Traders face $1 billion loss on faltering Ghana cocoa supply

LONDON/ACCRA, July 15 (Reuters): Trading houses face losses of at least $1 billion on cocoa derivatives after major producer Ghana failed to deliver beans this year, forcing traders to liquidate short positions in a rallying market, six industry sources told Reuters.
Global cocoa prices soared this year after bad weather, bean disease, smuggling and illegal gold mining reduced production and the volume of beans available in Ghana, the world's No.2 producer.
Chocolate prices also rose globally and chocolate makers have reduced the size of products such as bars as a result of the huge cocoa price increase.
Ghanaian authorities, who sell all of the country's beans, want to delay delivery of up to 350,000 metric tons this season - nearly half of the cocoa beans they sold - due to Ghana's devastated crop, five sources told Reuters last month. Ghana's cocoa regulator said the country was looking to roll over "some volumes, but not in those quantities".
A delay of 350,000 tons means cocoa traders and processors could face losses of about $4,000 per ton on cocoa futures they had bought to hedge their physical bean purchases, or around $1.4 billion combined, the sources said.
Trade houses like Cargill, Olam and Barry Callebaut use the futures market to hedge or lock in a price for cocoa they have not yet sold on to chocolate makers.
"We're sitting staring at our screens, barely trading," said the head cocoa trader at a global trading house specialising in agricultural commodities, speaking on condition of anonymity because he was not authorised to talk to the media.
He said trading in the global cocoa physical and futures market has just about ground to a halt as a result of the deep losses and uncertainty.
Much of Ghana's cocoa is bought by large, diversified trade houses with deep pockets, including Sucden, Olam, Barry Callebaut BARN.S, Cargill, Touton and Ecom.
Traders typically sign deals to buy beans - like any other commodity - months in advance in the hope of reselling later at a profit. By doing so they take a so called long position in the physical market.
As they wait for the physical commodity to be delivered for weeks or months they need to protect themselves against possible price falls. They typically do this by taking short positions in the futures market to protect against losses on a long position.
Short trading bets on price falls so when the physical commodity arrives, long and short positions cancel each other out, guaranteeing a fixed price.
The strategy unravels, however, if physical delivery - in this case cocoa beans - is delayed in a rallying market.
If this happens, traders are forced to liquidate short positions for the month they had expected the commodity to arrive and take a new short position for the month of a new expected delivery.
Doing so in April 2024 - after the market realised Ghana would delay bean delivery to 2025 - would have been costly, according to the traders.
The six sources said last year traders who bought physical beans for May 2024 delivery would have taken equivalent short positions in May 2024 futures at around $3,000 a ton.