May 16, 2024 • 45 mins
Pierre Andurand made his name trading oil and other energy-related assets, but wild swings in the price of cocoa have recently lured the founder of Andurand Capital Management into a new market. He bet on cocoa earlier this year and saw the trade pay off as the price of the beans surged to a record $12,000 a ton. Prices have since fallen back to around $7,800, but Andurand sees scope for further upside as extreme deficits in the building blocks of chocolate loom. In this episode, we talk about how he entered the cocoa market, how he formed his investment thesis, and potential interest in other soft commodities, like coffee and orange juice. We also talk about copper, where a similar story of structural shortages is now playing out in prices.
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Episode Transcript
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to
another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 2 (00:24):
And I'm Joe Wisenthal.
Speaker 1 (00:26):
Joe, can I tell you something. It's slightly embarrassing.
Speaker 2 (00:30):
This could field many things that but go on.
Speaker 1 (00:33):
Okay, So I had a self realization the other day.
I think I might have prepper tendencies.
Speaker 3 (00:40):
I didn't know that.
Speaker 2 (00:41):
But that doesn't totally surprise.
Speaker 3 (00:43):
Like.
Speaker 1 (00:45):
You're like, yes, you're a paranoid. This makes total So
the reason I had this realization we recorded an episode
recently on the big surge in cocoa prices, and a
few days after that episode came out, I was like, hmm,
I should buy some chocolate just in case. So I
went on Amazon and I bought like an industrial size
(01:06):
package of milk chocolate. And I was like, I'll just
keep it in the pantry. It'll be really convenient. It'll
be there for emergencies. I'm sure I won't eat it
at like ten PM when I'm craving something sweet. I'll
just keep it there for a long time. And so
I ordered it, and then you know what happened.
Speaker 2 (01:24):
Tell me the rest.
Speaker 1 (01:25):
Okay, So, The first thing that happened was I never
got the chocolate, which is kind of weird for Amazon,
like they just never fulfilled the order, and the supplier
was like, oops, we don't have enough chocolate, I guess.
But then secondly, as soon as I did it, prices
of cocoa started falling.
Speaker 2 (01:41):
This was the market saving you from a bad trade basically,
And so you put in an order right at the top.
You know, sometimes you need a little luck in life,
and now you can buy the dip.
Speaker 1 (01:51):
That's right. I was fully refunded at the top of
the market, and now I can buy it when it's
slightly more reasonable. But I have to say, I'm looking
at the chart of cocoa futures right now. So they
searched above eleven thousand, and then they came back down.
Let's see, we're about eight thousand, yeah, right now. So
it's been something of a roller coaster ride. And the
(02:12):
thing that I don't really understand is when I look
at coverage of the cocoa market at the moment, there
seems to be consensus that supply is going to be
an issue. So I know, Bloomberg published a survey of
traders where basically everyone was saying that they think prices
are going to go higher. Yeah, we could see over
fifteen thousand dollars later this year, but in the meantime
(02:36):
prices are sliding. So there seems to be a disconnect
there totally.
Speaker 2 (02:40):
Well, look, I mean, even if the fundamentals are say, okay,
this market is in deficit or you know, all these
growing conditions, like at some point, as they say, you know,
trees don't grow to the moon or trees to the sky,
to the sky, whatever it is, so at some point
like you can have like solid bullish fundamentals in the price.
I mean, it really is crazy because last you know, December,
we were looking at four thousand, so we're still you know,
(03:03):
double so far this year.
Speaker 1 (03:04):
Yeah, well, I have to say we do, in fact
have the perfect guest. We're going to be speaking to
someone who timed the big cocoa trade a lot better
than I did personally in my pantry. But we're going
to be speaking with Pierre on durand he is of
course the founder of on Duran Capital Management. We're going
to talk cocoa and a bunch of other commodities. So Pierre,
(03:25):
thank you so much for coming back. On all thoughts.
Speaker 3 (03:27):
Hi, thanks very much my pleasure.
Speaker 1 (03:29):
So maybe to begin with talk to us about how
you got interested in Coco, because my understanding is you
put a big trade on a long position earlier this year.
It paid off massively, But this isn't a sort of
normal type of trade for you. This is something that
was a little bit different.
Speaker 3 (03:48):
Yes.
Speaker 4 (03:49):
Well, generally my background is more in energy trading, but
I've traded quite a bit of metals as well a
little bit of agricultural products. But I have one and
thatst was very good and told me generally, per you
should look at Cocoas I'm like, okay, I don't know
anything about it, tell me, And it gave me a
really good presentation that was really interesting. So then we
really digged in really deep together to really understand the
(04:12):
fundancials market. And basically we have a massive supply shortage
this year. I mean we see production down seventeen percent
relative to last year. Most analysts out there have it
down eleven percent, but that's because they tend to be
very conservative. They have a lot of clients and they
don't want to worry the world, so they commu relatively
conservative estimates. But really tracking the exports from the main exporters,
(04:38):
many ivory coasts and Ghana that we put them together
about sixty percent of worlds production. We see basically ivory
cost exports down thirty percent here to date I mean
seedon to date and down forty one percent. So just
those two countries together since the start of the season,
which is the first of October, are down eight hundred
(05:00):
thousand tons.
Speaker 3 (05:01):
And now we have the what.
Speaker 4 (05:03):
You call the mild crop that is starting, but that
we present only twenty percent of the balance of the
season for West Africa and that's not going to be
enough to really change the deficit that we have this year.
Speaker 3 (05:18):
So we have a deficit of eight.
Speaker 4 (05:19):
Hundred thousand tons from those two countries, and then looking
at all the other countries we have, I think the
some are slightly positive, some are slightly negative, but basically
we get to a deficit of eight hundred thousand tons
this year. And so that's the first time we have such,
you know, such a decline in supply, and that's very
hard to.
Speaker 3 (05:38):
Make it fit.
Speaker 4 (05:39):
So at first you eat into current inventories until you
run out of inventories, and then the price can go anywhere.
So when we look at okay, what makes the price
of coco right? It's always about supply, supply versus demand.
But what has been capping the price between two thousand
and five hundred dollars a ton and three thousand dollars
a ton. It was not demand, because demand it's extremely inelastic.
