Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to
Speaker 1: another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal.
Speaker 1: Joe, can I tell you something. It's slightly embarrassing.
Speaker 2: This could field many things that but go on.
Speaker 1: Okay, So I had a self realization the other day.
Speaker 1: I think I might have prepper tendencies.
Speaker 3: I didn't know that.
Speaker 2: But that doesn't totally surprise.
Speaker 3: Like.
Speaker 1: You're like, yes, you're a paranoid. This makes total So
Speaker 1: the reason I had this realization we recorded an episode
Speaker 1: recently on the big surge in cocoa prices, and a
Speaker 1: few days after that episode came out, I was like, hmm,
Speaker 1: I should buy some chocolate just in case. So I
Speaker 1: went on Amazon and I bought like an industrial size
Speaker 1: package of milk chocolate. And I was like, I'll just
Speaker 1: keep it in the pantry. It'll be really convenient. It'll
Speaker 1: be there for emergencies. I'm sure I won't eat it
Speaker 1: at like ten PM when I'm craving something sweet. I'll
Speaker 1: just keep it there for a long time. And so
Speaker 1: I ordered it, and then you know what happened.
Speaker 2: Tell me the rest.
Speaker 1: Okay, So, The first thing that happened was I never
Speaker 1: got the chocolate, which is kind of weird for Amazon,
Speaker 1: like they just never fulfilled the order, and the supplier
Speaker 1: was like, oops, we don't have enough chocolate, I guess.
Speaker 1: But then secondly, as soon as I did it, prices
Speaker 1: of cocoa started falling.
Speaker 2: This was the market saving you from a bad trade basically,
Speaker 2: And so you put in an order right at the top.
Speaker 2: You know, sometimes you need a little luck in life,
Speaker 2: and now you can buy the dip.
Speaker 1: That's right. I was fully refunded at the top of
Speaker 1: the market, and now I can buy it when it's
Speaker 1: slightly more reasonable. But I have to say, I'm looking
Speaker 1: at the chart of cocoa futures right now. So they
Speaker 1: searched above eleven thousand, and then they came back down.
Speaker 1: Let's see, we're about eight thousand, yeah, right now. So
Speaker 1: it's been something of a roller coaster ride. And the
Speaker 1: thing that I don't really understand is when I look
Speaker 1: at coverage of the cocoa market at the moment, there
Speaker 1: seems to be consensus that supply is going to be
Speaker 1: an issue. So I know, Bloomberg published a survey of
Speaker 1: traders where basically everyone was saying that they think prices
Speaker 1: are going to go higher. Yeah, we could see over
Speaker 1: fifteen thousand dollars later this year, but in the meantime
Speaker 1: prices are sliding. So there seems to be a disconnect
Speaker 1: there totally.
Speaker 2: Well, look, I mean, even if the fundamentals are say, okay,
Speaker 2: this market is in deficit or you know, all these
Speaker 2: growing conditions, like at some point, as they say, you know,
Speaker 2: trees don't grow to the moon or trees to the sky,
Speaker 2: to the sky, whatever it is, so at some point
Speaker 2: like you can have like solid bullish fundamentals in the price.
Speaker 2: I mean, it really is crazy because last you know, December,
Speaker 2: we were looking at four thousand, so we're still you know,
Speaker 2: double so far this year.
Speaker 1: Yeah, well, I have to say we do, in fact
Speaker 1: have the perfect guest. We're going to be speaking to
Speaker 1: someone who timed the big cocoa trade a lot better
Speaker 1: than I did personally in my pantry. But we're going
Speaker 1: to be speaking with Pierre on durand he is of
Speaker 1: course the founder of on Duran Capital Management. We're going
Speaker 1: to talk cocoa and a bunch of other commodities. So Pierre,
Speaker 1: thank you so much for coming back. On all thoughts.
Speaker 3: Hi, thanks very much my pleasure.
Speaker 1: So maybe to begin with talk to us about how
Speaker 1: you got interested in Coco, because my understanding is you
Speaker 1: put a big trade on a long position earlier this year.
Speaker 1: It paid off massively, But this isn't a sort of
Speaker 1: normal type of trade for you. This is something that
Speaker 1: was a little bit different.
Speaker 3: Yes.
Speaker 4: Well, generally my background is more in energy trading, but
Speaker 4: I've traded quite a bit of metals as well a
Speaker 4: little bit of agricultural products. But I have one and
Speaker 4: thatst was very good and told me generally, per you
Speaker 4: should look at Cocoas I'm like, okay, I don't know
Speaker 4: anything about it, tell me, And it gave me a
Speaker 4: really good presentation that was really interesting. So then we
Speaker 4: really digged in really deep together to really understand the
Speaker 4: fundancials market. And basically we have a massive supply shortage
Speaker 4: this year. I mean we see production down seventeen percent
Speaker 4: relative to last year. Most analysts out there have it
Speaker 4: down eleven percent, but that's because they tend to be
Speaker 4: very conservative. They have a lot of clients and they
Speaker 4: don't want to worry the world, so they commu relatively
Speaker 4: conservative estimates. But really tracking the exports from the main exporters,
Speaker 4: many ivory coasts and Ghana that we put them together
Speaker 4: about sixty percent of worlds production. We see basically ivory
Speaker 4: cost exports down thirty percent here to date I mean
Speaker 4: seedon to date and down forty one percent. So just
Speaker 4: those two countries together since the start of the season,
Speaker 4: which is the first of October, are down eight hundred
Speaker 4: thousand tons.
Speaker 3: And now we have the what.
Speaker 4: You call the mild crop that is starting, but that
Speaker 4: we present only twenty percent of the balance of the
Speaker 4: season for West Africa and that's not going to be
Speaker 4: enough to really change the deficit that we have this year.
Speaker 3: So we have a deficit of eight.
Speaker 4: Hundred thousand tons from those two countries, and then looking
Speaker 4: at all the other countries we have, I think the
Speaker 4: some are slightly positive, some are slightly negative, but basically
Speaker 4: we get to a deficit of eight hundred thousand tons
Speaker 4: this year. And so that's the first time we have such,
Speaker 4: you know, such a decline in supply, and that's very
Speaker 4: hard to.
