Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Hi have you, Hey, how are you guys? We're good?
Speaker 2: How are you? No bad? And no complain?
Speaker 3: You know, olive oil prices are high, chocolate prices are high.
Speaker 3: I mean you're in demand, maybe in demand, but certainly
Speaker 3: I'm just gonna be ruined this.
Speaker 4: Right, what's happening with all of oil prices?
Speaker 3: They have come down about ten percent. I mean we're
Speaker 3: at the peak of the crop has just arrived, so
Speaker 3: it's it's normal that the prices come down a bit
Speaker 3: and demand is starting to react. I mean, it just
Speaker 3: it's just bloody expensive.
Speaker 1: Hey, this is like Javier's personal CPI basket, rightil and coco.
Speaker 3: I mind the waiting of those two items on my
Speaker 3: personal CPI basket. It's just coco and olive oil, probably
Speaker 3: one hundred and forty percent of it.
Speaker 4: I did a deadlift one.
Speaker 1: Two uh barges.
Speaker 4: This isn't after school special, except.
Speaker 1: I've decided I'm going to base my entire personality going
Speaker 1: forward on campaigning for a strategic pork reserve in the US.
Speaker 4: Where's the best with Impasta?
Speaker 1: These are the important question. Is it robots taking over
Speaker 1: the world?
Speaker 4: No, I think that like, in a couple of years,
Speaker 4: the AI will do a really good job of making
Speaker 4: the odd Launch podcast, and people say, I don't really
Speaker 4: need to listen to Joe and Tracy anymore.
Speaker 2: We do have.
Speaker 4: Perfect welcome to lots more? Will we catch up with
Speaker 4: friends about what's going on right now?
Speaker 1: Because even when odd Loots is over, there's always lots
Speaker 1: more and.
Speaker 4: We really do have the perfect guest Tracy, do you
Speaker 4: have opinions on chocolate? Do you have a favorite chocolates?
Speaker 2: I don't know.
Speaker 4: I've never askedly, I've never heard you. Actually I have.
Speaker 4: I'm expecting a long list of exotic flavors and names.
Speaker 1: Are you ready for my ted?
Speaker 2: Yes?
Speaker 1: Well, you see, when people ask if you have a
Speaker 1: favorite chocolate, I feel like you have to divide that
Speaker 1: into different price baskets. Actually, so, my favorite cheap chocolate
Speaker 1: is actually, and this is controversial, I really like Hershey's.
Speaker 4: Oh interesting.
Speaker 1: I actually think like there is there's a cheap tasting
Speaker 1: chocolate that is actually wonderful and it tastes cheap but
Speaker 1: it's still great, and that's Hershey's. And then my mid
Speaker 1: range is probably milk Up, which I feel like I
Speaker 1: have to say as a half Austrian person, although that
Speaker 1: company is Swiss and I think it's produced out of
Speaker 1: Germany now. And then expensive chocolate. I like all of
Speaker 1: the Swiss ones. Basically, there's that Swiss chocolate store that's
Speaker 1: right under our office.
Speaker 4: Yeah, what's your view on that?
Speaker 1: It's really good? But oh my god. I went in
Speaker 1: there to buy a present for my husband for Valentine's
Speaker 1: Day and I grabbed like a little candy chocolate heart
Speaker 1: thing and I was like, oh, okay, I'll just I'll
Speaker 1: leave without looking at the price. How bad can it be?
Speaker 1: And I got to the register thirty seven dollars and
Speaker 1: that was in February. It's probably worse now.
Speaker 4: Yes, so as most people know. By now, cocoa prices
Speaker 4: have soored. And when there's a commodity soring. We talk
Speaker 4: with our colleague Javier Blast. Do you have a favorite chocolate?
Speaker 3: Ah, I grew up in a Spain basically with Nofelia,
Speaker 3: which is the Spanish kind of brand of nutella. And yes, yes, yes,
Speaker 3: I know that that's a lot of milk and sugar
Speaker 3: and haszle nuts. But I still I will buy a
Speaker 3: jar of you know, the Spanish nutella, and I will
Speaker 3: not do a spread over bread. I will just get
Speaker 3: a spoon, a bigger spoon, and then just eat it.