(06:01):
I mean you can study that historically when you have
a visession or note, when prices go up a lot
or not, I mean demand journally goes up. And that's
because the amount of in dollar terms, that people consuming
cocoa is very small. I mean I did the back
of the enveloped calculation the other day. I meant at
basically ten thousand dollars a ton, even though it's four
(06:23):
times the more recent historical prices, out of a market
of five million tons of demand per year. You know,
you have like eight billion people on the planet. So
in ave wage, it means that people consume one point
seven gramps of coco per day, which at ten thousand
dollars a ton, which isn't one point seven cents per day. Okay,
(06:44):
at the average person, many people eat nothing and a
few eat ten times at a month's.
Speaker 1 (06:49):
Tracy, I was going to say, I can personally attest
that my chocolate demand is very in a last.
Speaker 4 (06:55):
But yeah, but you know, let's say if you eat
even one tablet, right, so one hundred and twenty five
grams a day, every single day for the wood yet,
which is quite a lot, right of a high high
content of real cocoa. Because you know your milk and
milk chocolate you have like less than ten percent coco
in it, So the price can go up ten times.
(07:16):
Your tablet is only a double in price. It's not
going to react very much to the cocoa price. But
if you take a high content, high chocolate content like
a tablet one hundred and twenty five grams, that mean
that you probably have maximum of fifty grams of cocoa
bin s equipment in it.
Speaker 3 (07:34):
I means probably a lot less.
Speaker 4 (07:36):
Then you get to an expense of fourteen dollars per
months at current prices, which is an increase of ten
dollars per months relative to when we had a more
normal price. So it means that demands like four more
reasonable chocolate lovers, that increase in price in cocoa just
corresponds to two to five dollars per months. So people
(07:58):
are not going to eat less chocolate because of So
it means that prices really are are capped by the
amount of supply you get. So if you can't get
enough supply, the price can go up a lot until
we get more supply. And when do we get more supply,
Well that in part due to the weather. If you
have much better weather then you get you might get
a more and more supply of coco bin the next year.
(08:20):
But we have some issues that are also structural. So
when we look at the wisons for this large decline
in production this year, I mean a lot of the
wisons are actually structural. I mean we can look at
four weasons why coco bit production has gone down a
lot this year. I mean, first I should give like
a little bit of background of why cocoa is so
(08:42):
concentrated in West Africa. I mean, it's mainly because it
requires very specific temperature, rainfall, and humidity conditions, and that's
why most of the production is concentrated around a certain latitude.
So seventy percent in West Africa, and then you have
a twenty one percent in Many Latin America and five
percent in Asia and Oceania. So the main reasons why
(09:06):
we lost a lot of productions. This year is number one. Weather,
so some of it due to El Nino. We had
a bili period of time when it was too hot
and period of time when we had way too much rain.
Second is climate change, So climate change is every year
shifting the weather patterns generally unfavorably for coco productions.
Speaker 3 (09:28):
Then you have two disease.
Speaker 4 (09:29):
You have one called the black pot disease that that
come from a fungus and it took hers mainy during
the rainy season. It's spread by brent splash so big
it can't go when it's dry. And then you have
a virus called the Swolen shoot disease. It's not a
new disease. It was discovered in nineteen thirty six. It's
transmitted by millibugs, but it dequisits cocoa yields a lot
(09:53):
so bili. A tree that has that Throlen shoot disease
loses twenty five percent yield within the first year and
fifty percent within two years, and the tree dies within
three to four years. And we've had like actually a
spread of that disease like over the last year. And
then also we had less usage of fertilizers mainly in
(10:13):
Ivory Coast due to high fertilizer prices and also shortages
due to the Russian invasion of Ukraine. So you know,
everything is linked. So some of it might be solved
if we get better weather. I mean for next year,
we should have laminar and not Alninius, so that should
help at the margin, but we still have issued with
climate change. We still have issues with black pot disease
(10:34):
and swollen three disease, and there's no indication that we
get more usage of fertilizers in Ivory Coast because actually
the farmers are still getting relatively low prices and they're
still struggling to make ensmit. So a lot of those
supply issues are actually structural.
Speaker 2 (10:52):
This was already a really fascinating answer in particular just
all that point about how if a commodity just does
not take up more much wallet share, then the then
you know, yes it can go up, but you don't
get that same sort of demand destruction as if it
were really creating a big financial burden on the end consumers.
Something I'm curious about with Coco is, you know, when
(11:13):
I think of like oil, we are just like we're
swimming in data about oil. There are multiple big, well
funded international statistical agencies of the track. You can get
inventory data easily. There's OPEC, there's et cetera. With Coco,
and I'm curious. You know you said your analysts brought
it to your attention in January. In my mind, I
imagine that there is less robust information and it's more scattered,
(11:37):
et cetera. Maybe I'm wrong, but does that present more
opportunities to identify moments where there's something going on in
the market and traders and analysts aren't seeing it.
Speaker 4 (11:47):
You know, we managed to get in us a relevant
data act. You need to understand what's happening. You have
some concertants that are specialized, and if we mount, the
have a team doing surveys of the main producing regions
to understand and then they work on their forecast on
how much the same production will go. So actually you
have some specialists, so actually we get enough data to
(12:08):
understand how.
Speaker 2 (12:09):
So what did your analysts? What did your analysts see
or how is your analyst able to see something in
the supply and demand situation that he felt and you
felt was not being identified by the analyst to cover
this closely?
Speaker 4 (12:24):
I think it's mainly an understanding of how much prices
have to move to balance the market. You know, people
sometimes people can trade that market for like twenty years.
They've been used to a range of prices and they believe, okay,
the top of the range is a high price for apple,
but they don't really ask themselves what makes that price right?
And sometimes taking a step back can help. I mean,
(12:48):
what makes the price is mainly the fact that in
the past you would have a supply repounce if prices
were going up. But if now you get you don't
get the supply repons or the supply response takes four
or five years, then you need to have a demand response.
And a lot of people look at prices in nominal terms.
So you hear people saying, oh, we're at all time
high prices in coco, but that's because they look at
(13:09):
prices in nominal terms. Previous high in nineteen seventy seven
was five five hundred something dollars a ton of nineteen
seventy seven dollars, which is equivalent to twenty eight thousand
dollars a turn of two days dollars. So we're still
very far from previous highs, and so you have to
look at a bit more history and understand in the past,
(13:30):
halgh prices reacted to a shortage, how long it took
to recover to product shortage to actually solve itself, and
what's different today. So there's there's a ratio that we
look at that most people look at. It's actually the
inventory to grinding the ratio, So it's a measure of
inventory to demand. What we call grinding is basically industrial
(13:54):
companies that take the coco bins and they want to
make chocolate with it. So it's a process and some
of them may the hand product chocolate tabacci. Some of
them sell back the product to other chocolate makers, and
so basically a typical grinder would take cocoa bins and
make cocoa butter and powder with it, and the prices
of both those elements also went up even more than
(14:15):
cocoa bins, which means that actually we probably had some
distalking everywhere on the.
