Hedge funds raised bullish bets on cocoa before prices climbed to the highest since 2011 on concern that the deadly Ebola disease will disrupt supplies from West Africa, which produces 70 percent of global supply.
Money managers raised their net-long positions by the most in 16 weeks. As governments and international organizations struggle to contain Ebola, concerns are mounting that the outbreak could spread from nations including Liberia and Guinea to neighboring Ivory Coast, the top cocoa producer.
Prices are heading for a sixth straight monthly gain, the longest streak in 12 years. Increasing consumption of chocolate in Asia is eroding world inventories as a percentage of demand to the lowest since 2010, the International Cocoa Organization estimates. The U.S. Centers for Disease Control and Prevention said Ebola infections may reach as many as 1.4 million cases in Liberia and Sierra Leone by January without additional intervention.
“While you have a surplus this year because the weather is decent, demand is picking up, and you can see that long-term shortage looming,” Damien Courvalin, an analyst at Goldman Sachs Group Inc., said in an interview at Bloomberg headquarters in New York on Sept. 24. “Recently, most of that rally is driven by the risk of Ebola.”
Cocoa advanced 1.6 percent last week on ICE Futures U.S. in New York to $3,311 a metric ton, after touching $3,399 on Sept. 25, the highest since March 2011. The Bloomberg Commodity Index fell 0.3 percent last week. The MSCI All-Country World Index of equities slumped 2 percent, and the Bloomberg Dollar Spot Index rose 1.1 percent.
The net-bullish position in cocoa climbed 6.4 percent to 65,761 futures and options in the week ended Sept. 23, the U.S. Commodity Futures Trading Commission data show. That’s the biggest gain since June 3.
Measures to control Ebola could cause labor shortages or disruptions to deliveries in October, “a critical time,” at the start of the harvest season, Moody’s Investors Service said in a report Sept. 24. More than 6,200 people have been infected and 2,900 have died from the current outbreak, the worst ever, that’s spread to five West African countries.
Exacerbating supply concerns, crops in Ivory Coast face greater risk from disease including black pod following heavy rains this month, according to World Weather Inc.
While world production is projected to top demand in the season that ends this month, cocoa-bean grindings, a measure of consumption, will climb for a fifth straight year to a record 4.26 million tons, the International Cocoa Organization predicts. This year’s 22 percent rally is threatening to shrink profit margins for chocolate makers including Hershey Co., which raised wholesale prices in July, citing higher ingredient costs.
Two experts from the U.S. Centers for Disease Control and Prevention traveled to Ivory Coast this month to reinforce preventive measures taken by the government and help safeguard the nation from the spread of the disease. In August, the country closed its western land borders with Guinea and Liberia, the hardest hit by the outbreak. It’s more than 245 miles (394 kilometers) from the Port of Abidjan, Ivory Coast’s biggest, to the Liberia border.
Even as inventories tracked by ICE Futures U.S. are at the lowest since February, they are still up 14 percent this year, set for the first annual gain since 2011.
“The rally is difficult to justify,” Tracey Allen, an analyst at Rabobank International in London, said Sept. 25. “I understand the concern about any potential closure of ports. But it’s certainly too far away from the affected area to be able to sustain this kind of move in prices. There are available supplies of cocoa outside that area of risk.”
While cocoa climbed 2.5 percent this month through Sept. 26, bigger supplies of everything from cotton to wheat are eroding most raw-material prices. The Bloomberg Commodity Index slid to a five-year low last week.
Combined net-wagers across 18 U.S. traded commodities dropped 10 percent to 450,424 contracts, the lowest since August 2013, according to the CFTC.
The net-long position in corn fell by 6.3 percent to 81,536 futures and options. Prices in Chicago dropped to a five-year low last week as farmers started harvesting the largest-ever crop in the U.S., the world’s top grower.
Bets on higher oil prices fell 4.8 percent to 193,965 contracts, the government data show. U.S. crude production has climbed to the highest since 1986.
Investors are the most-bearish on copper since April, with a net-short position of 12,304 contracts. That compares with a net-long position of 805 futures and options a week earlier. Goldman pared its 2015 economic growth forecast for China, the largest metals user, to 7.1 percent from 7.6 percent.
The net-bullish position in gold dropped 21 percent to 44,265 contracts, the lowest since January. Futures in New York have fallen for four straight weeks, the longest slide since April 2013, when the metal entered a bear market.
Bullion is headed for the first quarterly loss this year amid low inflation and bets that the U.S. recovery will prompt the Federal Reserve to boost interest rates before other global central banks. The Bloomberg Dollar Spot Index reached the highest since June 2010 last week.
“Our belief is that the dollar will continue its trend towards strengthening, which will keep compressing prices along the spectrum for all commodities, including gold,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said in a telephone interview. “It’s the perfect convergence of a stronger dollar, decelerating growth in China and the euro zone and the general oversupply issues that’s putting downward pressure on prices.”
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