa prices touched an all-time record in April, the physical market was starting to cool off. Bean deliveries to ports in top grower Ivory Coast for the season that began in October are running about 30% above last year’s pace, while origin differentials — the premiums that buyers pay depending on where beans are grown — have been easing in some countries though are still “nowhere near what I would describe as average,” said Jonathan Parkman, head of agricultural sales at Marex.

While chocolate makers awaited lower prices, they used up big chunks of inventories. Stockpiles held in US exchange warehouses are the lowest levels since 2005. Now, fears are mounting that heavy rains in West Africa, which led to farmer evacuations and moldy beans earlier in the season, will crimp supplies heading into the new year.

The outlook for a cocoa surplus this season is “very unsteady,” said Ignacio Canals Polo, a senior associate at Bloomberg Intelligence. Companies have to stay covered to an extent and cannot rely too heavily on flexible pricing strategies, he added. “If you’re a chocolate manufacturer, you know what’s happening on the ground. But I don’t know whether you’d want to take that risk.”

The next big update to this season’s production will hinge on the West African mid-crop harvest that starts in April. Until then, companies are trying to navigate the delicate balance between waiting for lower costs and still saying covered.

“I expect to have clarity on cocoa prices in the next month or a couple of months,” Luca Zaramella, chief financial officer at Oreo and Toblerone maker Mondelez International Inc., said on a late October earnings call. “We haven’t locked in cocoa prices yet. We want to take advantage of the potential decline of cocoa cost, albeit we want also to be protected on the upper side of cost.” Mondelez didn’t reply to a request for comment.

For now, Wall Street is awaiting higher prices. Money managers’ net-long positions were the most bullish in about nine months in the week ended Nov. 19, according to the most recent data from the Commodity Futures Trading Commission.

On Monday, Citi Research raised its near-term cocoa price target to $10,000 a ton, noting “prospects to re-test April’s highs.” Prices are currently bouncing around the $9,000-a-ton level after peaking above $11,000 a ton in the spring.