Speaker 3 (14:22):
In the chain.
Speaker 4 (14:23):
So it looks like demand when we look at the
chocolate makers, the hand demand for chocolate didn't go down
at all. It looked to be flat on the year.
Grindings look to be down see three and a half
percent this year. Despite the fact that the hand demand
is the same in volume, which means that they've been
distalking cocoa bins actually, and so we had like distalking
(14:43):
everywhere at the hand chocolate level, at the cocoa bins,
at the cocoa butter and cocoa powder level. So we
had this talking everywhere on the chain. And now we
have the largest deficit ever on top of two previous
years of deficit, and you look like next year we
will have a deficit. So we're in a situation where
we might actually run out of invantries completely. I mean,
(15:06):
this year, we think we will end up with an
inventory to grinding ratio, so inventry at the end of
the season of twenty one percent. For the last ten years,
we've been between thirty five and forty percent roughly. At
the previous peak in nineteen seventy seven, we were at
nineteen percent and that's what drove us to twenty eight
(15:27):
thousand dollars a turn of two day's dollars. If we
have another deficit next year, then we might go down
to thirteen percent. So I don't think it's actually possible.
That's when you will have real shortage of cocobine, you
can't get it, and that's when the price can really explode.
And so understanding that you have to slow down demand
and we know that the demand can't will be slowed,
so that's when you can.
Speaker 3 (15:49):
Have an explosion.
Speaker 4 (15:49):
And remember that these commodity futures you need to have,
they're actually physically settled, right, so if somebody wants to
take delivery, they have to converge with the price of
the physical. If you have no physical somebody wants to
take delivery, the price can go anywhere. So it's a
dangerous commodity too short, right, if you have no physical
against it. And actually, you know, sometimes we with knew
(16:11):
that the fonts have been pushing coco prices is actually
completely untrue because the farms have been selling since February.
They actually went from a length of one hundred and
seventy five thousand lots, so that's one point seventy five
million tons of coco lands. I think it was around
like September last year in average or orbitarlier to twenty
(16:35):
eight thousand lost to eighty thousand tons at the moment,
so they sold more than eighty percent of their lands actually,
and the people who've been buying a future from the
fonts its producers because they're producing a lot less than
they expected. So what has been happening in the cocoa
market is that you had a reduction of what we
(16:57):
call the open interest, where both the longs we use
their lands and the shorts we use their shots. And
then we get into a market where you have less
liquidity because you have less exposure.
Speaker 3 (17:08):
You have less longs and less less shorts, and then
the volatidity increases.
Speaker 4 (17:12):
So in the past, when when people were comfortable being
let's say, having a one hundred loss position, now because
it moves more than ten times more than in the past,
we're going to have like a ten lots position, right,
So the market became more due to the fact that
we had a massive move and we have a massive deficit,
so everybody reducing their positions, and because of the increased volatility,
(17:37):
we have less less activity and that's what makes the
point more volatile.
Speaker 1 (17:40):
That way, this is something I find fascinating. So the
way the financial markets sort of interact with the underlying
(18:05):
real commodity and how that ends up influencing price. Given
the dynamics that you just laid out, where because of
you know, structural changes in the market, both in coco
and then also in the way it's traded, This new
volatility making people maybe less inclined to short and leading
(18:25):
to decrease trading volumes. Are you still long Coco in
this environment or have you, like a lot of other people,
backed off at this point.
Speaker 4 (18:35):
Well, you have to be careful about the sizing of
your position because it's something that is clearly less liquid
than the commodities I'm used to, which are you know,
for apple oil or natural gas. So it's a lot
less liquid and in a market like that, it's a
lot more volatile.
Speaker 3 (18:49):
Right. It's not always volatile.
Speaker 4 (18:50):
But when you have a large deficit and low inventory,
it moves a lot. So you have to calibrate your
position to be able to take a fifty percent move
against you on the way right.
Speaker 3 (19:00):
So that's what you have to do.
Speaker 4 (19:01):
It doesn't mean that you have to be out completely,
because I still think that there's more upside than downside.
I think we still have the potential to go above
twenty thousand dollars a turn later this year or next year,
versus on the downside. Maybe we go from if you
look at a December contract. It's at toughly seven thousand
dollars a ton today, maybe we go back down to
five thousand, right, so you have like a two thousand
(19:24):
dollars turn downside versus thirteen to fifteen thousand dollars or
maybe more upside. So it's still worth having some lands,
you know, in terms of probability. But now I mean
it could go down. The probablity that it goes back
down is not zero. But for that you need a
lot of things need to go out. You need like
a bumper crop in West Africa next year, and it
(19:45):
means you need to have the perfect weather in West
Africa from now to the end of the year in
order to have a really good cop for next year.
And it might happen, but it might not happen, right,
You need to get extremely lucky for that to happen.
So I think the balance of probabilities are still that
we will have a deficit next year on top of
(20:06):
the very large deficit this year. We believe we have
eight hundred thousand tons deficit out of five million ton
market size, right, so it's a very large deficit. If
we have the production going back up roughly ten percent
from this year to next year, we still have a
deficit of three hundred thousand turns or so next year.
That brings us to thirteen percent stock to grinding ratio,
(20:31):
which which would be much lower than what we had
in nineteen seventy seven. So we still have I think
a high probability of having much much higher coco prices.
You know, even if they go there, we might have
big drops like we've seen the last months or so
the last two weeks, but we might make new hide
and then have big drops again and then make new
heihs or if over the next four months we realize
(20:54):
that we're going to have from all the surveys we
get every months in Ivory Coast and Ghana that the
crop next will be amazing, then the policies we'd probably
come off from here towards you know, I don't know,
five or six thousand dollars a turn, but they're not
going to go back down right away to two thousand,
five hundred dollars a ton because we need We have
(21:15):
very low inventories, so we need to rebuild stocks everywhere
in the supply chain.