Speaker 3: I'm five minutes later, then nutella is over and I'm unhappy,
Speaker 3: and you know, within thirty seconds the guild will come.
Speaker 3: But for for about thirty seconds, I am the happiest
Speaker 3: guy in this planet.
Speaker 1: Eating nutella with a spoon is one of those underrated
Speaker 1: joys in life, I think. So we've seen this massive
Speaker 1: run up in recent weeks which has caused comparisons to
Speaker 1: in video of all things, So chocolate outperforming in video lately,
Speaker 1: which is kind of ridiculous because one of those things
Speaker 1: powers the collective brain power of the economy and the
Speaker 1: other thing is just semiconductors.
Speaker 4: So the one just helps, but mixed stuff up.
Speaker 1: That's right, Okay, So why don't we start really simply
Speaker 1: havevia what's going on here?
Speaker 3: Well, there are two things going on simultaneously. The rally
Speaker 3: started about a year ago completely unfundamentals. This was supply
Speaker 3: and demand. First of all, demand has been increasing every year.
Speaker 3: It goes with GDP, more middle class, more people like chocolate.
Speaker 3: Who is going to complain about that? So global chocolate
Speaker 3: consumption has more or less double over the last thirty years.
Speaker 3: Then the main problem was a series of crop failures
Speaker 3: in four countries in West Africa with account for roughly
Speaker 3: seventy five percent of the world's production. That's Ghana, Ivory Coasts,
Speaker 3: Cameroon and Nigeria.
Speaker 2: Crop failed there.
Speaker 3: For a number of factors, one being that prices have
Speaker 3: been low for many years. Farmers are poor, they don't
Speaker 3: have money to plant new trees, they don't have money
Speaker 3: for fertilizers, they don't have money for pesticide.
Speaker 2: So trees are all there.
Speaker 3: They produce less every year, and old trees are also
Speaker 3: more more vulnerable to chew issues, bad weather and diseases,
Speaker 3: and we got both of them over the last few months.
Speaker 3: The weather has been really bad in West Africa. I
Speaker 3: know that a lot of people talking about the drought.
Speaker 3: Note what really mattered was the rains. It rain a
Speaker 3: lot last year and just when we didn't need rains,
Speaker 3: and that really depressed the crop massively. And also at
Speaker 3: the same time we have had a disease spreading across
Speaker 3: Ghana and Ivory Coast that is called the swelling shoot.
Speaker 3: Is bad because once a tree gets it, you basically
Speaker 3: have to uproot the tree to get rid of it.
Speaker 3: It's really bad and that has been endemic in the area,
Speaker 3: but this season has really spread everywhere. That was the
Speaker 3: beginning of the rally and why we went from like
Speaker 3: two thousand, five hundred dollars to five thousand and six thousand,
Speaker 3: but we are now a ten thousand and more has happened.
Speaker 4: Is there any lever that can be pulled on the
Speaker 4: supply side, like in other commodities, it's like we're going
Speaker 4: to you know, draw some new wells or whatever it is.
Speaker 4: Is there anything that can be done on the supply
Speaker 4: side even in the medium term.
Speaker 2: Well, yes and no.
Speaker 3: I mean we're gonna have a reaction from farmers everywhere
Speaker 3: where they're actually getting market prices. That's particularly true in
Speaker 3: Latin America in Indonesia, and we're gonna see them bying
Speaker 3: fertilizer by investicized and next year it provided that the
Speaker 3: weather is better, productions would recover a lot and grow
Speaker 3: in those countries. But to grow production, the main prot
Speaker 3: is takes time. It takes five years since planting a
Speaker 3: new tree to get the first you know, decent crops
Speaker 3: from that tree, and that also requires money. But also
Speaker 3: importantly farmers in West Africa, particularly in Ivory Coast and Ghana,
Speaker 3: which you know they are the main producers, are not
Speaker 3: getting anywhere the market prices. I mean, i'd best they're
Speaker 3: getting twenty to thirty percent of the market price. So
Speaker 3: their incentive for planting more is just very limited. To
Speaker 3: say none, Wait have you?
