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This is a lot of words to say you've never traded a commodity market. Blaming the liquidity providers while the fundamentals point to an exact reason cocoa is g

by zer8k 3y ago

This is a lot of words to say you've never traded a commodity market. Blaming the liquidity providers while the fundamentals point to an exact reason cocoa is going nuts. Maybe do a little more than "clicking on random graphs" to find a spurious justification. Cocoa will go limit up until the situation in Africa improves. The "traders" don't move nearly the volume the large chocolate providers do. Are they also "manipulating" the market?

ars 3y ago
I have a hard time believing that cocoa is so in-elastic that an 11% drop in supply translates to a 300% increase in price. Cocoa is a treat, with prices that high demand should plummet.
- gotoeleven 3y ago
  Who you gonna believe, the market-based consensus of 1000s of cocoa traders, or the lived experience of a wise ars?
  - throw-the-towel 3y ago
    OTOH markets are known to stay irrational longer than you can stay solvent.
    - fngjdflmdflg 3y ago
      This isn't a stock market but a commodity market. Nobody is betting on what they think Cocoa will be worth in the future. So that point isn't relevant here.
      - zer8k 3y ago
        If you look at old crop/new crop spreads over other commodities such as corn and soybeans it's clear that the disconnect between the front and back month is entirely on the yield (and therefore the price) of the future harvest. In this case, the futures contracts going out to 2025 are pricing in a poor crop harvest (and therefore a higher future price). By construction the future will "collapse" to the cash price at expiration (modulo carry costs) meaning that the future is exactly representing the market consensus on future price. This is no different than a stock market where a stock's theoretical price is the consensus on discounted future cash flows of the company. If a stock had an expiration date then it would have to collapse to the "cash price" (e.g. the exact discounted cash flow) at expiration otherwise funny arbitrage things happen.
        fngjdflmdflg 3y ago
        >In this case, the futures contracts going out to 2025 are pricing in a poor crop harvest (and therefore a higher future price). May 2024 futures are also up almost the same amount.[0] You can call that betting on the future but it's a big stretch. It's obvious that it is largely reflecting the current market price. [0] https://www.cnbc.com/quotes/@CC.1/ https://www.cnbc.com/quotes/@CC.1/
        fngjdflmdflg 3y ago
        Since I can't edit anymore, it's a new comment. Here are the futures for March 2024 which already expired.[0] It is clear to see that this is not wild speculation. You are right however that people can still speculate on the harvest and demand of a commodity. But the nature of this speculation is very different from speculating on if Nvidia will be worth 2 trillion in the future. Additionally as futures expire that means you can always stay solvent by shorting a future that is soon to expire, which cannot be said with stocks (I realize that this is a separate point from the one I made initially). And the fact that futures expire itself causes there to be less speculation because the window of time for the asset to appreciate is much smaller. Taking your example of a stock that expires, Nvidia's stock would be much lower now if it expired next year. Commodities simply don't go up 100x like stocks do. When a commodities does go up, it make more sense to assume that yields went down or that demand went up. I didn't mean to say that it's impossible that traders speculate on commodities. [0] https://www.barchart.com/futures/quotes/CCH24 https://www.barchart.com/futures/quotes/CCH24 (takes some time to load)
