On Tuesday, cocoa futures in NY surged above the previously unthinkable $10,000/T. The $1,000 surge over two days is equal to a year's trading range !
Although in nominal terms cocoa prices are at a record, in real terms — adjusted by inflation — prices remain below the peaks of the 1970s. The record high set back then equals to about $27,000/T in today's $.
Why are some traders still maintaining short positions in cocoa—even though every fundamental has pointed toward higher prices for several months?
The reason is hedging.
“Cocoa traders holding a long position in the physical market — owning inventories of cocoa beans or semi-processed products such as cocoa liquor, butter and powder — typically offset that by taking the opposite position in the financial market.”
In a sustained bull run, like the one currently engulfing cocoa, the margin calls may overwhelm the capacity to pay of a company in otherwise sound financial health, forcing it to lift its hedges to avoid a cash crunch.
In that scenario, the only option is to close out the short positions at whatever price the market demands.
See @javierblas' article on Bloomberg here: https://www.bloomberg.com/opinion/articles/2024-03-26/chocoholics-aren-t-the-only-victims-of-cocoa-s-surge?
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