PRESS ROOM
Cocoa futures curve enters steepest backwardation in 35 years1
Monday 23rd November '20
Front month ICE US Cocoa prices have risen close to 25% in between 12th and 19th November 2020. It’s a strange occurrence given that demand for cocoa has generally been weak in the COVID-19 pandemic era. Earlier this year top cocoa producers, Ivory Coast and Ghana implemented an extra fee of US$400 per ton of cocoa on top of the Free Onboard Price (FOB), which they call a living income differential (LID). That is applied to the 2020/21 marketing year (which started in October 2020) and will remain for the rest of the marketing year (and a new fee will be decided next year). Essentially buyers importing cocoa from the two countries through bilateral contracts are paying more for the cocoa to help reduce poverty of the farmers producing the crop. However, market prices for cocoa are weak reflecting the subdued demand for cocoa in the pandemic-stricken era. So, New York traded cocoa futures contracts up until last week were reflecting weak demand. Some buyers have turned to the New York futures to purchase their cocoa. Monday 16th November was the first date traders had to notify counterparties they intend to take physical delivery to settle contracts expiring December 15th. On Monday 16th November, the price of the December 15th contract surged, reflecting that the contract was under-priced last week. That has taken the futures curve that was in contango (futures price higher than spot price) on Thursday 12th November into a steep backwardation (spot price higher than futures price). The timing indicates the price move was driven by commercial traders rather speculators.

Source: Bloomberg. Orange line: 20/11/2020; Pink line: 16/11/2020; Green line: 12/11/2020
X-axis is the maturity date of the futures contract and y-axis is the price of the contract in US$/metric tonne.
Historical performance is not an indication of future performance and any investments may go down in value.
1 The difference between the first and second generic contracts on the ICE US Cocoa contract reached US$251/metric tonne on 18/11/2020, the highest since 14/05/1985 when it reached US$265/ metric tonne according to Bloomberg Data.