The futures exchanges give a platform for speculators and companies wishing to hedge against contracts, where the price might move against them in the future.
They are not normally where you go to actually buy and take delivery of a commodity. But Hershey‘s did some out of the box thinking and decided to do exactly that.
It has been reported that this tactic was derived from frustration at the West African premium of $400 a tonne applied by Ghana and Cote d’Ivoire.
Despite the dip in demand from the Covid pandemic, New York cocoa prices for delivery in December has jumped by more than 25% from lst week to $2,915 a tonne — the highest since the outbreak began.
Yet consumer demand for chocolate overall has decreased as the pandemic hits non-essential buying. Subdued demand, an excess supply, and higher costs are not a good combination, so it looks like Hershey‘s has been doing some creative problem solving.
The futures market for cocoa is largely used by buyers for hedging. This is a strategy used as a way of minimising losses if the market moves against you.
In the New York market, it is rare to see physical buyers taking delivery of the commodity from the futures exchange since the point of the market is about making a profit on speculation more than actually wanting to own a commodity.
This can likely be attributed to reduced demand as a result of the pandemic impacting discretionary food products such as chocolate.
The timing of the long awaited $400 per tonne price increase of Cocoa from the Ivory Coast and Ghana, which account for more than 60 per cent of world production, now looks unfortunate.
Physical market buyers also have to pay a “country premium” for cocoa from Ghana and Ivory Coast whose beans are regarded as higher quality among the African producers.
“It’s been hell of a rally,” said Jack Scoville at commodities brokers Price Futures Group in Chicago, who added it was the Ivory Coast and Ghana policies that was on traders’ minds. “It is not a fundamental strength,” he added.
While most chocolate companies and cocoa traders have said they were happy to pay the $400 “living income differential” premium for farmers, they have requested more flexibility on the country premiums to reflect lower demand. “It’s a complete mess at the moment. I wish Ghana and Ivory Coast would talk and listen,” said one large cocoa trader.
Procuring beans through the exchange, where there is no living income differential premium, offers a discount of about $200 a tonne for top-grade beans for Ivory Coast compared with the physical markets, according to brokers.
Buyers of beans on the exchange, however, do not have control over the quality of beans that get delivered.
Hershey’s trades were first reported by Bloomberg. Hershey’s said it has “long supported initiatives that improve the incomes and livelihoods of farmers”, and that it had bought cocoa on the physical markets, paying for the Ivorian and Ghanaian living income differential premiums.
“While we do not discuss details of our specific buying and hedging activities, we buy cocoa from a variety of suppliers and sources to meet our ongoing business needs,” it said. Cocoa authorities in Ghana and the Ivory Coast did not respond to requests for comment.