(Bloomberg) — Oil trader Pierre Andurand’s hedge fund bet on higher cocoa prices ahead of a massive surge last month, stepping into a volatile market for the key chocolate ingredient as other speculators retreated.
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The fund took a small, long position in early March, according to a person familiar with the matter. Prices soared more than 60% last month.
Shifting weather patterns and rampant crop disease are hurting global cocoa supplies, and muted production is expected to continue next season. New deforestation regulations in the European Union — a major consumer — are exacerbating the difficulties for farms to expand as prices surge.
Prices in New York have more than doubled since the start of the year, hitting a record above $10,300 a ton earlier this month, though they have eased since then.
“We believe we could break $20,000 later this year,” Andurand said by email. The recent surge is also a welcome respite for the trader, who is best known for specializing in the oil market and is recovering from a record loss at his hedge fund last year.
Andurand said his firm expects cocoa-beans production globally to be down at least 18% on an annual basis, compared to most analysts’ expectations of 10-11%.
“This means that we will finish the year with the lowest stocks-to-grinding ratio ever, and potentially run out of inventories late in the year,” he added.
The firm sees that ratio — which measures stockpiles relative to annual demand — will end the 2023-24 season around 16% in a base-case scenario. That would push the indicator below the previous record low set in the mid-1970s, when prices hit $5,000 a ton — equivalent to about $26,000 when adjusted for inflation, according to Bloomberg calculations.
Still, the trade has become increasingly risky for cocoa traders as open interest wanes and margin calls rise, making market moves more erratic and raising the specter of company failures. Money managers as a whole are holding the smallest net-long position in futures and options in a year, government data shows.
Read more: Cocoa Market Risks Breaking Point as Wild Moves Show Stress
The Andurand Commodities Discretionary Enhanced hedge fund, which has no set risk limits, gained 25.6% through the first quarter after losing 55% in 2023, according to a person familiar with the matter. The volatile period compares with stellar gains during the previous three years, when Andurand powered a more than sevenfold surge in investor capital.
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