Speaker 3: Make it fit.
Speaker 4: So at first you eat into current inventories until you
Speaker 4: run out of inventories, and then the price can go anywhere.
Speaker 4: So when we look at okay, what makes the price
Speaker 4: of coco right? It's always about supply, supply versus demand.
Speaker 4: But what has been capping the price between two thousand
Speaker 4: and five hundred dollars a ton and three thousand dollars
Speaker 4: a ton. It was not demand, because demand it's extremely inelastic.
Speaker 4: I mean you can study that historically when you have
Speaker 4: a visession or note, when prices go up a lot
Speaker 4: or not, I mean demand journally goes up. And that's
Speaker 4: because the amount of in dollar terms, that people consuming
Speaker 4: cocoa is very small. I mean I did the back
Speaker 4: of the enveloped calculation the other day. I meant at
Speaker 4: basically ten thousand dollars a ton, even though it's four
Speaker 4: times the more recent historical prices, out of a market
Speaker 4: of five million tons of demand per year. You know,
Speaker 4: you have like eight billion people on the planet. So
Speaker 4: in ave wage, it means that people consume one point
Speaker 4: seven gramps of coco per day, which at ten thousand
Speaker 4: dollars a ton, which isn't one point seven cents per day. Okay,
Speaker 4: at the average person, many people eat nothing and a
Speaker 4: few eat ten times at a month's.
Speaker 1: Tracy, I was going to say, I can personally attest
Speaker 1: that my chocolate demand is very in a last.
Speaker 4: But yeah, but you know, let's say if you eat
Speaker 4: even one tablet, right, so one hundred and twenty five
Speaker 4: grams a day, every single day for the wood yet,
Speaker 4: which is quite a lot, right of a high high
Speaker 4: content of real cocoa. Because you know your milk and
Speaker 4: milk chocolate you have like less than ten percent coco
Speaker 4: in it, So the price can go up ten times.
Speaker 4: Your tablet is only a double in price. It's not
Speaker 4: going to react very much to the cocoa price. But
Speaker 4: if you take a high content, high chocolate content like
Speaker 4: a tablet one hundred and twenty five grams, that mean
Speaker 4: that you probably have maximum of fifty grams of cocoa
Speaker 4: bin s equipment in it.
Speaker 3: I means probably a lot less.
Speaker 4: Then you get to an expense of fourteen dollars per
Speaker 4: months at current prices, which is an increase of ten
Speaker 4: dollars per months relative to when we had a more
Speaker 4: normal price. So it means that demands like four more
Speaker 4: reasonable chocolate lovers, that increase in price in cocoa just
Speaker 4: corresponds to two to five dollars per months. So people
Speaker 4: are not going to eat less chocolate because of So
Speaker 4: it means that prices really are are capped by the
Speaker 4: amount of supply you get. So if you can't get
Speaker 4: enough supply, the price can go up a lot until
Speaker 4: we get more supply. And when do we get more supply,
Speaker 4: Well that in part due to the weather. If you
Speaker 4: have much better weather then you get you might get
Speaker 4: a more and more supply of coco bin the next year.
Speaker 4: But we have some issues that are also structural. So
Speaker 4: when we look at the wisons for this large decline
Speaker 4: in production this year, I mean a lot of the
Speaker 4: wisons are actually structural. I mean we can look at
Speaker 4: four weasons why coco bit production has gone down a
Speaker 4: lot this year. I mean, first I should give like
Speaker 4: a little bit of background of why cocoa is so
Speaker 4: concentrated in West Africa. I mean, it's mainly because it
Speaker 4: requires very specific temperature, rainfall, and humidity conditions, and that's
Speaker 4: why most of the production is concentrated around a certain latitude.
Speaker 4: So seventy percent in West Africa, and then you have
Speaker 4: a twenty one percent in Many Latin America and five
Speaker 4: percent in Asia and Oceania. So the main reasons why
Speaker 4: we lost a lot of productions. This year is number one. Weather,
Speaker 4: so some of it due to El Nino. We had
Speaker 4: a bili period of time when it was too hot
Speaker 4: and period of time when we had way too much rain.
Speaker 4: Second is climate change, So climate change is every year
Speaker 4: shifting the weather patterns generally unfavorably for coco productions.
Speaker 3: Then you have two disease.
Speaker 4: You have one called the black pot disease that that
Speaker 4: come from a fungus and it took hers mainy during
Speaker 4: the rainy season. It's spread by brent splash so big
Speaker 4: it can't go when it's dry. And then you have
Speaker 4: a virus called the Swolen shoot disease. It's not a
Speaker 4: new disease. It was discovered in nineteen thirty six. It's
Speaker 4: transmitted by millibugs, but it dequisits cocoa yields a lot
Speaker 4: so bili. A tree that has that Throlen shoot disease
Speaker 4: loses twenty five percent yield within the first year and
Speaker 4: fifty percent within two years, and the tree dies within
Speaker 4: three to four years. And we've had like actually a
Speaker 4: spread of that disease like over the last year. And
Speaker 4: then also we had less usage of fertilizers mainly in
Speaker 4: Ivory Coast due to high fertilizer prices and also shortages
Speaker 4: due to the Russian invasion of Ukraine. So you know,
Speaker 4: everything is linked. So some of it might be solved
Speaker 4: if we get better weather. I mean for next year,
Speaker 4: we should have laminar and not Alninius, so that should
Speaker 4: help at the margin, but we still have issued with
Speaker 4: climate change. We still have issues with black pot disease
Speaker 4: and swollen three disease, and there's no indication that we
Speaker 4: get more usage of fertilizers in Ivory Coast because actually
Speaker 4: the farmers are still getting relatively low prices and they're
Speaker 4: still struggling to make ensmit. So a lot of those
Speaker 4: supply issues are actually structural.
Speaker 2: This was already a really fascinating answer in particular just
Speaker 2: all that point about how if a commodity just does
Speaker 2: not take up more much wallet share, then the then
Speaker 2: you know, yes it can go up, but you don't
Speaker 2: get that same sort of demand destruction as if it
Speaker 2: were really creating a big financial burden on the end consumers.
