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Cocoa prices jump after Citigroup sees supply shortages ahead

Cocoa prices have surged as dryness is hitting crops in West Africa, which accounts for more than two-thirds of global supplies.

New York

COCOA prices took off on Monday after Citigroup Inc predicted the tightest supply situation in a decade. One analyst said that this could just be the start of the rally and it's time to be a "raging long-term bull".

Here's what traders are watching:

  • Futures jump. Cocoa for July delivery jumped as much as 5.4 per cent to US$2,714 a tonne on Monday on ICE Futures US in New York, the highest since October 2016. Prices have surged 43 per cent in 2018 as dryness plagues crops in West Africa, which accounts for more than two-thirds of global supplies.

This year's gains for cocoa are a stark reversal from the last two years, when futures plunged more than 40 per cent amid a global glut. The lower prices took a toll on growers, who cut spending on farm maintenance. That's now showing up in crop quality as yields begin to drop. At the same time, demand for chocolate has stayed strong.

  • Shortages ahead. The cocoa market is heading for supply shortages this year and next, Citigroup said in a report on Sunday, citing rising demand and shrinking crops. Back-to-back deficits would make for the tightest supply situation since 2008, according to data from the International Cocoa Organization.

Along with the problems for African crops, other growers are also facing challenges. Indonesia's output is likely to trail expectations this season, Citigroup said. The country's production has slumped in the past decade due to aging trees, diseases, extreme weather and better returns for other commodities.

  • El Nino looms. There's a 37 per cent chance that an El Nino weather pattern will form by early autumn, according to the US Climate Prediction Center. The phenomenon is known for bringing even more dryness to West African cocoa regions.

"We are raging long-term bulls in the cocoa market given the high correlation of bullish price moves against poor Western African cocoa production output during El Nino years," Shawn Hackett, the president of Hackett Financial Advisors in Boynton Beach, Florida, said in a report.

"The longer time passes by and the more El Nino weather impacts begin to run the global weather patterns, the more bullish this market will become," he said, adding that futures could test the 32-year high that was set in 2011. BLOOMBERG