Trick or Treat? Funds Signal Post-Halloween Chocolate Rally

(Bloomberg) -- Chocolates are cheaper for Halloween, but prices are likely to rebound by Christmas thanks to rising demand for cocoa beans.

A global surplus sent cocoa prices plunging for most of the past two years, which helped to temper retail chocolate costs. There are signs that the overhang is beginning to ebb as consumers eat away the excess. Grindings, a measure of demand, have been climbing globally. That’s caught the attention of hedge funds, who are finally starting to back away from bets that the commodity’s slump will continue.

“Low prices are the cure for low prices,” said Harish Sundaresh, a portfolio manager and commodities analyst in Boston for the Loomis Sayles Alpha Strategies team, which oversees $5 billion. “A combination of improving grinding demand from chocolatiers ahead of the holiday season, over-crowded short positioning and persistently low prices over the past year has improved the price outlook.”

Cocoa futures traded in New York have erased 2017’s losses. Prices were down as much as 17 percent in May, but cocoa was 0.1 percent higher at $2,141 a metric ton as of 9:48 a.m. in New York, up 0.7 percent for the year.

Hedge funds held a net-short position, or the difference between bets on a price increase and wagers on a decline, of 18,446 futures and options in the week ended Oct. 17, according to U.S. Commodity Futures Trading Commission data released Friday. That compares with 21,560 a week earlier and was a sixth straight contraction.

Here’s what traders will be keeping an eye on in the market:

Holiday Demand

Luckily for Halloween revelers, who will celebrate on Oct. 31, the rebound hasn’t started in full yet. In the four-week period ended Oct. 8, average retail unit prices for chocolate were down 7.3 percent from the prior period, according to data from Chicago-based researcher IRI compiled by Bloomberg Intelligence. The U.S. holiday is a candy bonanza. Americans will dole out $2.7 billion on the treats, as total spending on Halloween climbs 8.3 percent to $9.1 billion, the National Retail Federation estimates. About 75 percent of households hand out sweets to trick-or-treaters, and chocolate comes in as the clear favorite, according to the National Confectioners Association.

West Africa

Ivory Coast, the world’s biggest cocoa grower, has tightened requirements to issue export licenses. The nation is also in conversations with rival and No. 2 producer Ghana on how to boost earnings from the crop after the price slump cut government revenues and incomes for hundreds of thousands of small-scale farmers. The World Bank has pledged its support for the nations’ plans to develop a coordinated strategy, which could include common policies on the marketing, storage and processing of cocoa. The countries account for more than 60 percent of global supplies. The revised export rules along with the possibility of more clamp-down has “raised uncertainty about the speed of supplies reaching the market,” said Albert Scalla, senior vice president for INTL FCStone in Miami.

Stockpile Slump

Cocoa inventories at warehouses monitored by ICE Futures U.S. have fallen for 42 straight days, the longest slide since November 2014. The drop comes partly amid the slowing pace of deliveries from Ecuador, the fourth-largest grower, after U.S. officials rejected some shipments because of traces of a noxious weed in some cargoes. The stockpiles are about 54 percent higher than a year ago, though, helping to provide some cushion to the market. Still, inventories could keep dropping because cash-market prices have gotten so high that it’s become less attractive to deliver beans through the exchange, Scalla said. If futures breach resistance above $2,200, the next upside target sits at $2,300, he said.

To contact the reporter on this story: Marvin G. Perez in New York at mperez71@bloomberg.net.

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Millie Munshi

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