Speaker 2: Something I'm curious about with Coco is, you know, when
Speaker 2: I think of like oil, we are just like we're
Speaker 2: swimming in data about oil. There are multiple big, well
Speaker 2: funded international statistical agencies of the track. You can get
Speaker 2: inventory data easily. There's OPEC, there's et cetera. With Coco,
Speaker 2: and I'm curious. You know you said your analysts brought
Speaker 2: it to your attention in January. In my mind, I
Speaker 2: imagine that there is less robust information and it's more scattered,
Speaker 2: et cetera. Maybe I'm wrong, but does that present more
Speaker 2: opportunities to identify moments where there's something going on in
Speaker 2: the market and traders and analysts aren't seeing it.
Speaker 4: You know, we managed to get in us a relevant
Speaker 4: data act. You need to understand what's happening. You have
Speaker 4: some concertants that are specialized, and if we mount, the
Speaker 4: have a team doing surveys of the main producing regions
Speaker 4: to understand and then they work on their forecast on
Speaker 4: how much the same production will go. So actually you
Speaker 4: have some specialists, so actually we get enough data to
Speaker 4: understand how.
Speaker 2: So what did your analysts? What did your analysts see
Speaker 2: or how is your analyst able to see something in
Speaker 2: the supply and demand situation that he felt and you
Speaker 2: felt was not being identified by the analyst to cover
Speaker 2: this closely?
Speaker 4: I think it's mainly an understanding of how much prices
Speaker 4: have to move to balance the market. You know, people
Speaker 4: sometimes people can trade that market for like twenty years.
Speaker 4: They've been used to a range of prices and they believe, okay,
Speaker 4: the top of the range is a high price for apple,
Speaker 4: but they don't really ask themselves what makes that price right?
Speaker 4: And sometimes taking a step back can help. I mean,
Speaker 4: what makes the price is mainly the fact that in
Speaker 4: the past you would have a supply repounce if prices
Speaker 4: were going up. But if now you get you don't
Speaker 4: get the supply repons or the supply response takes four
Speaker 4: or five years, then you need to have a demand response.
Speaker 4: And a lot of people look at prices in nominal terms.
Speaker 4: So you hear people saying, oh, we're at all time
Speaker 4: high prices in coco, but that's because they look at
Speaker 4: prices in nominal terms. Previous high in nineteen seventy seven
Speaker 4: was five five hundred something dollars a ton of nineteen
Speaker 4: seventy seven dollars, which is equivalent to twenty eight thousand
Speaker 4: dollars a turn of two days dollars. So we're still
Speaker 4: very far from previous highs, and so you have to
Speaker 4: look at a bit more history and understand in the past,
Speaker 4: halgh prices reacted to a shortage, how long it took
Speaker 4: to recover to product shortage to actually solve itself, and
Speaker 4: what's different today. So there's there's a ratio that we
Speaker 4: look at that most people look at. It's actually the
Speaker 4: inventory to grinding the ratio, So it's a measure of
Speaker 4: inventory to demand. What we call grinding is basically industrial
Speaker 4: companies that take the coco bins and they want to
Speaker 4: make chocolate with it. So it's a process and some
Speaker 4: of them may the hand product chocolate tabacci. Some of
Speaker 4: them sell back the product to other chocolate makers, and
Speaker 4: so basically a typical grinder would take cocoa bins and
Speaker 4: make cocoa butter and powder with it, and the prices
Speaker 4: of both those elements also went up even more than
Speaker 4: cocoa bins, which means that actually we probably had some
Speaker 4: distalking everywhere on the.
Speaker 3: In the chain.
Speaker 4: So it looks like demand when we look at the
Speaker 4: chocolate makers, the hand demand for chocolate didn't go down
Speaker 4: at all. It looked to be flat on the year.
Speaker 4: Grindings look to be down see three and a half
Speaker 4: percent this year. Despite the fact that the hand demand
Speaker 4: is the same in volume, which means that they've been
Speaker 4: distalking cocoa bins actually, and so we had like distalking
Speaker 4: everywhere at the hand chocolate level, at the cocoa bins,
Speaker 4: at the cocoa butter and cocoa powder level. So we
Speaker 4: had this talking everywhere on the chain. And now we
Speaker 4: have the largest deficit ever on top of two previous
Speaker 4: years of deficit, and you look like next year we
Speaker 4: will have a deficit. So we're in a situation where
Speaker 4: we might actually run out of invantries completely. I mean,
Speaker 4: this year, we think we will end up with an
Speaker 4: inventory to grinding ratio, so inventry at the end of
Speaker 4: the season of twenty one percent. For the last ten years,
Speaker 4: we've been between thirty five and forty percent roughly. At
Speaker 4: the previous peak in nineteen seventy seven, we were at
Speaker 4: nineteen percent and that's what drove us to twenty eight
Speaker 4: thousand dollars a turn of two day's dollars. If we
Speaker 4: have another deficit next year, then we might go down
Speaker 4: to thirteen percent. So I don't think it's actually possible.
Speaker 4: That's when you will have real shortage of cocobine, you
Speaker 4: can't get it, and that's when the price can really explode.
Speaker 4: And so understanding that you have to slow down demand
Speaker 4: and we know that the demand can't will be slowed,
Speaker 4: so that's when you can.
Speaker 3: Have an explosion.
Speaker 4: And remember that these commodity futures you need to have,
Speaker 4: they're actually physically settled, right, so if somebody wants to
Speaker 4: take delivery, they have to converge with the price of
Speaker 4: the physical. If you have no physical somebody wants to
Speaker 4: take delivery, the price can go anywhere. So it's a
Speaker 4: dangerous commodity too short, right, if you have no physical
Speaker 4: against it. And actually, you know, sometimes we with knew
Speaker 4: that the fonts have been pushing coco prices is actually
Speaker 4: completely untrue because the farms have been selling since February.
