HSY - Traders Grapple With $1 Billion Loss After Shorting Cocoa Prices

Commodities traders are facing losses of $1 billion U.S. or more after bets that %Cocoa prices would decline have backfired.

The Reuters News Agency is reporting that traders are scrambling to cover their short bets against cocoa as prices march higher on news that Ghana, a major global producer, will not deliver any cocoa beans this year.

Global cocoa prices have spiked nearly 10% on news that Ghana, the world's second largest producer of cocoa beans, has seen its crop wiped out this year.

A combination of bad weather, crop disease, and smuggling have conspired to destroy Ghana’s 2024 crop, leading to a supply crunch that is pushing prices upwards.

The latest development is the opposite of what commodities and futures traders had anticipated. After rising 215% over the last 12 months, traders had expected a decline in cocoa prices.

While the price of cocoa did come down in May, it is spiking again on news of the Ghana crop and is currently trading at $8,380 U.S. per metric ton.

The steep rise in the price of cocoa, which is the active ingredient in chocolate, has led to price increases for candy and reduced the size of chocolate bars.

Trading houses such as Cargill, Olam and Barry Callebaut (BARN) are now scrambling to cover their previous short positions that bet on cocoa’s price continuing to decline in coming months.

Commodities traders are also racing to lock-in a price for the cocoa they have not yet sold to chocolate makers.

Commodities traders typically buy cocoa beans themselves months in advance in the hope of reselling them to chocolate makers at a later date for a profit.

Cocoa’s price has been above $10,000 U.S. per ton at various points this year as impacts from climate change devastate the global supply of the bean and push prices higher.

The rising cost of cocoa will continue to impact publicly traded chocolate makers such as %HersheyCo (NYSE: ) and %Mondelez (NASDAQ: ), who in turn pass the cost onto consumers.