        zer8k 3y ago
        > commodities don't go up 100x like stocks do This is entirely due to the limit mechanism that tries to keep prices approximately in line with supply and demand. There have been several instances of grains in particular locking limit up during a blight over and over again. In recent history oil going negative is another example. If it wasn't for the limit mechanism (and in some cases, the literal government) stepping in they absolutely could 100x. When you're a goods supplier you'll pay nearly anything once prices reach your "uncle" level. The dynamics at limit are somewhat interesting as it's a case where the entirely market has consensus that "I need to buy (sell) now or I'm hosed". I wasn't suggesting you were saying you couldn't speculate on commodities. I was mostly suggesting that even removing traders the "speculation" occurring is due to the anticipated future value of that commodity. If it wasn't, then buyers and sellers would go to the cash market which while extremely volatile may also be a smart choice for at least some of the crop. IMO limit mechanisms are not nearly aggressive enough and I've been caught in a few of them myself. One of the few rare nightmare scenarios for a commodity trader. But making limits more aggressive would imply some form of price control which also would not be great.
  - ars 3y ago
    Very cute. But my point is I believe the prices changes are driven by speculation, and not caused by supply fundamentals.
    - fngjdflmdflg 3y ago
      That isn't accurate. >Cocoa futures ended Thursday at $5,635 a metric ton, shooting past the old record of $5,368, which was set in July 1977. Bad growing weather in West Africa is to blame this time as well as then. >Hot and dry weather in Ghana and the Ivory Coast bedeviled growers in the region last year and threaten the cocoa crop again this year, said Jack Scoville, futures-market analyst at Price Future Group.[0] [0] https://www.wsj.com/livecoverage/stock-market-today-dow-jones-earnings-02-08-2024/card/cocoa-prices-surge-past-a-46-year-record-g0cpLc8Is8Sb83c9qrbC https://www.wsj.com/livecoverage/stock-market-today-dow-jone...
      - ars 3y ago
        I replied to this. The bad weather, etc, amounts to an 11% reduction in crop. Cocoa is very elastic, so an 11% reduction in crop should not lead to a 300% increase in prices. The normal thing instead would for people to eat less chocolate until there is enough supply, with only minimal change in prices. Instead there's something weird going on - tell me, would you buy a chocolate snack that costs 3 times as much as last year? Or would you buy a different snack instead?
        fngjdflmdflg 3y ago
        Take a look at the already expired March cocoa futures.[0] This is clearly not speculation. >The normal thing instead would for people to eat less chocolate until there is enough supply The cost of cocoa is not identical to the cost of chocolate. >Based on a 200g milk chocolate bar costing €2, cocoa comprises around 10 percent of total costs; sugar 1 percent; milk products 6 percent; production, packaging and marketing and profits around 78 percent and tax 6 percent. [1] This means a 3x increase in prices would make the bar cost €2.60. There are also products that use only small amounts of chocolate, reducing the total increase even further. For example the increase in chocolate costs in a chocolate chip cookie is negligible. [0] https://www.barchart.com/futures/quotes/CCH24 https://www.barchart.com/futures/quotes/CCH24 [1] https://edepot.wur.nl/335476 https://edepot.wur.nl/335476
- bryanlarsen 3y ago
  Only a small part of the retail price of chocolate is the raw materials. A 25 cent increase on 100g of dark chocolate is not going to substantially affect demand.