Speaker 2 (21:21):
These inventories. So you've been talking about the stock inventory,
the grinding ratio or the stocks to grinding ratio within
the sort of cocoa or chocolate supply chain. Who are
the holders of the stocks and how do you get there?
Like how is that data collected?
Speaker 4 (21:36):
So basically you have the exchange. So first you have
exchange stocks, so we have weekly data in European exchanges
and the US exchanges. So in the US NAPPLE everything's
held on exchange pretty much, so everything in exchange. In
Europe only twenty percent of the the inventories on exchange.
Twenty percent of the European stocks are on exchange. The
(21:59):
others are really with with chocolate makers or that they
need to hold stocks directly to make the chocolate. And
then you have then you have some also obviously at
the producing regions. So and that's something that we can
see the inventories at the port in Ivory Coast and Ghana,
so the main exporters. You can actually follow the amount
(22:22):
in inventory there and then the West. What we don't
know is inferred statistically, right, so there's a bit of
noise in what that that total amount of inventory would be.
But you have some some firm that has specialized in
it that will come up with an estimate of the number,
So they'll they'll do some surveys, they'll they'll, they'll they'll
do some cost validation to make sure that the numbers
(22:43):
at are at the end.
Speaker 1 (22:44):
Out of curiosity and just widening this out to a
few other commodities, have you observed any similar dynamics in
something like coffee, which has been getting a lot of
attention recently, or orange juice. I ran into some guy
called Mortimer who was telling me that Brazil is supposed
to have a bad harvest this year.
Speaker 3 (23:04):
That's possible.
Speaker 4 (23:04):
I haven't followed orange juice. I mean, we looked at
coffee quickly. It looked less. It looked interesting as well,
because you get big losses in production from Vietnam. But
we didn't look We didn't see from far something that
was so exciting, so we didn't try it.
Speaker 3 (23:22):
Orange juice, we haven't.
Speaker 4 (23:23):
I don't know, but I would say that generally the
shift in weather patterns due to climate change are going
to bring some structural stories into soft commodities, and so we'll.
Speaker 3 (23:35):
Have to look.
Speaker 4 (23:37):
At more and more of the soft commodities because it's
not only going to be from one year to another.
You're going to have like that everything could change due
to random change in weather.
Speaker 3 (23:45):
You have this underlying climate change that.
Speaker 4 (23:48):
It's also a trend that really impact production of the time,
and so we have to identify the communities that will
be impacted by that.
Speaker 2 (23:57):
Tell to us a little bit more about Obviously we've
had you on in the past primarily talk about oil
and as you mentioned in the beginning, entering and you're
not you don't trade egg as much. There's sort of
a different space for you other than the size of
the market. And I guess you know, as you mentioned,
it's all physical delivery futures. What are the other dynamics
(24:17):
that are different when you go from trading a commodity
like oil, which is gigantic and liquid, to a commodity
like cocoa.
Speaker 4 (24:26):
Well, you have to follow the I mean cocoa I
think is less complicated than the grains because in the grains,
your weather can impact productions so quickly. But sus for cocoa,
it does impact production, but it takes you five years
to you know, when you plant a cocoa tree for
I mean three to five years for that coco tree
(24:46):
to give you cocoa beans. This is for grains, you
get it right away, so you get like a slower
production responsor. It should be when you have a big
supply issue and that you have issues due to climate change,
you should have like a.
Speaker 3 (24:59):
Large move than four coins.
Speaker 4 (25:01):
So it should make it easier in a way to
have a positions that you can hold for longer that
are a bit more structural.
Speaker 3 (25:11):
Than four coins. I would say that's my understanding at
least for now. And there's enough data too.
Speaker 4 (25:16):
I mean enough data meaning like if we we get
like a bit more more data on how the new
crops are doing many many in iboricos and cana to
have a good understanding of what the crop will be,
the production will be the following year. So I feel
like we have enough data to understand in which direction
(25:38):
we're going. Versus the grains, I feel like the grains
can they move up and down a lot?
Speaker 3 (25:43):
Then you can't. It's more complicated.
Speaker 4 (25:45):
You have to look at a lot of like tiny
details versus coco where you have many one mega major
producer and another very large one.
Speaker 1 (25:55):
Speaking of climate change, can we talk a little bit
about copper, because this is all so a commodity where
I feel like there was a lot of discussion about
it being in structural short supply as the world moves
towards electrification. But then over the past couple of years
prices went down, I guess because of concerns over the
outlook for economic growth, and just relatively recently so starting
(26:20):
sort of February of this year, prices are going up again.
What's your thesis when it comes to copper.
Speaker 4 (26:27):
I think coppers should go up a lot Bleakly. We
are going from biky Over the last let's say fifteen
twenty years, we were in a market where demand was
going about half a million turn a year and supply
was going half a million ton a year in average. Right,
if you look at long term averages, it was over
time a balance market. We had times where it was tight,
(26:50):
times where it was in a bit of a surplus,
many during the pandemic or during financial crisis, but overall
it was a balance market. Now, due to the energy transition,
we're obviously as we have to electrify the world, we
have new demand from electrification of transport, so it means
that not only to make the electric vehicles, but also
(27:15):
to supply more electricity.
Speaker 3 (27:16):
Overall in the world.
Speaker 4 (27:19):
For that energy transition, so you have to work on
the grid to have more renewable and renewables take a
lot more copper than like nuclear plants or like fossil
fuel generated electricity, so like solar panels and windmills take
a lot more copper. And also all the data centers
take a lot of copper. So we have that third
in power demand that we need a lot of copper.
(27:41):
And we're getting into a market where despite the fact
that the Chinese property market will be much weaker than
the last fifteen years in terms of growth, and we're
seeing decline in the property in the copper demand in
China for the fourthingble future, despite that, we see a
market in which we're have overall one million tons of
(28:02):
demand perier roughly of demand increased per year, and the
supply goes basically by the end of next year will
be zero to negative. So we think that in terms
of mining supply, we're picking in about a year like
twelve to eighteen.
Speaker 3 (28:18):
Months, and then we flatten and then we go down.
Speaker 4 (28:21):
So best case scenario, you get like a million tons
increasing demand against no increasing supply, so you get larger
and larger deficit deficit every year and the price hasn't
reacted yet, and that's mainly because I think there's not
enough fonts at the or companies that actually trade the
(28:41):
future's market and all positions for very long. I mean,
if you look at most of the hedgephones out there,
it's a bunch of leg pots that have.
Speaker 3 (28:49):
Very many, many.