Speaker 1: I need you to do something very important right now.
Speaker 1: I need you to walk me or talk me off
Speaker 1: the ledge of buying a cocoa plant and putting it
Speaker 1: in a greenhouse and trying to grow cocoa beans. Why
Speaker 1: why shouldn't I do this? You are It's kind of
Speaker 1: a New Years question though, why well, it's a greenhouse.
Speaker 2: But why isn't.
Speaker 1: There more commercial production of cocoa beans. Why haven't someone
Speaker 1: said like, oh, we can make tons of money by
Speaker 1: setting up some massive hydroponic farm or something.
Speaker 3: For two reasons. One, coco trees are not easy to cultivate.
Speaker 3: You need to basically have a very particular kind of
Speaker 3: climatic conditions that's roughly twenty degrees north and south of
Speaker 3: the equator. I think that you're going to struggle in
Speaker 3: New York even you use a glasshouse, or you're going
Speaker 3: to spend a lot of money heating on that class house,
Speaker 3: which is probably not good.
Speaker 2: For your wallet, neither for the environment.
Speaker 3: But you know, maybe we can convince someone at Bloomberg
Speaker 3: to let us just grow a coco tree on a
Speaker 3: glasshow in New York.
Speaker 2: That would be quite fun. But we need five.
Speaker 3: Years to get the first coco production and I have
Speaker 3: first dips or whatever you get. But why it's not commercial,
Speaker 3: that's a lot of the problem. I mean, on most
Speaker 3: agricultural commodities you have commercial plantations, you have plantation business.
Speaker 3: Here is all the small holders, and the reason is
Speaker 3: that no one really makes money on coco.
Speaker 2: I mean, the only reason.
Speaker 3: That we get a lot of coco is because it's
Speaker 3: the only kind of exit, the strategy for millions of
Speaker 3: poor farmers in West Africa to make some money. But
Speaker 3: it doesn't really develop into a commercial plantation business just
Speaker 3: because until now prices work so low that you know,
Speaker 3: it didn't make any commercial sense to make it.
Speaker 4: Who gets the money I think you mentioned you said
Speaker 4: the farmers. Maybe you're only getting twenty to thirty percent
Speaker 4: of the price of coco. Like how does it divide up?
Speaker 4: Sort of walk us through when cocoa is bought. When
Speaker 4: chocolate is bought, where the profits are.
Speaker 3: Accruing, Well, everyone makes money other than the farmers, let's
Speaker 3: put it that way. So the intermediary is make money.
Speaker 3: The governments make money in particularly in West Africa, because
Speaker 3: they tax coco very, very heavily. So governments are making money.
Speaker 3: Some of the commoity traders certainly they make money. The
Speaker 3: processes make money, and then you know, the chocolate companies,
Speaker 3: the confectionery companies also make money. They're going to make
Speaker 3: a bit less money because there is no way this
Speaker 3: year that they're going to be able to pass all
Speaker 3: the increase in coco cost to the consumers because their
Speaker 3: sales will really slamp, and I suppose that they're going
Speaker 3: to have to accept lower thinner margins in the next
Speaker 3: few months.
Speaker 2: But just as a rule of thumb.
Speaker 3: You basically say everyone makes money barring the farmers, and
Speaker 3: some of the governments in West Africa make a lot
Speaker 3: of money.
Speaker 1: So one of the things I wanted to ask you
Speaker 1: is we've seen a lot of headlines obviously about the
Speaker 1: price of chocolate. You know, cocoa breaking that ten thousand
Speaker 1: dollars barrier. You know, things are bad when people start
Speaker 1: using standard deviations. And I saw someone say that cocoa
Speaker 1: prices had risen one hundred and twenty five percent above
Speaker 1: their two hundred day moving average, ranking it as the
Speaker 1: seventh most profound deviation above the long term average for
Speaker 1: any commodity since nineteen fifty nine. So we have these
Speaker 1: insane numbers, insane stats. You can look at the charts
Speaker 1: and it's based straight upwards arrow, But how much of
Speaker 1: that feeds into the actual price that people are paying
Speaker 1: at the grocery store, Like how much of it is
Speaker 1: financialization and being squeezed upwards by things like margin calls.
