(BLOOMBERG) 5/16/24
And finally, here's what Joe’s interested in this morning
The world could completely run out of cocoa inventories, according to the famed commodity trader and hedge fund manager Pierre Andurand.
Pierre has built a successful career primarily based on his oil bets. But he also veers into other areas from time to time, including a successful long bet on cocoa back in March, right before the price of the commodity took off.
We talked to Pierre for the Odd Lots podcast out today, and it was absolutely fascinating hearing how someone like him conceptualizes the market. Find the whole episode on Apple, Spotify or elsewhere.
As he sees it, there are four factors greatly diminishing supply:
Here's how he maths it out (edited for clarity):
It's always about supply versus demand. But what has been capping the price between $2,500 a ton and $3,000 a ton was not demand because demand is extremely inelastic. You can study that historically when you have a recession or not, when prices go up a lot or not. Demand generally goes up. And that's because the amount in dollar terms that people consume in cocoa is very small. I did a back-of-the-envelope calculation the other day. You have 8 billion people on the planet and a market of 5 million tons of demand per year, so on average it means that people consume 1.7 grams of cocoa per day. At $10,000 a ton, which is four times the more recent historical prices, that represents 1.7 cents per day. Okay, that's the average person. Many people eat nothing and a few eat 10 times that amount.
So, at these levels of spending — 1.7 cents per day per person — the swings just don't matter much and the only way to bring the market into balance is supply.
Now he sees a possibility that the world could run out of cocoa inventories, which to be clear is different than the world not having any cocoa. Exchanges and producers hold stocks of cocoa, which is an important number to get your hands on, so you can get a “stocks-to-grinding” ratio, which gives you a sense of how much the world has on hand as a buffer relative to how much is processed at any given time. Right now we're at 21%, which is far lower than the past 10 years, when the world was closer to 35% to 40%.
If we get another bad year of weather and disease, those excess inventories could just vanish.
And finally, here's what Joe’s interested in this morning
The world could completely run out of cocoa inventories, according to the famed commodity trader and hedge fund manager Pierre Andurand.
Pierre has built a successful career primarily based on his oil bets. But he also veers into other areas from time to time, including a successful long bet on cocoa back in March, right before the price of the commodity took off.
We talked to Pierre for the Odd Lots podcast out today, and it was absolutely fascinating hearing how someone like him conceptualizes the market. Find the whole episode on Apple, Spotify or elsewhere.
As he sees it, there are four factors greatly diminishing supply:
- Bad weather in West Africa
- Climate change
- Two separate disease outbreaks affecting the cocoa plants
- A shortage of fertilizer on account of Russia's invasion of Ukraine.
Here's how he maths it out (edited for clarity):
It's always about supply versus demand. But what has been capping the price between $2,500 a ton and $3,000 a ton was not demand because demand is extremely inelastic. You can study that historically when you have a recession or not, when prices go up a lot or not. Demand generally goes up. And that's because the amount in dollar terms that people consume in cocoa is very small. I did a back-of-the-envelope calculation the other day. You have 8 billion people on the planet and a market of 5 million tons of demand per year, so on average it means that people consume 1.7 grams of cocoa per day. At $10,000 a ton, which is four times the more recent historical prices, that represents 1.7 cents per day. Okay, that's the average person. Many people eat nothing and a few eat 10 times that amount.
So, at these levels of spending — 1.7 cents per day per person — the swings just don't matter much and the only way to bring the market into balance is supply.
Now he sees a possibility that the world could run out of cocoa inventories, which to be clear is different than the world not having any cocoa. Exchanges and producers hold stocks of cocoa, which is an important number to get your hands on, so you can get a “stocks-to-grinding” ratio, which gives you a sense of how much the world has on hand as a buffer relative to how much is processed at any given time. Right now we're at 21%, which is far lower than the past 10 years, when the world was closer to 35% to 40%.
If we get another bad year of weather and disease, those excess inventories could just vanish.