Speaker 4 (28:50):
Teams in those big multi strategy fonts that have very
tight drawdowns, so they tend to try to trade for
the next few days or next week or so. They
count really positions for very long, and there's not a
lot of companies that can hold positions, so because the
market is not really doing its job to actually give
a price signal to solve that deficit, that upcoming deficit,
(29:11):
that's a multi year deficit. Basically, it takes, you know,
to grow supply in copper. I mean, if you bring
a new mind, is like more than ten years to
bring its like ten to fifteen years to bring a
new mind.
Speaker 3 (29:22):
And everything has been relatively well explored.
Speaker 4 (29:25):
So now the supply growth from copper is coming from
more and more dangerous countries as well, like less and
less stable countries, So you don't get that quick supply
response in copper, but the demand is now and the
demand is growing. I mean, we're going to build that
electric grid, and we're going to build all these EVAs
and also that data center. They're going to be built
(29:46):
at whatever the cost of copper. And remember that the
price of copper is a very small percentage of the
price of the end product, right, So if copper goes
up ten times, I mean your m product will go
up a little bit. It's not good to double in price.
So if you need to have a demand response, mainly
when the world is kind of obligated to go through
(30:07):
that through that energy position, then we should get to
really really large price move.
Speaker 3 (30:14):
So I think there's a long long way to go
for copper.
Speaker 2 (30:18):
I'm interested in this because you know, we have seen
this bit of a copper rally, though we're not even
I don't even think we're quite at the twenty twenty
one highs. But it's interesting. I'd love to hear you
explain further about the connection between Okay, any any fool
can look at supply and demand and say, there's this
much demand for copper out there, there's this much supply
(30:41):
coming online, there's going to be a deficit. That seems bullish,
how do you take that analysis and or take that
starting premise and then think about what does a fair
price look like? And so as opposed to just saying yeah,
this is there's more demand that supply. How do you
get to like a number that in your view or
in your analyst view, looks like a number that might
(31:01):
bring supply and demand into balance.
Speaker 4 (31:04):
I mean it's going to be you know, I don't
think it's just a price. It's like the whole path
is important, I think. So we look at it year
by yea, so we think, okay, at current prices, what
would be the supply and demand balance to current prices
have an impact on demand goes or not? Or what
is the state of the global economy. What kind of
you know, demand goes do we expect for copper and
(31:26):
what is the supply goes?
Speaker 3 (31:27):
I mean, supply goes.
Speaker 4 (31:29):
Is not going to be too dependent on copper prices
for the first few years. I mean a little bit
to scrap. You get a bit more crap scrap metals
when prices go up, so you can model for that.
When prices go up, you get more crap supply that
that comes as a source of supply for copper.
Speaker 3 (31:47):
And then the demand.
Speaker 4 (31:48):
We look at, okay, what can be priced and city
what can be pushed too later or not? It's not
that much to be honest, And then we get to
a path for the demand. And then we look at, okay,
what is what do we think the supplant demand balance.
Speaker 3 (32:01):
Look looks like every year.
Speaker 4 (32:03):
So for Apple this year, at current pri set, we
think we're going to get about like four hundred to
five hundred thousand tons deficit, and we had less than
that in terms of visible stocks at the beginning of
the year, so it means that we could actually run
out of visible inventories by the end.
Speaker 3 (32:18):
Of the year.
Speaker 4 (32:19):
Now there is some extra inventories, mainly the strategic reserve,
what we call the SRB in China, but if they
know that we're going to we're at the beginning of
a multi year deficit, they're not going to sell their
strategy reserve in the first year. So then we look
at the following year. We think for next year, we
also have half a million ton deficit, and actually we
can't cover that with a level of inventory, so we
(32:40):
need and then assuming we had enough inventory, we go
to in twenty twenty six to invent like deficit that
are more than a million tons and eventually more than
three million tons in twenty thirty, and that obviously those
deficits accumulate and we don't have enough inventries to actually
you know, go through.
Speaker 3 (32:59):
The first year.
Speaker 4 (32:59):
So it means that we're going to have really large
pricing is sooner than later to slow demand, and I
don't know how much it would have to go by. Yeah,
So basically on copper, what I mean that we're going
to have to have nonel in our move sooner than
later because of the large deficit we think we're going
to have this year and if not this year, next year,
(33:21):
and we don't have enough inventories to meet that deficit.
So we need to slow down demand relatively fast. And
we think that demand is also very in elastic due
to the fact that the price of copper as a
percentage of the end product is very low, and we
need to go through the energy transition regardless of the
price almost so I think that's why prices can move
(33:44):
a lot for copper. So at the end, like we
don't know exactly how high they can go to we
go to I think they could go up four times
over five year five year horizon. But does it mean
that we go up from ten thousand to fifteen thousand
this year and then twenty two thousand next year. I
don't know, but I think that the kind of twice
moves that I'm expecting, you know, like this that multiple
(34:06):
in twice, not to twenty percent increase. The twenty percent
increase doesn't change anything to your suppreme demand balance on
a two to three highs.
Speaker 1 (34:30):
So Joe asked you how you come up with the
price thesis for something like copper and how you see
it play out. And you know, we're mostly focusing on
time scales there, but there was one commodity that I
wanted to ask you a similar question on which is oil.
And oil it feels to me is facing a very
(34:51):
uncertain year in many respects. We have the upcoming US
presidential election, and it feels like things could go in
very different paths depending on whether Trump or Biden get
the presidency. Not necessarily in terms of US oil production,
which is already quite high and I think has surprised
(35:11):
a number of people, including possibly yourself, but maybe in
terms of things like the response from OPEC or what
happens with Russia Ukraine can you walk us through how
you in such an uncertain moment, how you even begin
to come up with a short term thesis for the
price of oil over the next year or so.
Speaker 4 (35:32):
Yeah, So when you look at all the potential supply
disruption that we could have had at the end of thing,
we didn't get any supply disruption. So if you look
at in twenty twenty to twenty twenty three, we're all
expecting to see at least some decline in the Russian
production due to sanctions, so due to issue within Russia,
and at the end, there was no supply responsor at all.
Speaker 3 (35:55):
I mean, there was no subplate disuption.
Speaker 4 (35:57):
Last year in twenty twenty three, we've got to sell
in Iranian exports due to the fact that the sanctions
on Iran were not really.
Speaker 3 (36:05):
Enforced, I would say.
