Cocoa futures
- Thread starter schizo
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(Axios)
1 big thing: The real reason cocoa spiked
Data: Yahoo Finance; Chart: Axios Visuals
First nickel, now cocoa. The commodities world is again being rocked by a short squeeze, Felix writes.
Why it matters: Just as with nickel in 2022, arcane financial contracts are taking on a life of their own and hurting those you'd think the price spike would help — companies that own large amounts of cocoa.
The big picture: The commodities market provides a way for buyers and sellers of cocoa to lock in prices.
1 big thing: The real reason cocoa spiked
Data: Yahoo Finance; Chart: Axios Visuals
First nickel, now cocoa. The commodities world is again being rocked by a short squeeze, Felix writes.
Why it matters: Just as with nickel in 2022, arcane financial contracts are taking on a life of their own and hurting those you'd think the price spike would help — companies that own large amounts of cocoa.
The big picture: The commodities market provides a way for buyers and sellers of cocoa to lock in prices.
- Confectioners and other manufacturers are the natural buyers of cocoa futures: They go long on cocoa.
- Producers of cocoa are the natural sellers. They go short.
- In an efficient market, when production falls, prices rise commensurately — that's just basic supply and demand. But right now, the cocoa market isn't efficient.
- "The last few weeks of daily record highs have more to do with financial factors than fundamentals," he writes.
- When contracts come due, cocoa producers generally have the physical beans necessary to close out their position. What they don't have is the financial liquidity needed to meet margin calls against them as the spot price rises in the short term.
- Eventually, those companies are forced to close out their short positions at a loss — by buying contracts, sending the price even higher, and squeezing the other shorts even further.
Yeah, yeah, we all know what a vicious short squeeze is. But the writer states it's the "companies" not speculators. Now, why the heck would savvy companies like Nestle and Hersheys sell short when they KNOW there's a major shortage of cocoa crop (in another word, price can only go higher)? Don't you think they have field agents on the ground actually looking into everything? My verdict: That guy doesn't know what he's talking about and should be fired.
Nestle and Hersheys would be long cocoa since they have to buy cocoa at a future date. It would be the farmers who are short.
But why??! If you were a farmer who clearly knows LESS SUPPLY = HIGHER PRICE, why the hell would you go short? If you didn't already know that, you shouldn't be a farmer (or shouldn't be trading).
Because farmers, dirt poor ones especially, are concerned about the crop in the field. Not the crop(s) yet to be planted.
We're talking about SHORT SELLING here, not about closing out your long position. Those dirt poor farmers might be forced to sell their long contracts out of economic necessity. Who knows? They need to send their kids to college or they have unforeseen medical expenses. But they would NEVER sell short knowing that there is an OBVIOUS shortage of crop. Otherwise, they're simply idiots.
Now if you are shorting as a speculator, well, then that would be a whole different matter.
Farmers absolutely sell short - to lock in a price they need to ... to live another
Don't you understand the hedging part of the equation?