Speaker 4: They actually went from a length of one hundred and
Speaker 4: seventy five thousand lots, so that's one point seventy five
Speaker 4: million tons of coco lands. I think it was around
Speaker 4: like September last year in average or orbitarlier to twenty
Speaker 4: eight thousand lost to eighty thousand tons at the moment,
Speaker 4: so they sold more than eighty percent of their lands actually,
Speaker 4: and the people who've been buying a future from the
Speaker 4: fonts its producers because they're producing a lot less than
Speaker 4: they expected. So what has been happening in the cocoa
Speaker 4: market is that you had a reduction of what we
Speaker 4: call the open interest, where both the longs we use
Speaker 4: their lands and the shorts we use their shots. And
Speaker 4: then we get into a market where you have less
Speaker 4: liquidity because you have less exposure.
Speaker 3: You have less longs and less less shorts, and then
Speaker 3: the volatidity increases.
Speaker 4: So in the past, when when people were comfortable being
Speaker 4: let's say, having a one hundred loss position, now because
Speaker 4: it moves more than ten times more than in the past,
Speaker 4: we're going to have like a ten lots position, right,
Speaker 4: So the market became more due to the fact that
Speaker 4: we had a massive move and we have a massive deficit,
Speaker 4: so everybody reducing their positions, and because of the increased volatility,
Speaker 4: we have less less activity and that's what makes the
Speaker 4: point more volatile.
Speaker 1: That way, this is something I find fascinating. So the
Speaker 1: way the financial markets sort of interact with the underlying
Speaker 1: real commodity and how that ends up influencing price. Given
Speaker 1: the dynamics that you just laid out, where because of
Speaker 1: you know, structural changes in the market, both in coco
Speaker 1: and then also in the way it's traded, This new
Speaker 1: volatility making people maybe less inclined to short and leading
Speaker 1: to decrease trading volumes. Are you still long Coco in
Speaker 1: this environment or have you, like a lot of other people,
Speaker 1: backed off at this point.
Speaker 4: Well, you have to be careful about the sizing of
Speaker 4: your position because it's something that is clearly less liquid
Speaker 4: than the commodities I'm used to, which are you know,
Speaker 4: for apple oil or natural gas. So it's a lot
Speaker 4: less liquid and in a market like that, it's a
Speaker 4: lot more volatile.
Speaker 3: Right. It's not always volatile.
Speaker 4: But when you have a large deficit and low inventory,
Speaker 4: it moves a lot. So you have to calibrate your
Speaker 4: position to be able to take a fifty percent move
Speaker 4: against you on the way right.
Speaker 3: So that's what you have to do.
Speaker 4: It doesn't mean that you have to be out completely,
Speaker 4: because I still think that there's more upside than downside.
Speaker 4: I think we still have the potential to go above
Speaker 4: twenty thousand dollars a turn later this year or next year,
Speaker 4: versus on the downside. Maybe we go from if you
Speaker 4: look at a December contract. It's at toughly seven thousand
Speaker 4: dollars a ton today, maybe we go back down to
Speaker 4: five thousand, right, so you have like a two thousand
Speaker 4: dollars turn downside versus thirteen to fifteen thousand dollars or
Speaker 4: maybe more upside. So it's still worth having some lands,
Speaker 4: you know, in terms of probability. But now I mean
Speaker 4: it could go down. The probablity that it goes back
Speaker 4: down is not zero. But for that you need a
Speaker 4: lot of things need to go out. You need like
Speaker 4: a bumper crop in West Africa next year, and it
Speaker 4: means you need to have the perfect weather in West
Speaker 4: Africa from now to the end of the year in
Speaker 4: order to have a really good cop for next year.
Speaker 4: And it might happen, but it might not happen, right,
Speaker 4: You need to get extremely lucky for that to happen.
Speaker 4: So I think the balance of probabilities are still that
Speaker 4: we will have a deficit next year on top of
Speaker 4: the very large deficit this year. We believe we have
Speaker 4: eight hundred thousand tons deficit out of five million ton
Speaker 4: market size, right, so it's a very large deficit. If
Speaker 4: we have the production going back up roughly ten percent
Speaker 4: from this year to next year, we still have a
Speaker 4: deficit of three hundred thousand turns or so next year.
Speaker 4: That brings us to thirteen percent stock to grinding ratio,
Speaker 4: which which would be much lower than what we had
Speaker 4: in nineteen seventy seven. So we still have I think
Speaker 4: a high probability of having much much higher coco prices.
Speaker 4: You know, even if they go there, we might have
Speaker 4: big drops like we've seen the last months or so
Speaker 4: the last two weeks, but we might make new hide
Speaker 4: and then have big drops again and then make new
Speaker 4: heihs or if over the next four months we realize
Speaker 4: that we're going to have from all the surveys we
Speaker 4: get every months in Ivory Coast and Ghana that the
Speaker 4: crop next will be amazing, then the policies we'd probably
Speaker 4: come off from here towards you know, I don't know,
Speaker 4: five or six thousand dollars a turn, but they're not
Speaker 4: going to go back down right away to two thousand,
Speaker 4: five hundred dollars a ton because we need We have
Speaker 4: very low inventories, so we need to rebuild stocks everywhere
Speaker 4: in the supply chain.
Speaker 2: These inventories. So you've been talking about the stock inventory,
Speaker 2: the grinding ratio or the stocks to grinding ratio within
Speaker 2: the sort of cocoa or chocolate supply chain. Who are
Speaker 2: the holders of the stocks and how do you get there?
Speaker 2: Like how is that data collected?
Speaker 4: So basically you have the exchange. So first you have
Speaker 4: exchange stocks, so we have weekly data in European exchanges
Speaker 4: and the US exchanges. So in the US NAPPLE everything's
Speaker 4: held on exchange pretty much, so everything in exchange. In
Speaker 4: Europe only twenty percent of the the inventories on exchange.
Speaker 4: Twenty percent of the European stocks are on exchange. The
Speaker 4: others are really with with chocolate makers or that they
Speaker 4: need to hold stocks directly to make the chocolate. And
Speaker 4: then you have then you have some also obviously at
Speaker 4: the producing regions. So and that's something that we can
Speaker 4: see the inventories at the port in Ivory Coast and Ghana,
Speaker 4: so the main exporters. You can actually follow the amount
Speaker 4: in inventory there and then the West. What we don't
Speaker 4: know is inferred statistically, right, so there's a bit of
Speaker 4: noise in what that that total amount of inventory would be.
