KANSAS CITY — The meteoric rise in cocoa bean futures has been nearly unprecedented in commodity markets, with some now referring to potential price spikes as the “cocoa market effect.” In commodity prices, what goes up must come down. That’s undoubtedly true in cocoa, but the question is when?

One trader recently said the situation in cocoa had given buyers “severe anxiety” as they realized prices for other commodities may do the same amid extreme market conditions (usually instigated by adverse weather). For cocoa it was a combination of adverse weather and disease in cocoa bean trees, with the final upward push the result of stronger-than-expected global cocoa grind (demand) in the January-March period. Cocoa is in its third consecutive global deficit year, with a fourth year possible in 2024-25.

The “cocoa market effect” had prompted technical buyers in other commodities, including wheat futures, to extend coverage beyond average length for the date due to concerns about a potential price spike should adverse weather cut production in the United States and Russia.

New York and London cocoa bean futures prices soared to record highs multiple times in the past several months, with New York prices closing above $11,000 per tonne in the two nearby months and just under $12,000 per tonne in spot May on April 19 after release of the quarterly cocoa grind data April 18. The spot price was up 2.8 times from the end of 2023 and was nearly four times the year-ago level.

Then the bottom seemingly fell out with futures prices plunging as much as 10% the following week and as much as 15% in a single day (April 29) last week. The downturn happened without a change in market fundamentals (supply or demand).

Cocoa bean futures are a high-risk, low-volume market, at least compared to other commodities like wheat and corn. The cocoa futures market typically is driven by fund activity. The most recent plunge was attributed in part to increases in ICE Futures US (New York) futures trading margin requirements (the amount of money traders are required to deposit with the exchange to guarantee they have funds to support their positions should prices turn opposite their expectations). As a result, some contended speculative commodity funds quickly exited (sold) positions before the end of April and liquidity plunged to a modern era record low, leaving most trading to algorithms that ignore market fundamentals.

While speculative funds and algorithmic trading are active in all futures markets and may influence price moves, but when they become the dominant trading force, volatility tends to soar.

There has been some positive news about cocoa supplies, although it was far short of justifying the sharp drop in prices. Comments from the recent World Cocoa Conference in Brussels suggested production in parts of the world may increase beginning with the 2024-25 crop (October-March). Thus, the market adage of “the best cure for high prices is high prices,” may be borne out in the coming months. In some countries other than in West Africa, where prices paid to farmers are set well in advance of knowing what supplies and world prices will be, limiting farmers’ ability to capitalize on high prices, growers are expected to boost fertilizer and pesticide use for some immediate effect and plant more trees for a longer-term impact (it takes about three years for a new planting to produce marketable beans). Growers in Ecuador, the world’s third largest cocoa bean grower after the Ivory Coast and Ghana (which together account for nearly 60% of global output), may benefit the most as they have been able to “cash in” on the high prices.

The global cocoa market still is seen as bullish due to tight supplies and unrelenting demand. Futures prices made a small recovery as last week progressed, but with ongoing low liquidity, it’s likely the large price swings will persist.

The “loser” in much of this is the cash ingredient buyer who faces record-high prices for uncertain supplies of cocoa powder and cocoa butter, with a sizable amount of 2025 needs still uncovered. Buyers in some cases have been unable to get quotes as suppliers were uncertain if they could meet contract expectations. Cocoa inventories in US ports monitored by ICE Futures US were at three-year lows in late April.