Speaker 1: We know this is a commodity with a lot of
Speaker 1: speculation attached to it, So I guess I'm just curious,
Speaker 1: like how real is that number?
Speaker 3: Well, so two questions on you know, one is how
Speaker 3: much coco is on the chocolate that you actually buy
Speaker 3: on the supermarket and the and the other one is
Speaker 3: how much of the last few weeks of the rally
Speaker 3: is actually financial factors more than supply, as I said,
Speaker 3: More than supply and demand as I said at the beginning,
Speaker 3: supply and demand were really the main factors at the
Speaker 3: beginning of the rally. I will say that probably since
Speaker 3: kind of mid January early February, financial factors have really
Speaker 3: been a big driver.
Speaker 2: And here in particular two things that in some ways
Speaker 2: they are not bad.
Speaker 3: It's not a speculation, it's actually what you use a
Speaker 3: financial market for. But it have really exacerbated the valley.
Speaker 3: So we need to look at how the market work.
Speaker 3: Was basically one on one commoity markets just minding a
Speaker 3: commoity trader which is getting Coco pins and therefore has
Speaker 3: a long position on the physical side of the Coco
Speaker 3: and therefore wants to ensure against price variation. It wants
Speaker 3: to h so it will take the opposite position on
Speaker 3: the financial market.
Speaker 2: It will go short. All fine, the price of Coco
Speaker 2: goes up.
Speaker 3: Is losing money on the futures market because he's short,
Speaker 3: but he's making money on the financial and on the
Speaker 3: physical side because it's long physical. So one another off
Speaker 3: sets all here, no problem. That's exactly why you use
Speaker 3: the market. Obviously, you need to sustain that short position
Speaker 3: on the financial market, and for that, from time to time,
Speaker 3: as you are losing money on that position, they change.
Speaker 3: The brokers are going to be the mandy margin variation
Speaker 3: margin and Obviously, when the market goes to those insane
Speaker 3: levels of ten thousand dollars, which is double the previous record,
Speaker 3: the margin calls are just staggering, and companies that otherwise
Speaker 3: will just keep going, they have no option. They run
Speaker 3: out of money for marketing calls, and they have to
Speaker 3: buy back their hedges, and they buy back those hedges
Speaker 3: at the worst potential moment.
Speaker 2: This is a record high.
Speaker 3: That's what's happening now, and that's why prices have just
Speaker 3: really balloon. I mean, we have seen days the market
Speaker 3: moving six seven hundred dollars. That's the typical price range
Speaker 3: that in the past will take one or two years
Speaker 3: to see, and here it happened just literally in eight
Speaker 3: hours of marketing trading. That's how bad it has been.
Speaker 3: There are also a number of participants that they seem
Speaker 3: to be overhatched. They thought that they were going to
Speaker 3: get an x amount of beans, say one hundred bins,
Speaker 3: so they sold one hundred bins on the futures market.
Speaker 3: But because the crops have been so low, everyone on
Speaker 3: the physical side, the farmers are defaulting on the contracts,
Speaker 3: and so some traders processor I'm finding that they are
Speaker 3: getting only say twenty beans, but they have one hundred
Speaker 3: being short position on the financial market, they are massively overheads.
Speaker 3: They are needed to buy back those overheading positions or
Speaker 3: rolling them over and that is just costing a lot
Speaker 3: of money to everyone. And that's also at the end
Speaker 3: of the day, pushing up prices, and it's used a loop.
Speaker 3: The more they buy, the more it goes up, the
Speaker 3: more marketing calls, and it's a circle.
Speaker 2: We have been here before.
Speaker 3: We were hearing in nickel, we were hearing natural gas,
Speaker 3: we were hearing in cotton in two thousand and eight,
Speaker 3: twenty eleven, and.
Speaker 2: We know how this goes. The market will go up
Speaker 2: until something breaks, right.