Speaker 4: But you have some some firm that has specialized in
Speaker 4: it that will come up with an estimate of the number,
Speaker 4: So they'll they'll do some surveys, they'll they'll, they'll they'll
Speaker 4: do some cost validation to make sure that the numbers
Speaker 4: at are at the end.
Speaker 1: Out of curiosity and just widening this out to a
Speaker 1: few other commodities, have you observed any similar dynamics in
Speaker 1: something like coffee, which has been getting a lot of
Speaker 1: attention recently, or orange juice. I ran into some guy
Speaker 1: called Mortimer who was telling me that Brazil is supposed
Speaker 1: to have a bad harvest this year.
Speaker 3: That's possible.
Speaker 4: I haven't followed orange juice. I mean, we looked at
Speaker 4: coffee quickly. It looked less. It looked interesting as well,
Speaker 4: because you get big losses in production from Vietnam. But
Speaker 4: we didn't look We didn't see from far something that
Speaker 4: was so exciting, so we didn't try it.
Speaker 3: Orange juice, we haven't.
Speaker 4: I don't know, but I would say that generally the
Speaker 4: shift in weather patterns due to climate change are going
Speaker 4: to bring some structural stories into soft commodities, and so we'll.
Speaker 3: Have to look.
Speaker 4: At more and more of the soft commodities because it's
Speaker 4: not only going to be from one year to another.
Speaker 4: You're going to have like that everything could change due
Speaker 4: to random change in weather.
Speaker 3: You have this underlying climate change that.
Speaker 4: It's also a trend that really impact production of the time,
Speaker 4: and so we have to identify the communities that will
Speaker 4: be impacted by that.
Speaker 2: Tell to us a little bit more about Obviously we've
Speaker 2: had you on in the past primarily talk about oil
Speaker 2: and as you mentioned in the beginning, entering and you're
Speaker 2: not you don't trade egg as much. There's sort of
Speaker 2: a different space for you other than the size of
Speaker 2: the market. And I guess you know, as you mentioned,
Speaker 2: it's all physical delivery futures. What are the other dynamics
Speaker 2: that are different when you go from trading a commodity
Speaker 2: like oil, which is gigantic and liquid, to a commodity
Speaker 2: like cocoa.
Speaker 4: Well, you have to follow the I mean cocoa I
Speaker 4: think is less complicated than the grains because in the grains,
Speaker 4: your weather can impact productions so quickly. But sus for cocoa,
Speaker 4: it does impact production, but it takes you five years
Speaker 4: to you know, when you plant a cocoa tree for
Speaker 4: I mean three to five years for that coco tree
Speaker 4: to give you cocoa beans. This is for grains, you
Speaker 4: get it right away, so you get like a slower
Speaker 4: production responsor. It should be when you have a big
Speaker 4: supply issue and that you have issues due to climate change,
Speaker 4: you should have like a.
Speaker 3: Large move than four coins.
Speaker 4: So it should make it easier in a way to
Speaker 4: have a positions that you can hold for longer that
Speaker 4: are a bit more structural.
Speaker 3: Than four coins. I would say that's my understanding at
Speaker 3: least for now. And there's enough data too.
Speaker 4: I mean enough data meaning like if we we get
Speaker 4: like a bit more more data on how the new
Speaker 4: crops are doing many many in iboricos and cana to
Speaker 4: have a good understanding of what the crop will be,
Speaker 4: the production will be the following year. So I feel
Speaker 4: like we have enough data to understand in which direction
Speaker 4: we're going. Versus the grains, I feel like the grains
Speaker 4: can they move up and down a lot?
Speaker 3: Then you can't. It's more complicated.
Speaker 4: You have to look at a lot of like tiny
Speaker 4: details versus coco where you have many one mega major
Speaker 4: producer and another very large one.
Speaker 1: Speaking of climate change, can we talk a little bit
Speaker 1: about copper, because this is all so a commodity where
Speaker 1: I feel like there was a lot of discussion about
Speaker 1: it being in structural short supply as the world moves
Speaker 1: towards electrification. But then over the past couple of years
Speaker 1: prices went down, I guess because of concerns over the
Speaker 1: outlook for economic growth, and just relatively recently so starting
Speaker 1: sort of February of this year, prices are going up again.
Speaker 1: What's your thesis when it comes to copper.
Speaker 4: I think coppers should go up a lot Bleakly. We
Speaker 4: are going from biky Over the last let's say fifteen
Speaker 4: twenty years, we were in a market where demand was
Speaker 4: going about half a million turn a year and supply
Speaker 4: was going half a million ton a year in average. Right,
Speaker 4: if you look at long term averages, it was over
Speaker 4: time a balance market. We had times where it was tight,
Speaker 4: times where it was in a bit of a surplus,
Speaker 4: many during the pandemic or during financial crisis, but overall
Speaker 4: it was a balance market. Now, due to the energy transition,
Speaker 4: we're obviously as we have to electrify the world, we
Speaker 4: have new demand from electrification of transport, so it means
Speaker 4: that not only to make the electric vehicles, but also
Speaker 4: to supply more electricity.
Speaker 3: Overall in the world.
Speaker 4: For that energy transition, so you have to work on
Speaker 4: the grid to have more renewable and renewables take a
Speaker 4: lot more copper than like nuclear plants or like fossil
Speaker 4: fuel generated electricity, so like solar panels and windmills take
Speaker 4: a lot more copper. And also all the data centers
Speaker 4: take a lot of copper. So we have that third
Speaker 4: in power demand that we need a lot of copper.
Speaker 4: And we're getting into a market where despite the fact
Speaker 4: that the Chinese property market will be much weaker than
Speaker 4: the last fifteen years in terms of growth, and we're
Speaker 4: seeing decline in the property in the copper demand in
Speaker 4: China for the fourthingble future, despite that, we see a
Speaker 4: market in which we're have overall one million tons of
Speaker 4: demand perier roughly of demand increased per year, and the
Speaker 4: supply goes basically by the end of next year will
Speaker 4: be zero to negative. So we think that in terms
Speaker 4: of mining supply, we're picking in about a year like
Speaker 4: twelve to eighteen.
