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