U.S. Cocoa Buyers to Get a Taste of Africa on Record Premium
(Bloomberg) -- U.S. chocolate lovers could soon get more of a taste of Africa.
Traders said this week that they’re preparing to ship cocoa from the new West African crop to the U.S. as New York futures trade at the highest premium to London in at least three decades. The unprecedented arbitrage window has opened as some funds prefer to bet on U.S. futures and as the London bourse is plagued with supplies from Cameroon that traders don’t want to buy.
The price gap -- now at more than $200 a metric ton -- allows traders to make a huge profit even after accounting for the cost of shipping, importing and storing in American warehouses. There are also big premiums for contract months further out, which may encourage demand for beans from top producers Ivory Coast and Ghana when the next crop starts in October.
“This has never happened before, this is extraordinary,” said Jonathan Parkman, co-head of agriculture at London-based brokerage Marex Spectron Group and who has been in the market more than 30 years. “In my entire career, I have never seen anything like this. We have an arbitrage a year forward which is not just a record, but it’s a record by a wide margin.”
New York cocoa for July delivery now costs about $220 a ton more than London futures for the same month. The premium for May futures, which are closer to expiring, exceeds $300 and for December it’s at $176.
The gap has widened partly because of concerns over the quality of beans that can be delivered on the London exchange, Marex Spectron and Rabobank International said. There’s a large amount of bulk bags from Cameroon that can be delivered in London that have certificates close to expiring. Traders are worried that the certificates may not be renewed, leaving them supplies that could be difficult to offload in the future.
“People are reluctant to take up cocoa when it expires for fear that if it fails regrading, they can’t redeliver against the futures markets subsequently,” Parkman said. “They are not sure they are going to be able to sell it in the physical market.”
The concerns about bulk Cameroon beans is also being reflected in London futures. The May contract reached a record discount of 76 pounds ($106) a ton to July futures on Wednesday, signaling less appetite for nearby supplies.
U.S. futures have also benefited from participation from trend-following funds, which are usually more attracted to the New York market. At the same time, many traders who traditionally dominated the London bourse, such as hedge fund king Anthony Ward and Olam International Ltd.’s Amit Suri, have recently stepped back.
“The market is changing,” said Greg Spaenjaers, managing director of Volcap Trading in London. “The fact that these big influencers have left the market and the systematic funds have a preference for the U.S. contract is basically the game changer."
Some traders said they need a bigger incentive to take delivery of London beans and then sell them in New York. That’s because they’re likely to end up with a lot of beans from Cameroon, which are harder to ship to the U.S. because of import rules. Obtaining Ivorian and Ghanaian cocoa through the London exchange would require a large position, because they’d first have to take the Cameroonian supplies.
High Asian demand also means less cocoa is moving from No. 3 grower Indonesia to the U.S. market. In the past, those lower-quality beans helped keep New York futures at a discount to London. Indonesia has now become a net importer amid an expansion in domestic processing.
©2018 Bloomberg L.P.