Speaker 3: Months, and then we flatten and then we go down.
Speaker 4: So best case scenario, you get like a million tons
Speaker 4: increasing demand against no increasing supply, so you get larger
Speaker 4: and larger deficit deficit every year and the price hasn't
Speaker 4: reacted yet, and that's mainly because I think there's not
Speaker 4: enough fonts at the or companies that actually trade the
Speaker 4: future's market and all positions for very long. I mean,
Speaker 4: if you look at most of the hedgephones out there,
Speaker 4: it's a bunch of leg pots that have.
Speaker 3: Very many, many.
Speaker 4: Teams in those big multi strategy fonts that have very
Speaker 4: tight drawdowns, so they tend to try to trade for
Speaker 4: the next few days or next week or so. They
Speaker 4: count really positions for very long, and there's not a
Speaker 4: lot of companies that can hold positions, so because the
Speaker 4: market is not really doing its job to actually give
Speaker 4: a price signal to solve that deficit, that upcoming deficit,
Speaker 4: that's a multi year deficit. Basically, it takes, you know,
Speaker 4: to grow supply in copper. I mean, if you bring
Speaker 4: a new mind, is like more than ten years to
Speaker 4: bring its like ten to fifteen years to bring a
Speaker 4: new mind.
Speaker 3: And everything has been relatively well explored.
Speaker 4: So now the supply growth from copper is coming from
Speaker 4: more and more dangerous countries as well, like less and
Speaker 4: less stable countries, So you don't get that quick supply
Speaker 4: response in copper, but the demand is now and the
Speaker 4: demand is growing. I mean, we're going to build that
Speaker 4: electric grid, and we're going to build all these EVAs
Speaker 4: and also that data center. They're going to be built
Speaker 4: at whatever the cost of copper. And remember that the
Speaker 4: price of copper is a very small percentage of the
Speaker 4: price of the end product, right, So if copper goes
Speaker 4: up ten times, I mean your m product will go
Speaker 4: up a little bit. It's not good to double in price.
Speaker 4: So if you need to have a demand response, mainly
Speaker 4: when the world is kind of obligated to go through
Speaker 4: that through that energy position, then we should get to
Speaker 4: really really large price move.
Speaker 3: So I think there's a long long way to go
Speaker 3: for copper.
Speaker 2: I'm interested in this because you know, we have seen
Speaker 2: this bit of a copper rally, though we're not even
Speaker 2: I don't even think we're quite at the twenty twenty
Speaker 2: one highs. But it's interesting. I'd love to hear you
Speaker 2: explain further about the connection between Okay, any any fool
Speaker 2: can look at supply and demand and say, there's this
Speaker 2: much demand for copper out there, there's this much supply
Speaker 2: coming online, there's going to be a deficit. That seems bullish,
Speaker 2: how do you take that analysis and or take that
Speaker 2: starting premise and then think about what does a fair
Speaker 2: price look like? And so as opposed to just saying yeah,
Speaker 2: this is there's more demand that supply. How do you
Speaker 2: get to like a number that in your view or
Speaker 2: in your analyst view, looks like a number that might
Speaker 2: bring supply and demand into balance.
Speaker 4: I mean it's going to be you know, I don't
Speaker 4: think it's just a price. It's like the whole path
Speaker 4: is important, I think. So we look at it year
Speaker 4: by yea, so we think, okay, at current prices, what
Speaker 4: would be the supply and demand balance to current prices
Speaker 4: have an impact on demand goes or not? Or what
Speaker 4: is the state of the global economy. What kind of
Speaker 4: you know, demand goes do we expect for copper and
Speaker 4: what is the supply goes?
Speaker 3: I mean, supply goes.
Speaker 4: Is not going to be too dependent on copper prices
Speaker 4: for the first few years. I mean a little bit
Speaker 4: to scrap. You get a bit more crap scrap metals
Speaker 4: when prices go up, so you can model for that.
Speaker 4: When prices go up, you get more crap supply that
Speaker 4: that comes as a source of supply for copper.
Speaker 3: And then the demand.
Speaker 4: We look at, okay, what can be priced and city
Speaker 4: what can be pushed too later or not? It's not
Speaker 4: that much to be honest, And then we get to
Speaker 4: a path for the demand. And then we look at, okay,
Speaker 4: what is what do we think the supplant demand balance.
Speaker 3: Look looks like every year.
Speaker 4: So for Apple this year, at current pri set, we
Speaker 4: think we're going to get about like four hundred to
Speaker 4: five hundred thousand tons deficit, and we had less than
Speaker 4: that in terms of visible stocks at the beginning of
Speaker 4: the year, so it means that we could actually run
Speaker 4: out of visible inventories by the end.
Speaker 3: Of the year.
Speaker 4: Now there is some extra inventories, mainly the strategic reserve,
Speaker 4: what we call the SRB in China, but if they
Speaker 4: know that we're going to we're at the beginning of
Speaker 4: a multi year deficit, they're not going to sell their
Speaker 4: strategy reserve in the first year. So then we look
Speaker 4: at the following year. We think for next year, we
Speaker 4: also have half a million ton deficit, and actually we
Speaker 4: can't cover that with a level of inventory, so we
Speaker 4: need and then assuming we had enough inventory, we go
Speaker 4: to in twenty twenty six to invent like deficit that
Speaker 4: are more than a million tons and eventually more than
Speaker 4: three million tons in twenty thirty, and that obviously those
Speaker 4: deficits accumulate and we don't have enough inventries to actually
Speaker 4: you know, go through.
Speaker 3: The first year.
Speaker 4: So it means that we're going to have really large
Speaker 4: pricing is sooner than later to slow demand, and I
Speaker 4: don't know how much it would have to go by. Yeah,
Speaker 4: So basically on copper, what I mean that we're going
Speaker 4: to have to have nonel in our move sooner than
Speaker 4: later because of the large deficit we think we're going
Speaker 4: to have this year and if not this year, next year,
Speaker 4: and we don't have enough inventories to meet that deficit.
