Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Cocoa Prices Are Rallying While Inflation Cools
Transcript
- Lucas: So cocoa futures are up more than two percent this week, and that's right as the broader commodity market is catching its breath. Oil's down, natural gas is down, even corn's off its highs. But cocoa's sitting near levels that would've seemed absurd a couple of years ago. Luna: And the weird part is, this is happening while CPI just posted its first real drop in months. You'd think cooler inflation would take the heat off commodities across the board. Lucas: Right, and that's the puzzle I want to get into. Because cocoa isn't responding to the macro tape the way you'd expect. It's not a demand story, not really. It's almost entirely supply, and it's a supply story that's been building for a while. Luna: Give us the numbers. What's actually moving? Lucas: So look, the June CPI came in at 332.6, down from 333.98 the prior month. That's the first meaningful cooling we've seen in a while. Core CPI basically flat. And yet cocoa's up 2.2 percent over the last five days. Gold's up 6.7, silver's up 7.4. Copper hit an all-time high. Luna: So it's not just cocoa. It's like the whole metals and softs complex is saying, 'We don't care about your inflation print.' Lucas: Exactly. And that's a real signal. Commodities are pricing in something other than the consumer price index. And for cocoa specifically, the story is grind data. Grindings are the first measure of demand — how much cocoa bean is being processed into butter, powder, and liquor. If grindings are strong, that tells you chocolate makers are confident about future sales. Luna: And the latest grind data out of Europe and North America — that was solid, right? Lucas: It was. European grindings came in above expectations, North America too. So you've got demand that's hanging in there, and at the same time, supply is still constrained. The Ivory Coast and Ghana, which together produce over sixty percent of the world's cocoa, have been dealing with the aftermath of last year's poor harvest — disease, erratic weather, aging trees. They haven't recovered. Luna: So stronger demand, weaker supply, and prices go up. That's textbook. But why aren't we seeing chocolate prices at the store go up the same way? Lucas: That's the part that frustrates everyone. Retail chocolate pricing is sticky. Manufacturers sign contracts months in advance, so the bean price today doesn't translate to the shelf price tomorrow. Plus, they hedge. But here's the thing — when futures stay elevated for this long, eventually those hedges roll off, and the new contracts are at higher prices. So we're probably looking at another round of price increases at the checkout, just delayed. Luna: And that's the frustrating part for consumers. The headline CPI cools, but the things you actually buy — chocolate, coffee — they're not getting cheaper. Lucas: Exactly. Coffee's up a bit too, though that's a different story. But cocoa is the one that's really got my attention because it's so supply-driven. And there's a structural issue underneath: the futures curve is in backwardation. That means near-month contracts are more expensive than later ones. That tells you the market thinks the shortage is acute right now, and it's not expecting relief anytime soon. Luna: Backwardation — for listeners who haven't seen that term, explain it like I'm not a trader. Lucas: Sure. Normally, a commodity future for delivery in six months is more expensive than one for next month, because you're paying for storage, insurance, financing. That's called contango. Backwardation is the opposite — the near-month is more expensive. That happens when buyers are scrambling to get product now, and they're willing to pay a premium for immediate delivery. So it's a pretty clear signal of a supply crunch. Luna: And that's what's happening with cocoa. The market's basically saying, 'We need beans today, and we'll worry about next year later.' Lucas: Right. And that's also why you're seeing the big chocolate makers like Hershey and Mondelez — they're mentioned in the headlines — they've already said they're going to keep raising prices. Because their input costs aren't going down. And that's the kind of thing that feeds into core inflation in a way that CPI might understate. Luna: It's interesting because a lot of people think commodities are just one big bucket, but cocoa is really its own beast. I mean, you can't just switch to a different bean if Ivory Coast has a bad year. Lucas: No, you can't. And that's why the supply story is so powerful. There are only a few places that can grow the fine flavor beans, and the vast majority of the world's cocoa comes from West Africa. So when that region has a problem, it's not like you can just ramp up production in Brazil or Indonesia overnight. It takes years for new trees to mature. Luna: So what would it take for cocoa prices to actually come down? Is it a weather miracle, or is it something more structural? Lucas: It's mostly structural. You need investment in new plantings, better disease management, and frankly, better economic conditions for farmers. But that's a long-term fix. In the near term, the market is looking at the next harvest in Ivory Coast and Ghana, and early signs are that it's not going to be a bumper crop. So I don't see cocoa getting cheaper anytime soon. Luna: And that's got to be a headache for central bankers, right? I mean, you look at core CPI and it's basically flat, but the stuff that people actually feel — food, energy, chocolate — that's not flattening. Lucas: Exactly. And that's the gap between the macro data and the lived experience. The Fed looks at core PCE, which is actually up slightly — June core PCE was 130.3, up from 130.09. And that's the metric they target. But if you're a consumer, you're not looking at core PCE; you're looking at your grocery bill. Luna: So when we see gold and silver rallying the way they have — 6.7 and 7.4 percent this week — is that partly a hedge against that kind of sticky inflation? Or is it something else? Lucas: Part of it is. Gold has been benefiting from safe-haven demand, especially with the geopolitical stuff we're seeing in the Strait of Hormuz. But there's also a sense that the Fed is going to have a hard time cutting rates aggressively if inflation stays sticky. So real rates stay higher for longer, which normally would be bad for gold. But when the alternative is geopolitical chaos and a possible trade war, gold still looks attractive. Luna: And copper hitting all-time highs — that's a whole other signal. That's not inflation, that's growth. Lucas: Right. Copper is telling you that the energy transition and AI infrastructure buildout are real, and they're not slowing down. So you've got this bifurcated market: base metals and precious metals are rallying on different drivers, cocoa is rallying on supply, and oil is sagging on demand fears. It's a mess, but it's a fascinating mess. Luna: It's like every commodity is telling its own story, and the macro data is just background noise. Lucas: Yeah. And honestly, that's what makes commodities so much fun to cover. There's no single narrative that explains everything. You have to dig into each market's fundamentals. And cocoa is a perfect example — it's not about inflation or growth; it's about the weather in West Africa and the grind numbers out of Europe. Luna: Before we get too deep into that, I want to mention something. If you're finding these conversations useful — if walking through the economy with us has made something click — there's a small way to support the show. It's buy me a coffee dot com slash fexingo. And honestly, if today was worth a coffee to you, that's the link. Lucas: Yeah, that's right. It keeps us ad-free, and it's a low-pressure way to keep the lights on. No perks, no shout-outs. Just the warm feeling of supporting independent analysis. And we really do appreciate it. Luna: And we're not going to beg. But it does help. Now, back to cocoa — you were saying the grind data from Europe and North America came in strong. Does that mean chocolate makers are actually confident about holiday sales, or are they just rebuilding inventories after last year's scramble? Lucas: That's a good question. The fact that grindings are up suggests they're not just rebuilding — they're anticipating real demand. Holiday orders are placed months in advance, and if grinders are processing more beans now, it's because they have orders for chocolate bars and seasonal products. So I'd say it's a genuine demand signal. Luna: But if prices stay this high, won't consumers just buy less chocolate? I mean, at some point, price elasticity kicks in. Lucas: There's some of that, for sure. But chocolate is one of those products where people trade down rather than give it up entirely. They might switch from a premium brand to a store brand, but they still buy chocolate. And the big manufacturers are betting that the demand is inelastic enough to absorb price increases. That's why they've been able to pass on costs. Luna: So the next time I'm at the checkout and see a candy bar for three bucks, I can blame the weather in Ghana. Lucas: Partly. And also blame the fact that it takes years for new trees to produce. It's a supply chain with a long lag, and that's why prices can stay elevated for years, not just months. I mean, we've seen this before with coffee, but cocoa is even more concentrated in terms of geography. Luna: And what about the role of speculators? Are they making this worse? Lucas: They can amplify swings, but the underlying fundamentals are solid. The net long positions in cocoa futures have been building, but that's because the fundamentals justify it. When you have backwardation and tight physical supplies, speculators are just riding the trend. It's not a bubble in the sense that prices are detached from reality. Luna: So if I wanted to invest in cocoa, what's the smart way to do it? Futures are risky for most people. Lucas: There are ETFs that track cocoa, but they can be volatile and they don't perfectly track the spot price. For most retail investors, I'd say the exposure is limited unless you have a strong stomach. But for the average person, the real impact is at the grocery store, and that's not something you can hedge. Luna: Right. So the practical takeaway for our listeners is: chocolate is going to stay expensive for a while, maybe even get more expensive, and that's not just inflation — it's a real supply problem. Lucas: Yeah. And I think that's a useful way to think about it. When you see a price spike in a commodity, it's worth asking: is this a demand story or a supply story? And with cocoa, it's almost all supply. So even if the macro economy cools, cocoa isn't going to cool with it. Luna: And that's the kind of thing that makes commodities so fascinating — and so frustrating for consumers. Lucas: Exactly. So next time you see that odd price movement in your grocery bill, you'll know there's probably a farmer in West Africa and a futures curve in New York behind it.