Speaker 4 (36:07):
So we had relative to expectations, we ended up having
like a lot more Russian production and Iranian production. And
also last year US supply grew up more than expected
for the beginning of the month of the year. So
for the last four months, for five months four months,
I would say US production has been disappointing. So it's
(36:27):
been a bit lower than people expected. And that the
first time in a long time. Obviously, four months is
not enough to grow a trend, but it's something to
watch out for. I mean, is US shel production about
to peak or not.
Speaker 3 (36:40):
We don't know. We'll only know it.
Speaker 4 (36:41):
After the fact, But so far it looks like US
production is actually not growing too much, I mean, or
at least over the last four months. With the tensions
in the Middle East. In terms of what scenario we
could have to really lose supply, I would say it's
only if we get an attack on Iranian oil facilities,
(37:02):
but I don't think the US would want that, so
I don't think Israel would do it, because if they
were to do it, then the Uranians would probably try
to blow at the Saudi facilities or close the straight
of Hormoved and then we.
Speaker 3 (37:13):
Get into really huge toppled disruption.
Speaker 4 (37:16):
But it's a low probability event, right, It's very unlikely,
but it's not impossible. But if the conflict stays between
Israel and Gaza, I mean, there's no oil there, it
has no impact at all all supply. So where we
could have supply disruptions is coming from the Ukrainian attacks
on Russian oil infrastructure, and when you look at what
(37:37):
they've been doing for the last six months, they have
many attacks Russian behind with and that's really to try
to hurt the war reforts in Russia in the SPS,
not actually with it so much financially, it's more for
them to not have the white amount of fuel to
make enough rockets and all that, and for the Russian
people to feel like they're also there's something going on,
(38:00):
and it's not just in a sub a whyland, But
the Ukrainioans have not attacked pipelines and ports yet. I
think if they really wanted to impact the revenues of Russia,
they should attack the ports and the pipelines, bringing Frudel
to the port and keep on blowing up pipeline and
then that would really have a big impact in the
(38:20):
revenue that Russia would get. But that would also have
an impact on all places. And the US don't want
to have millions in an election year. They don't want
to have the Biden adiministration is very very paranoid about
having high gasoline prices before the election. So they're putting
pressure on the Ukrainians to not attacks, to not attack ports.
But if we get into a situation where the Ukrainians
(38:41):
become more desperate I need.
Speaker 3 (38:44):
More help than they might attack ports.
Speaker 4 (38:45):
So that's where we could potentially have supplied disruptions.
Speaker 3 (38:49):
In terms of yes, sorry, I just.
Speaker 2 (38:51):
Real quickly, how much do you think that pressure from
the ADMIN not to attack oil infrastructure is hampering the
war effort for you?
Speaker 3 (39:00):
Right?
Speaker 4 (39:01):
Well, at the end of the day, like if that
no help from the US, they would attack the old
facilities in Russia. But the fact that depending on US
weapons obviously they have to, right, you know, to listen
to what the US say. I mean as far as
they're helping. If the US stop helping, then of course
they will they will go. They will go for the
old facilities.
Speaker 3 (39:17):
I think.
Speaker 4 (39:20):
And in terms of the elections, you're asking, like Trump
versus Biden, does it change anything for oil? I mean,
I think it's quite marginal or nothing, I would say
for US supply because despite all the talks, US productions
searched under Biden, So I don't think that Trump would
make it search more. I mean, it's just a question
of geology and money. Actually, more than anything, I think
(39:42):
we can't be too far from peak in US productions.
Speaker 3 (39:45):
So you know, I don't think the.
Speaker 4 (39:48):
US supply grows as the potential of many millions of
barrels the extra So I think I think it's quite
marginal for US production. But where there could be a
bit of an impact for oil would I would expect
Trump to and force the sanctions on Iran more Titi,
so we might lose some oil from Iran, and that's
(40:08):
but again that we probably get a bit more oil
from the Saudist So.
Speaker 3 (40:12):
I'm not sure. I don't think.
Speaker 4 (40:13):
I don't think Trump versus Biden have a big impact
on oil prices.
Speaker 1 (40:18):
All right, Well, Pierre, we're going to leave it there.
Thank you so much for coming back on all lots
and walking us through all these various soft commodities and
oil as well. Really appreciate you coming back on pleasure.
Speaker 3 (40:30):
Thanks very much, thanksolling you opportunity.
Speaker 2 (40:32):
Thank you Joe.
Speaker 1 (40:47):
That was super interesting. I really liked hearing someone's conception
of the cocoa market when they haven't necessarily been in
it that much, and like how they formed that thesis
and decided to actually put on the trade totally.
Speaker 2 (41:02):
I thought that was fascinating. I mean just hearing him
like walk through all of the different factors, whether it's
climate change, whether the two diseases.
Speaker 1 (41:11):
Fertilizer was one that I hadn't heard that much about.
Speaker 2 (41:14):
Before totally, but makes total sense. Like when you think
about it, and when he brings it up, some of
the metrics he looks at. I'm also interested in just
this point, which is obvious, but I hadn't really thought
about it, that you could have a quadrupling in the
price of cocoa, and even if that translates into a
quadrupling of the price of a cocoa bar or a
chuckolate bar that you buy that in a commodity that
(41:37):
ultimately is just not that big of a monthly expense
or weekly expense for people, you might not get much
of a demand response. If you had a quadrupling of
the gasoline prices, you might expect carpooling or people to
take less trips or you know whatever, or subway rides.
You're just not going to get that same effect the market.
Speaker 3 (41:55):
That's small.
Speaker 1 (41:55):
Yeah, and it was kind of interesting to hear a
similar dynamic in copper as well.
Speaker 3 (42:00):
Well.
Speaker 1 (42:00):
The one other thing I was thinking about, just to
push the an inelasticity point a little bit more, I
wonder sometimes if all the headlines about cocoa prices going up,
if everyone rushes out to buy chocolate in the same
way I do, maybe you get like even a bit
of a demand boost in those scenarios.
Speaker 2 (42:18):
Or a bullwhip, right, because then everyone buys it, and
then they're pulling demand from the future. And also whatever
you have in your pantry, Tracy, is probably you know,
it's it's hidden inventory, right, Like the statistical agencies can't
see into that, so then there's more cut. Who knows
whether that's an but it is a It is an
interesting question.
Speaker 1 (42:36):
Yeah, no one knows about my strategic chocolate reserve, Tracy.