Speaker 4: So we need to slow down demand relatively fast. And
Speaker 4: we think that demand is also very in elastic due
Speaker 4: to the fact that the price of copper as a
Speaker 4: percentage of the end product is very low, and we
Speaker 4: need to go through the energy transition regardless of the
Speaker 4: price almost so I think that's why prices can move
Speaker 4: a lot for copper. So at the end, like we
Speaker 4: don't know exactly how high they can go to we
Speaker 4: go to I think they could go up four times
Speaker 4: over five year five year horizon. But does it mean
Speaker 4: that we go up from ten thousand to fifteen thousand
Speaker 4: this year and then twenty two thousand next year. I
Speaker 4: don't know, but I think that the kind of twice
Speaker 4: moves that I'm expecting, you know, like this that multiple
Speaker 4: in twice, not to twenty percent increase. The twenty percent
Speaker 4: increase doesn't change anything to your suppreme demand balance on
Speaker 4: a two to three highs.
Speaker 1: So Joe asked you how you come up with the
Speaker 1: price thesis for something like copper and how you see
Speaker 1: it play out. And you know, we're mostly focusing on
Speaker 1: time scales there, but there was one commodity that I
Speaker 1: wanted to ask you a similar question on which is oil.
Speaker 1: And oil it feels to me is facing a very
Speaker 1: uncertain year in many respects. We have the upcoming US
Speaker 1: presidential election, and it feels like things could go in
Speaker 1: very different paths depending on whether Trump or Biden get
Speaker 1: the presidency. Not necessarily in terms of US oil production,
Speaker 1: which is already quite high and I think has surprised
Speaker 1: a number of people, including possibly yourself, but maybe in
Speaker 1: terms of things like the response from OPEC or what
Speaker 1: happens with Russia Ukraine can you walk us through how
Speaker 1: you in such an uncertain moment, how you even begin
Speaker 1: to come up with a short term thesis for the
Speaker 1: price of oil over the next year or so.
Speaker 4: Yeah, So when you look at all the potential supply
Speaker 4: disruption that we could have had at the end of thing,
Speaker 4: we didn't get any supply disruption. So if you look
Speaker 4: at in twenty twenty to twenty twenty three, we're all
Speaker 4: expecting to see at least some decline in the Russian
Speaker 4: production due to sanctions, so due to issue within Russia,
Speaker 4: and at the end, there was no supply responsor at all.
Speaker 3: I mean, there was no subplate disuption.
Speaker 4: Last year in twenty twenty three, we've got to sell
Speaker 4: in Iranian exports due to the fact that the sanctions
Speaker 4: on Iran were not really.
Speaker 3: Enforced, I would say.
Speaker 4: So we had relative to expectations, we ended up having
Speaker 4: like a lot more Russian production and Iranian production. And
Speaker 4: also last year US supply grew up more than expected
Speaker 4: for the beginning of the month of the year. So
Speaker 4: for the last four months, for five months four months,
Speaker 4: I would say US production has been disappointing. So it's
Speaker 4: been a bit lower than people expected. And that the
Speaker 4: first time in a long time. Obviously, four months is
Speaker 4: not enough to grow a trend, but it's something to
Speaker 4: watch out for. I mean, is US shel production about
Speaker 4: to peak or not.
Speaker 3: We don't know. We'll only know it.
Speaker 4: After the fact, But so far it looks like US
Speaker 4: production is actually not growing too much, I mean, or
Speaker 4: at least over the last four months. With the tensions
Speaker 4: in the Middle East. In terms of what scenario we
Speaker 4: could have to really lose supply, I would say it's
Speaker 4: only if we get an attack on Iranian oil facilities,
Speaker 4: but I don't think the US would want that, so
Speaker 4: I don't think Israel would do it, because if they
Speaker 4: were to do it, then the Uranians would probably try
Speaker 4: to blow at the Saudi facilities or close the straight
Speaker 4: of Hormoved and then we.
Speaker 3: Get into really huge toppled disruption.
Speaker 4: But it's a low probability event, right, It's very unlikely,
Speaker 4: but it's not impossible. But if the conflict stays between
Speaker 4: Israel and Gaza, I mean, there's no oil there, it
Speaker 4: has no impact at all all supply. So where we
Speaker 4: could have supply disruptions is coming from the Ukrainian attacks
Speaker 4: on Russian oil infrastructure, and when you look at what
Speaker 4: they've been doing for the last six months, they have
Speaker 4: many attacks Russian behind with and that's really to try
Speaker 4: to hurt the war reforts in Russia in the SPS,
Speaker 4: not actually with it so much financially, it's more for
Speaker 4: them to not have the white amount of fuel to
Speaker 4: make enough rockets and all that, and for the Russian
Speaker 4: people to feel like they're also there's something going on,
Speaker 4: and it's not just in a sub a whyland, But
Speaker 4: the Ukrainioans have not attacked pipelines and ports yet. I
Speaker 4: think if they really wanted to impact the revenues of Russia,
Speaker 4: they should attack the ports and the pipelines, bringing Frudel
Speaker 4: to the port and keep on blowing up pipeline and
Speaker 4: then that would really have a big impact in the
Speaker 4: revenue that Russia would get. But that would also have
Speaker 4: an impact on all places. And the US don't want
Speaker 4: to have millions in an election year. They don't want
Speaker 4: to have the Biden adiministration is very very paranoid about
Speaker 4: having high gasoline prices before the election. So they're putting
Speaker 4: pressure on the Ukrainians to not attacks, to not attack ports.
Speaker 4: But if we get into a situation where the Ukrainians
Speaker 4: become more desperate I need.
Speaker 3: More help than they might attack ports.
Speaker 4: So that's where we could potentially have supplied disruptions.
Speaker 3: In terms of yes, sorry, I just.
Speaker 2: Real quickly, how much do you think that pressure from
Speaker 2: the ADMIN not to attack oil infrastructure is hampering the
Speaker 2: war effort for you?
Speaker 3: Right?
