Overview

• Examination of why cocoa futures in New York and London are diverging in price
• Analysis of underlying factors: quality differences, currency dynamics, market speculation, and oil-related production costs

Market Differentiation

• New York vs. London Cocoa:
  • New York:
    • Trades premium cocoa sourced from Ghana and Ivory Coast
    • Used for artisanal and luxury chocolate production
    • Futures priced in U.S. dollars
  • London:
    • Predominantly supplied by older, lower-quality beans from Cameroon and Nigeria
    • Suitable for cost-effective milk chocolate production
    • Futures priced in British pounds

Currency Influence

• U.S. dollar strengthened by approximately 14% against the British pound from 2023 to 2025
• Stronger dollar increases international attractiveness of New York’s premium beans
• London’s pound-denominated cocoa becomes less appealing as a result

Speculative Trading and Market Strategies

• Speculators and arbitrageurs contribute to the price divergence
• Arbitrage strategy:
  • Purchase lower-priced cocoa in London
  • Improve quality through re-fermentation
  • Sell in New York for a higher price
• Market speculation intensifies the spread between the two exchanges

Quality and Storage Factors

• High-Quality Deliveries:
  • 85% of cocoa deliveries in New York (2024-2025) meet premium standards
  • Buyers pay an extra premium (up to $800 per ton) for superior quality
• London’s Inventory Challenges:
  • Approximately 340,000 tons of cocoa stored that do not meet premium standards
  • Around 40% of stocks held over three years, facing issues like moisture damage and fat bloom
  • Resulting in a discount of $1,200–$1,500 per ton relative to New York futures

Regional Demand Dynamics

• North America:
  • 18% annual growth in premium chocolate consumption since 2021
  • Increased demand for dark chocolate and bean-to-bar products drives up premium cocoa prices
• Europe:
  • European chocolate makers prioritize cost efficiency due to higher energy costs and subdued consumer spending
  • Preference for milk chocolate produced with lower-grade cocoa

Oil Prices and Production Costs

• Rising oil prices affect production costs, including fertilizer and diesel expenses
• Impact on cocoa-producing countries:
  • Depreciation of national currencies
  • Reduced farmers’ purchasing power and lower cocoa yields

Key Event Highlight: September 2024 Squeeze

• A “squeeze” on New York cocoa futures forced hedge funds with large short positions to cover
• Surge in demand from Asian chocolate makers triggered a price rally of approximately $2,400 per ton

Summary & Implications for the Industry

• The widening price differential is a result of quality stratification, currency fluctuations, and energy-linked costs
• Producers may need to:
  • Adopt quality certification systems
  • Reform futures market practices
  • Invest in renewable energy to combat rising oil costs
• The evolving global demand for premium chocolate presents ongoing challenges and opportunities for both cocoa producers and manufacturers

These show notes capture the critical factors influencing the current cocoa market landscape and provide insight into how these dynamics reflect broader trends in agricultural commodities.