Speaker 2 (42:39):
And I never tell you about the time that I
was at the top of the Patronas towers in a
nightclub and I talked to a palm oil magnate.
Speaker 1 (42:47):
Yes, yes, you have in Malaysia, right, yeah.
Speaker 2 (42:49):
Yeah, Malaysia.
Speaker 3 (42:50):
Yeah.
Speaker 2 (42:50):
But it was It's interesting too because he was talking
about the fact that, like palm oil is a tree
based commodity, obviously, and he was describing very different market
dynamics versus a field based crop, in which a field
based crop you just have one person on a tractor,
are combine to the whole field, the labor intensivity, the
difficulty of automation when it comes to a tree based
(43:11):
commodity versus field based commodity. There aren't many robots that
can climb trees yet as far as I know. So
it's interesting think about the market structure of some of
these different commodities and how different they are just depending
on the growing conditions, how labor intensive, how prone they
are to automation scale, et cetera.
Speaker 3 (43:29):
Things like that.
Speaker 1 (43:29):
We should have asked Pierre about palm oil.
Speaker 2 (43:31):
We'll have to have them back for that.
Speaker 1 (43:32):
Yeah, all right, shall we leave it there.
Speaker 2 (43:34):
Let's leave it there.
Speaker 1 (43:35):
This has been another episode of the Oudlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (43:40):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our guest Pierre on Durant. He's at on Duran Pierre.
Follow our producers Kerman Rodriguez at Kerman Ermann dash Ol
Bennett at Dashbot, and Kilbrooks at Kilbrooks. Thank you to
our producer Moses on Them. For more Oddlots content, go
to Bloomberg dot com slash odd Lots, where we have
transcripts of lag and a newsletter, and you can chat
(44:02):
about all of these topics twenty four to seven in
the discord with fellow listeners Discord dot gg, slash outlock.
Speaker 1 (44:08):
And if you enjoy Odd Lots, if you like it
when we do deep dives into the price of Coco
and the way the market works, then please leave us
a positive review on your favorite podcast platform. And remember,
if you are a Bloomberg subscriber, you can listen to
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(44:28):
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without ads. Thanks for listening.
Speaker 3 (45:00):
No
Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to
another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 2 (00:24):
And I'm Joe Wisenthal.
Speaker 1 (00:26):
Joe, can I tell you something. It's slightly embarrassing.
Speaker 2 (00:30):
This could field many things that but go on.
Speaker 1 (00:33):
Okay, So I had a self realization the other day.
I think I might have prepper tendencies.
Speaker 3 (00:40):
I didn't know that.
Speaker 2 (00:41):
But that doesn't totally surprise.
Speaker 3 (00:43):
Like.
Speaker 1 (00:45):
You're like, yes, you're a paranoid. This makes total So
the reason I had this realization we recorded an episode
recently on the big surge in cocoa prices, and a
few days after that episode came out, I was like, hmm,
I should buy some chocolate just in case. So I
went on Amazon and I bought like an industrial size
(01:06):
package of milk chocolate. And I was like, I'll just
keep it in the pantry. It'll be really convenient. It'll
be there for emergencies. I'm sure I won't eat it
at like ten PM when I'm craving something sweet. I'll
just keep it there for a long time. And so
I ordered it, and then you know what happened.
Speaker 2 (01:24):
Tell me the rest.
Speaker 1 (01:25):
Okay, So, The first thing that happened was I never
got the chocolate, which is kind of weird for Amazon,
like they just never fulfilled the order, and the supplier
was like, oops, we don't have enough chocolate, I guess.
But then secondly, as soon as I did it, prices
of cocoa started falling.
Speaker 2 (01:41):
This was the market saving you from a bad trade basically,
And so you put in an order right at the top.
You know, sometimes you need a little luck in life,
and now you can buy the dip.
Speaker 1 (01:51):
That's right. I was fully refunded at the top of
the market, and now I can buy it when it's
slightly more reasonable. But I have to say, I'm looking
at the chart of cocoa futures right now. So they
searched above eleven thousand, and then they came back down.
Let's see, we're about eight thousand, yeah, right now. So
it's been something of a roller coaster ride. And the
(02:12):
thing that I don't really understand is when I look
at coverage of the cocoa market at the moment, there
seems to be consensus that supply is going to be
an issue. So I know, Bloomberg published a survey of
traders where basically everyone was saying that they think prices
are going to go higher. Yeah, we could see over
fifteen thousand dollars later this year, but in the meantime
(02:36):
prices are sliding. So there seems to be a disconnect
there totally.
Speaker 2 (02:40):
Well, look, I mean, even if the fundamentals are say, okay,
this market is in deficit or you know, all these
growing conditions, like at some point, as they say, you know,
trees don't grow to the moon or trees to the sky,
to the sky, whatever it is, so at some point
like you can have like solid bullish fundamentals in the price.
I mean, it really is crazy because last you know, December,
we were looking at four thousand, so we're still you know,
(03:03):
double so far this year.
Speaker 1 (03:04):
Yeah, well, I have to say we do, in fact
have the perfect guest. We're going to be speaking to
someone who timed the big cocoa trade a lot better
than I did personally in my pantry. But we're going
to be speaking with Pierre on durand he is of
course the founder of on Duran Capital Management. We're going
to talk cocoa and a bunch of other commodities. So Pierre,
(03:25):
thank you so much for coming back. On all thoughts.
Speaker 3 (03:27):
Hi, thanks very much my pleasure.
Speaker 1 (03:29):
So maybe to begin with talk to us about how
you got interested in Coco, because my understanding is you
put a big trade on a long position earlier this year.
It paid off massively, But this isn't a sort of
normal type of trade for you. This is something that
was a little bit different.
Speaker 3 (03:48):
Yes.
Speaker 4 (03:49):
Well, generally my background is more in energy trading, but
I've traded quite a bit of metals as well a
little bit of agricultural products. But I have one and
thatst was very good and told me generally, per you
should look at Cocoas I'm like, okay, I don't know
anything about it, tell me, And it gave me a
really good presentation that was really interesting. So then we
really digged in really deep together to really understand the
(04:12):
fundancials market. And basically we have a massive supply shortage
this year. I mean we see production down seventeen percent
relative to last year. Most analysts out there have it
down eleven percent, but that's because they tend to be
very conservative. They have a lot of clients and they
don't want to worry the world, so they commu relatively
conservative estimates. But really tracking the exports from the main exporters,
(04:38):
many ivory coasts and Ghana that we put them together
about sixty percent of worlds production. We see basically ivory
cost exports down thirty percent here to date I mean
seedon to date and down forty one percent. So just
those two countries together since the start of the season,
which is the first of October, are down eight hundred
(05:00):
thousand tons.