Speaker 4: Well, at the end of the day, like if that
Speaker 4: no help from the US, they would attack the old
Speaker 4: facilities in Russia. But the fact that depending on US
Speaker 4: weapons obviously they have to, right, you know, to listen
Speaker 4: to what the US say. I mean as far as
Speaker 4: they're helping. If the US stop helping, then of course
Speaker 4: they will they will go. They will go for the
Speaker 4: old facilities.
Speaker 3: I think.
Speaker 4: And in terms of the elections, you're asking, like Trump
Speaker 4: versus Biden, does it change anything for oil? I mean,
Speaker 4: I think it's quite marginal or nothing, I would say
Speaker 4: for US supply because despite all the talks, US productions
Speaker 4: searched under Biden, So I don't think that Trump would
Speaker 4: make it search more. I mean, it's just a question
Speaker 4: of geology and money. Actually, more than anything, I think
Speaker 4: we can't be too far from peak in US productions.
Speaker 3: So you know, I don't think the.
Speaker 4: US supply grows as the potential of many millions of
Speaker 4: barrels the extra So I think I think it's quite
Speaker 4: marginal for US production. But where there could be a
Speaker 4: bit of an impact for oil would I would expect
Speaker 4: Trump to and force the sanctions on Iran more Titi,
Speaker 4: so we might lose some oil from Iran, and that's
Speaker 4: but again that we probably get a bit more oil
Speaker 4: from the Saudist So.
Speaker 3: I'm not sure. I don't think.
Speaker 4: I don't think Trump versus Biden have a big impact
Speaker 4: on oil prices.
Speaker 1: All right, Well, Pierre, we're going to leave it there.
Speaker 1: Thank you so much for coming back on all lots
Speaker 1: and walking us through all these various soft commodities and
Speaker 1: oil as well. Really appreciate you coming back on pleasure.
Speaker 3: Thanks very much, thanksolling you opportunity.
Speaker 2: Thank you Joe.
Speaker 1: That was super interesting. I really liked hearing someone's conception
Speaker 1: of the cocoa market when they haven't necessarily been in
Speaker 1: it that much, and like how they formed that thesis
Speaker 1: and decided to actually put on the trade totally.
Speaker 2: I thought that was fascinating. I mean just hearing him
Speaker 2: like walk through all of the different factors, whether it's
Speaker 2: climate change, whether the two diseases.
Speaker 1: Fertilizer was one that I hadn't heard that much about.
Speaker 2: Before totally, but makes total sense. Like when you think
Speaker 2: about it, and when he brings it up, some of
Speaker 2: the metrics he looks at. I'm also interested in just
Speaker 2: this point, which is obvious, but I hadn't really thought
Speaker 2: about it, that you could have a quadrupling in the
Speaker 2: price of cocoa, and even if that translates into a
Speaker 2: quadrupling of the price of a cocoa bar or a
Speaker 2: chuckolate bar that you buy that in a commodity that
Speaker 2: ultimately is just not that big of a monthly expense
Speaker 2: or weekly expense for people, you might not get much
Speaker 2: of a demand response. If you had a quadrupling of
Speaker 2: the gasoline prices, you might expect carpooling or people to
Speaker 2: take less trips or you know whatever, or subway rides.
Speaker 2: You're just not going to get that same effect the market.
Speaker 3: That's small.
Speaker 1: Yeah, and it was kind of interesting to hear a
Speaker 1: similar dynamic in copper as well.
Speaker 3: Well.
Speaker 1: The one other thing I was thinking about, just to
Speaker 1: push the an inelasticity point a little bit more, I
Speaker 1: wonder sometimes if all the headlines about cocoa prices going up,
Speaker 1: if everyone rushes out to buy chocolate in the same
Speaker 1: way I do, maybe you get like even a bit
Speaker 1: of a demand boost in those scenarios.
Speaker 2: Or a bullwhip, right, because then everyone buys it, and
Speaker 2: then they're pulling demand from the future. And also whatever
Speaker 2: you have in your pantry, Tracy, is probably you know,
Speaker 2: it's it's hidden inventory, right, Like the statistical agencies can't
Speaker 2: see into that, so then there's more cut. Who knows
Speaker 2: whether that's an but it is a It is an
Speaker 2: interesting question.
Speaker 1: Yeah, no one knows about my strategic chocolate reserve, Tracy.
Speaker 2: And I never tell you about the time that I
Speaker 2: was at the top of the Patronas towers in a
Speaker 2: nightclub and I talked to a palm oil magnate.
Speaker 1: Yes, yes, you have in Malaysia, right, yeah.
Speaker 2: Yeah, Malaysia.
Speaker 3: Yeah.
Speaker 2: But it was It's interesting too because he was talking
Speaker 2: about the fact that, like palm oil is a tree
Speaker 2: based commodity, obviously, and he was describing very different market
Speaker 2: dynamics versus a field based crop, in which a field
Speaker 2: based crop you just have one person on a tractor,
Speaker 2: are combine to the whole field, the labor intensivity, the
Speaker 2: difficulty of automation when it comes to a tree based
Speaker 2: commodity versus field based commodity. There aren't many robots that
Speaker 2: can climb trees yet as far as I know. So
Speaker 2: it's interesting think about the market structure of some of
Speaker 2: these different commodities and how different they are just depending
Speaker 2: on the growing conditions, how labor intensive, how prone they
Speaker 2: are to automation scale, et cetera.
Speaker 3: Things like that.
Speaker 1: We should have asked Pierre about palm oil.
Speaker 2: We'll have to have them back for that.
Speaker 1: Yeah, all right, shall we leave it there.
Speaker 2: Let's leave it there.
Speaker 1: This has been another episode of the Oudlots podcast. I'm
Speaker 1: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our guest Pierre on Durant. He's at on Duran Pierre.
Speaker 2: Follow our producers Kerman Rodriguez at Kerman Ermann dash Ol
Speaker 2: Bennett at Dashbot, and Kilbrooks at Kilbrooks. Thank you to
Speaker 2: our producer Moses on Them. For more Oddlots content, go
Speaker 2: to Bloomberg dot com slash odd Lots, where we have
Speaker 2: transcripts of lag and a newsletter, and you can chat
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Speaker 3: No