Cocoa prices jump after Citigroup sees supply shortages ahead

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:

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.

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.

"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