This year’s melt-up in cocoa prices likely has further to go, according to the hedge fund manager who has made a big bet on the beans. He now sees a risk that the world runs out of cocoa stocks altogether.
Pierre Andurand, founder of Andurand Capital Management LLP, is best-known for his oil and energy trades, riding a multi-year bull market in commodities to power a more than sevenfold increase in his clients’ invested capital over the course of three years.
But recent developments in the market for cocoa beans have lured the energy market veteran to the softer side of commodities trading. Andurand’s hedge fund went long cocoa futures in early March. That bet appeared to pay off as prices then surged to a record of more than $12,000 a ton during the following month, although they have since erased some of those gains.
In a new episode of the Odd Lots podcast, Andurand says he sees scope for further increases in cocoa, as financial markets clash headfirst with real-world constraints. He cites bad weather, climate change, a scarcity of fertilizer, and the outbreak of two separate plant diseases combining with long-term underinvestment to curb supply across major producers in Africa. If the weather fails to improve, cocoa futures could jump to more than $20,000 this year or the next, Andurand predicts.
And so stark is the supply shortage that it could lead to a situation where inventories of cocoa beans dry up altogether, he says.
“Basically we have a massive supply shortage this year. I mean, we see production down 17% relative to last year. Most analysts out there have it down 11%, but that’s because they tend to be very conservative. You know, they have lots of clients and they don’t want to to worry the world, so they come with relatively conservative estimates,” Andurand says. “We’re in a situation where we might actually run out of inventories completely.”
While cocoa futures have fallen from the lofty levels reached in April, dipping to below $9,000 a ton in recent weeks, structural pressures on an industry famous for its drawn-out growing timelines are expected to continue for years. Andurand estimates an 800,000-ton deficit this year due to shortages in Ghana and the Ivory Coast — that’s equivalent to about 17% of the total global production for the current growing season.
“This year we think we will end up with a with an inventory-to-grinding ratio — so inventory at the end of the season — of 21%,” he says , referring to stocks of cocoa relative to expected demand from the processors who grind the beans into cocoa paste and butter, ingredients that are used to make chocolate. “For the last 10 years, we’ve been between 35% and 40%. Roughly at the previous peak in 1977, we were at 19%.”
Inventories of unprocessed cocoa, which are tracked by the International Cocoa Organization, can serve as a cushion for when there’s a shortfall in supply. However, the lower the inventory-to-grinding ratio goes, the less of a buffer there is. When the stock-to-grinding ratio plunged in 1977, cocoa prices had surged to more than $5,500 a ton, or upwards of $28,000 on an inflation-adjusted basis.
That ratio could dip to as low as 13% in 2025, Andurand says.
“That’s when you really have a real shortage of cocoa beans. You can’t get it. And that’s when the price can really explode.”
With little sign that inventories of cocoa beans will meaningfully improve anytime soon, that leaves just the consumption side of the supply-demand equation to curb higher prices. Some analysts say they see signs of reduced consumption already, with big chocolate manufacturers taking steps to offset higher prices by reducing the size of their offerings, or using lower-quality cocoa and other substitutes.
But for Andurand, the fact that cocoa comprises a relatively small component of most chocolate products, combined with the fact that chocolate itself just isn’t a very big expenditure for most people, means that demand isn’t very responsive to the price of beans.
“What has been capping the price [historically] between $2,500 a ton and $3,000 a ton? It was not demand because demand is extremely inelastic,” he says. “And that’s because the amount in dollar terms that people consume in cocoa is very small.”
“So people are not going to eat less chocolate because of that. So it means that prices really are are capped by the amount of supply you get,” he adds. “So if you can’t get enough supply, the price can go up a lot until we get more supply. And when do we get more supply? Well, that in part is due to the weather, if you have much better weather then you might get more supply of cocoa beans the next year.”
Erratic weather patterns are also contributing to surges in other soft commodities. Orange juice futures jumped to a record high this week on expectations that Brazil, the world’s largest exporter of orange juice, will have its worst harvest in 36 years. Meanwhile, drought in Vietnam has helped push up the price of Robusta coffee futures to the highest in more than four decades.
Extreme volatility in soft commodities could expand the trading opportunities for hedge funds like Andurand’s.
“Generally, the shifts in weather patterns due to climate change are going to bring some structural stories into soft commodities,” he says. “And so we’ll have to look at it, more and more of those soft commodities, because it’s not only going to be from one year to another.”
The Andurand Commodities Discretionary Enhanced hedge fund gained 25.6% through the first quarter, according to a person familiar with the matter, after losing 55% in 2023 when a forecast spike in the price of oil failed to materialize.
“When you look at all the potential supply disruptions that we could have, at the end, nothing, we didn’t get any supply disruption,” Andurand says of the oil market. “Relative to expectations, we ended up having a lot more Russian production and Iranian production. And also last year US supply grew up more than expected.”
In addition to cocoa, Andurand sees copper as another commodity where a similar structural shortage is playing out. The metal has long been touted as a winner in the world’s drive for electrification, and its price has surged again this week, hitting a two-year high in London.
“Copper should go up a lot,” the hedge fund manager says. “Solar panels and windmills take a lot more copper, and also all the data centers take a lot of copper. So we have that surge in power demand that will need a lot of copper.”
There will be an “increase in demand against no increase in supply. So you get a larger and larger deficit every year,” he says. “And the price hasn’t reacted yet, and that’s mainly because I think there’s not enough funds out there or companies that actually trade the futures market and hold positions for very long. I mean, if you look at most of the hedge funds out there, it’s a bunch of like pods that have very many, many teams in those big multi-strategy funds that have very tight drawdowns.”
“So they tend to try to trade for the next few days or next week or so. They can’t really hold positions for very long. And there’s not a lot of companies that can hold a position,” he adds. “So because the market is not really doing its job to actually give a price signal to solve that deficit, that upcoming deficit, that’s a multi-year deficit.”
For copper, “we are going to have a nonlinear move sooner rather than later,” he concludes.