Speaker 4: Yeah, definitely your description there, which was excellent, reminded me
Speaker 4: of the nickel I guess that was in twenty twenty
Speaker 4: one and those contracts that had to be broken. Who
Speaker 4: participates in these markets? The big chocolate companies, how much
Speaker 4: do they play in the futures market or versus like,
Speaker 4: how much do they have direct relationships with farmers or
Speaker 4: distributors that allow them to avoid some of these price swings.
Speaker 2: There is a bit of everything. I mean, big players.
Speaker 3: We have the big Commoiti traders in Coco like cargill
Speaker 3: or Lamb of Singapore, Barry Khalabud, which is a trader
Speaker 3: and a processor. And then we have specialty commoity traders
Speaker 3: in coco, the likes of e Com, micro Industrial, the
Speaker 3: likes of two Ton Suck then and a few others.
Speaker 3: We have obviously the chocolate companies, the Nestless, the hairshet
Speaker 3: of this world. That they all participate buying, selling on
Speaker 3: the physical side and also on the financial side as
Speaker 3: a hedge, not to speculate, but but to hetche their positions.
Speaker 3: So it is a very active market with all kinds
Speaker 3: of different participants. And it's also no participants that you
Speaker 3: just use h coco pans, which is the first kind
Speaker 3: of element the feedstock of the industry, but there are
Speaker 3: some semi process coco products that they need also to hatch.
Speaker 3: I mean, you get coco liquor, which is the kind
Speaker 3: of the really flavory stat when you press the cocoa
Speaker 3: beans that you get, you get cocoa butter, you get
Speaker 3: coco powder, and those kinds of cocoa products that they
Speaker 3: go into the products that we then buy on the supermarket.
Speaker 3: And to go back to what Tracy was, asking earlier,
Speaker 3: you know how much of this cocoa price valy then
Speaker 3: you just feed into the shelf of the supermarket. It
Speaker 3: very much depends on what you are buying. If you
Speaker 3: are buying like a high end chocolate box, the kind
Speaker 3: of thing that you may use not even go to
Speaker 3: the supermarket, but one of these boutique chocolate boutiques chocolate hotels,
Speaker 3: well you know there is a lot of marketing there.
Speaker 3: You are paying probably more for the box and the
Speaker 3: actual card box or even budden box or metal box
Speaker 3: that you are buying, the kind of the service, the
Speaker 3: kind of glamour, or buying it in a very fancy
Speaker 3: location on a highest street, or that's more important that
Speaker 3: the coco. If you go to the supermarket and you
Speaker 3: are buying just a regular tread might kind of you know,
Speaker 3: a small bar. The kind of things that I feed
Speaker 3: while I'm working at the Bloomberg news room, I go
Speaker 3: upstairs into the pantry and get some chocolate bars and
Speaker 3: then I can just put a few more hours into
Speaker 3: my desk. Those are really more affected by by cocoa
Speaker 3: prices because the market is a lot smaller.
Speaker 1: So my takeaway from this is that I need to
Speaker 1: start stockpiling more expensive chocolate.
Speaker 3: You should have done this like two months ago when
Speaker 3: I wrote first about this. I mean, I have no
Speaker 3: I'm not gonna tell you what is on my kitchen.
Speaker 3: That's a secret.
Speaker 1: Can you do your favorite Can you just send me an
Speaker 1: email right before you write your columns and just let
Speaker 1: me know what the modern I should be stockpile.
Speaker 2: That inside training. We cannot do this perfect.
Speaker 1: Okay, even for chocolate. That seems that seems strict.
Speaker 2: Okay, I think I think that is no, no, no, no.
Speaker 3: I remember very well the statute and on the CFTC
Speaker 3: it really clearly say that you cannot use inside information
Speaker 3: on the exception, with the exception of the chocolate market,
Speaker 3: is there, I mean, just check with the CDC chairman
Speaker 3: will confirm few.
Speaker 2: Okay.