by zer8k 3y ago

ars 3y ago

I have a hard time believing that cocoa is so in-elastic that an 11% drop in supply translates to a 300% increase in price. Cocoa is a treat, with prices that high demand should plummet.

gotoeleven 3y ago
Who you gonna believe, the market-based consensus of 1000s of cocoa traders, or the lived experience of a wise ars?
- throw-the-towel 3y ago
  OTOH markets are known to stay irrational longer than you can stay solvent.
  - fngjdflmdflg 3y ago
    This isn't a stock market but a commodity market. Nobody is betting on what they think Cocoa will be worth in the future. So that point isn't relevant here.
    - zer8k 3y ago
      If you look at old crop/new crop spreads over other commodities such as corn and soybeans it's clear that the disconnect between the front and back month is entirely on the yield (and therefore the price) of the future harvest. In this case, the futures contracts going out to 2025 are pricing in a poor crop harvest (and therefore a higher future price). By construction the future will "collapse" to the cash price at expiration (modulo carry costs) meaning that the future is exactly representing the market consensus on future price. This is no different than a stock market where a stock's theoretical price is the consensus on discounted future cash flows of the company. If a stock had an expiration date then it would have to collapse to the "cash price" (e.g. the exact discounted cash flow) at expiration otherwise funny arbitrage things happen.
      - fngjdflmdflg 3y ago
        >In this case, the futures contracts going out to 2025 are pricing in a poor crop harvest (and therefore a higher future price). May 2024 futures are also up almost the same amount.[0] You can call that betting on the future but it's a big stretch. It's obvious that it is largely reflecting the current market price. [0] https://www.cnbc.com/quotes/@CC.1/ https://www.cnbc.com/quotes/@CC.1/
        fngjdflmdflg 3y ago
        Since I can't edit anymore, it's a new comment. Here are the futures for March 2024 which already expired.[0] It is clear to see that this is not wild speculation. You are right however that people can still speculate on the harvest and demand of a commodity. But the nature of this speculation is very different from speculating on if Nvidia will be worth 2 trillion in the future. Additionally as futures expire that means you can always stay solvent by shorting a future that is soon to expire, which cannot be said with stocks (I realize that this is a separate point from the one I made initially). And the fact that futures expire itself causes there to be less speculation because the window of time for the asset to appreciate is much smaller. Taking your example of a stock that expires, Nvidia's stock would be much lower now if it expired next year. Commodities simply don't go up 100x like stocks do. When a commodities does go up, it make more sense to assume that yields went down or that demand went up. I didn't mean to say that it's impossible that traders speculate on commodities. [0] https://www.barchart.com/futures/quotes/CCH24 https://www.barchart.com/futures/quotes/CCH24 (takes some time to load)
        zer8k 3y ago
        > commodities don't go up 100x like stocks do This is entirely due to the limit mechanism that tries to keep prices approximately in line with supply and demand. There have been several instances of grains in particular locking limit up during a blight over and over again. In recent history oil going negative is another example. If it wasn't for the limit mechanism (and in some cases, the literal government) stepping in they absolutely could 100x. When you're a goods supplier you'll pay nearly anything once prices reach your "uncle" level. The dynamics at limit are somewhat interesting as it's a case where the entirely market has consensus that "I need to buy (sell) now or I'm hosed". I wasn't suggesting you were saying you couldn't speculate on commodities. I was mostly suggesting that even removing traders the "speculation" occurring is due to the anticipated future value of that commodity. If it wasn't, then buyers and sellers would go to the cash market which while extremely volatile may also be a smart choice for at least some of the crop. IMO limit mechanisms are not nearly aggressive enough and I've been caught in a few of them myself. One of the few rare nightmare scenarios for a commodity trader. But making limits more aggressive would imply some form of price control which also would not be great.
- ars 3y ago
  Very cute. But my point is I believe the prices changes are driven by speculation, and not caused by supply fundamentals.
  - fngjdflmdflg 3y ago
    That isn't accurate. >Cocoa futures ended Thursday at $5,635 a metric ton, shooting past the old record of $5,368, which was set in July 1977. Bad growing weather in West Africa is to blame this time as well as then. >Hot and dry weather in Ghana and the Ivory Coast bedeviled growers in the region last year and threaten the cocoa crop again this year, said Jack Scoville, futures-market analyst at Price Future Group.[0] [0] https://www.wsj.com/livecoverage/stock-market-today-dow-jones-earnings-02-08-2024/card/cocoa-prices-surge-past-a-46-year-record-g0cpLc8Is8Sb83c9qrbC https://www.wsj.com/livecoverage/stock-market-today-dow-jone...
    - ars 3y ago
      I replied to this. The bad weather, etc, amounts to an 11% reduction in crop. Cocoa is very elastic, so an 11% reduction in crop should not lead to a 300% increase in prices. The normal thing instead would for people to eat less chocolate until there is enough supply, with only minimal change in prices. Instead there's something weird going on - tell me, would you buy a chocolate snack that costs 3 times as much as last year? Or would you buy a different snack instead?
      - fngjdflmdflg 3y ago
        Take a look at the already expired March cocoa futures.[0] This is clearly not speculation. >The normal thing instead would for people to eat less chocolate until there is enough supply The cost of cocoa is not identical to the cost of chocolate. >Based on a 200g milk chocolate bar costing €2, cocoa comprises around 10 percent of total costs; sugar 1 percent; milk products 6 percent; production, packaging and marketing and profits around 78 percent and tax 6 percent. [1] This means a 3x increase in prices would make the bar cost €2.60. There are also products that use only small amounts of chocolate, reducing the total increase even further. For example the increase in chocolate costs in a chocolate chip cookie is negligible. [0] https://www.barchart.com/futures/quotes/CCH24 https://www.barchart.com/futures/quotes/CCH24 [1] https://edepot.wur.nl/335476 https://edepot.wur.nl/335476
bryanlarsen 3y ago
Only a small part of the retail price of chocolate is the raw materials. A 25 cent increase on 100g of dark chocolate is not going to substantially affect demand.