Speaker 1: On a serious note, though it sounds so I take
Speaker 1: the point about what's gonna arrest the sort of short
Speaker 1: term cycle is something breaking in the financial market, But
Speaker 1: what arrests the long term dynamic of a mismatch between
Speaker 1: supply and demand, because as you mentioned, it doesn't seem
Speaker 1: like there's a lot of appetite out there for further investment,
Speaker 1: which is really what's needed.
Speaker 3: Well, First of all, you know, these markets are a
Speaker 3: cyclical and weather is a big pattern.
Speaker 2: If we get a couple of years, three years in.
Speaker 3: A row of decent, good weather, that could really resolve
Speaker 3: a lot of the problem. And demand is going to
Speaker 3: do a lot of work. I mean, we are going
Speaker 3: to see really a biggest lowdown in demand. It's not
Speaker 3: just gonna be because we are going to be priced out.
Speaker 3: It's gonna be unfortunately. We're gonna finds reflac its reflexion
Speaker 3: juice all over the boxes. Rather than having ten pieces
Speaker 3: of chocolate, they are gonna have a the tablerons are
Speaker 3: gonna be thinner at the top. I mean, all of
Speaker 3: these things that the quality of the coco probably is
Speaker 3: gonna come down. There's gonna be more hassle notes on
Speaker 3: the coco mix, my nutella maybe just be a bit
Speaker 3: lighter on coco. All of those things are gonna be
Speaker 3: at play, and that's gonna rebalance the market. But yeah,
Speaker 3: I mean weather, it's gonna be really really important. And
Speaker 3: then there are a number of countries where farmers right
Speaker 3: now are getting market price Ecuador, Brazil, Indonesia.
Speaker 2: And if you are a.
Speaker 3: Farmer, a coco farmer, in those three countries. You are
Speaker 3: gonna try to produce as must as you can. You're
Speaker 3: gonna fertilize, You're gonna take care of the coco trees
Speaker 3: as almost they were your children, because you don't want
Speaker 3: any diseases, you don't want anything happening to them. And
Speaker 3: then next year we get good weather, we get a
Speaker 3: good crop, and the market really comes down.
Speaker 4: What is it, just last question for me, what is
Speaker 4: it structurally about Ecuador, Indonesia and elsewhere that allows those
Speaker 4: farmers to get a market price in the way the
Speaker 4: West African.
Speaker 3: Facts mostly the structure of taxi, the structure of the
Speaker 3: market in places like Coco. Sorry, in places like Ivory
Speaker 3: Coast and Ghana, the government effectively is buying from the
Speaker 3: farmers at a fixed price, so the farmers know in
Speaker 3: advance this is the price that the government is going
Speaker 3: to pay, so they don't suffer the ups and downs
Speaker 3: of the market. Is good when the market goes down, obviously,
Speaker 3: it's not great when the market goes up like now.
Speaker 2: But for those countries, coco is so.
Speaker 3: Important for the economy that the governments are deeply regulating
Speaker 3: and deeply controlling the market. In some cases, you talk
Speaker 3: to people in the market, will say it's a lot
Speaker 3: of corruption within those governments. In places like Ecuador, Indonesia, Brazil,
Speaker 3: Coco is another commodity. It's not important for the national economy,
Speaker 3: so the governments are.
Speaker 2: Not that involved.
Speaker 3: Prices are free, whatever the market says. When it's price
Speaker 3: is low, the farmers are not happy. But when the
Speaker 3: prices are very high, the farmers are celebrating. Like now
Speaker 3: that that's the big difference. I'm looking forward for that
Speaker 3: coco plantation business that.
Speaker 2: Will be.
Speaker 1: You'll see.
Speaker 3: That's why I have an old and I have been
Speaker 3: there for two years. He has produced not a single
Speaker 3: in olive, but it's beautiful there and I'm I'm still
Speaker 3: hoping that three to five ys from now we will
Speaker 3: get about six olives.
Speaker 1: Well, so I hear like the London environment is supposed
Speaker 1: to be turning more Mediterranean, right, so maybe you just
Speaker 1: need to wait for more climate.
Speaker 2: That's that's probably it is my head against.
Speaker 1: Yeah, exactly, exactly.
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