Speaker 3 (05:01):
And now we have the what.
Speaker 4 (05:03):
You call the mild crop that is starting, but that
we present only twenty percent of the balance of the
season for West Africa and that's not going to be
enough to really change the deficit that we have this year.
Speaker 3 (05:18):
So we have a deficit of eight.
Speaker 4 (05:19):
Hundred thousand tons from those two countries, and then looking
at all the other countries we have, I think the
some are slightly positive, some are slightly negative, but basically
we get to a deficit of eight hundred thousand tons
this year. And so that's the first time we have such,
you know, such a decline in supply, and that's very
hard to.
Speaker 3 (05:38):
Make it fit.
Speaker 4 (05:39):
So at first you eat into current inventories until you
run out of inventories, and then the price can go anywhere.
So when we look at okay, what makes the price
of coco right? It's always about supply, supply versus demand.
But what has been capping the price between two thousand
and five hundred dollars a ton and three thousand dollars
a ton. It was not demand, because demand it's extremely inelastic.
(06:01):
I mean you can study that historically when you have
a visession or note, when prices go up a lot
or not, I mean demand journally goes up. And that's
because the amount of in dollar terms, that people consuming
cocoa is very small. I mean I did the back
of the enveloped calculation the other day. I meant at
basically ten thousand dollars a ton, even though it's four
(06:23):
times the more recent historical prices, out of a market
of five million tons of demand per year. You know,
you have like eight billion people on the planet. So
in ave wage, it means that people consume one point
seven gramps of coco per day, which at ten thousand
dollars a ton, which isn't one point seven cents per day. Okay,
(06:44):
at the average person, many people eat nothing and a
few eat ten times at a month's.
Speaker 1 (06:49):
Tracy, I was going to say, I can personally attest
that my chocolate demand is very in a last.
Speaker 4 (06:55):
But yeah, but you know, let's say if you eat
even one tablet, right, so one hundred and twenty five
grams a day, every single day for the wood yet,
which is quite a lot, right of a high high
content of real cocoa. Because you know your milk and
milk chocolate you have like less than ten percent coco
in it, So the price can go up ten times.
(07:16):
Your tablet is only a double in price. It's not
going to react very much to the cocoa price. But
if you take a high content, high chocolate content like
a tablet one hundred and twenty five grams, that mean
that you probably have maximum of fifty grams of cocoa
bin s equipment in it.
Speaker 3 (07:34):
I means probably a lot less.
Speaker 4 (07:36):
Then you get to an expense of fourteen dollars per
months at current prices, which is an increase of ten
dollars per months relative to when we had a more
normal price. So it means that demands like four more
reasonable chocolate lovers, that increase in price in cocoa just
corresponds to two to five dollars per months. So people
(07:58):
are not going to eat less chocolate because of So
it means that prices really are are capped by the
amount of supply you get. So if you can't get
enough supply, the price can go up a lot until
we get more supply. And when do we get more supply,
Well that in part due to the weather. If you
have much better weather then you get you might get
a more and more supply of coco bin the next year.
(08:20):
But we have some issues that are also structural. So
when we look at the wisons for this large decline
in production this year, I mean a lot of the
wisons are actually structural. I mean we can look at
four weasons why coco bit production has gone down a
lot this year. I mean, first I should give like
a little bit of background of why cocoa is so
(08:42):
concentrated in West Africa. I mean, it's mainly because it
requires very specific temperature, rainfall, and humidity conditions, and that's
why most of the production is concentrated around a certain latitude.
So seventy percent in West Africa, and then you have
a twenty one percent in Many Latin America and five
percent in Asia and Oceania. So the main reasons why
(09:06):
we lost a lot of productions. This year is number one. Weather,
so some of it due to El Nino. We had
a bili period of time when it was too hot
and period of time when we had way too much rain.
Second is climate change, So climate change is every year
shifting the weather patterns generally unfavorably for coco productions.
Speaker 3 (09:28):
Then you have two disease.
Speaker 4 (09:29):
You have one called the black pot disease that that
come from a fungus and it took hers mainy during
the rainy season. It's spread by brent splash so big
it can't go when it's dry. And then you have
a virus called the Swolen shoot disease. It's not a
new disease. It was discovered in nineteen thirty six. It's
transmitted by millibugs, but it dequisits cocoa yields a lot
(09:53):
so bili. A tree that has that Throlen shoot disease
loses twenty five percent yield within the first year and
fifty percent within two years, and the tree dies within
three to four years. And we've had like actually a
spread of that disease like over the last year. And
then also we had less usage of fertilizers mainly in
(10:13):
Ivory Coast due to high fertilizer prices and also shortages
due to the Russian invasion of Ukraine. So you know,
everything is linked. So some of it might be solved
if we get better weather. I mean for next year,
we should have laminar and not Alninius, so that should
help at the margin, but we still have issued with
climate change. We still have issues with black pot disease
(10:34):
and swollen three disease, and there's no indication that we
get more usage of fertilizers in Ivory Coast because actually
the farmers are still getting relatively low prices and they're
still struggling to make ensmit. So a lot of those
supply issues are actually structural.
Speaker 2 (10:52):
This was already a really fascinating answer in particular just
all that point about how if a commodity just does
not take up more much wallet share, then the then
you know, yes it can go up, but you don't
get that same sort of demand destruction as if it
were really creating a big financial burden on the end consumers.
Something I'm curious about with Coco is, you know, when
(11:13):
I think of like oil, we are just like we're
swimming in data about oil. There are multiple big, well
funded international statistical agencies of the track. You can get
inventory data easily. There's OPEC, there's et cetera. With Coco,
and I'm curious. You know you said your analysts brought
it to your attention in January. In my mind, I
imagine that there is less robust information and it's more scattered,
(11:37):
et cetera. Maybe I'm wrong, but does that present more
opportunities to identify moments where there's something going on in
the market and traders and analysts aren't seeing it.
Speaker 4 (11:47):
You know, we managed to get in us a relevant
data act. You need to understand what's happening. You have
some concertants that are specialized, and if we mount, the
have a team doing surveys of the main producing regions
to understand and then they work on their forecast on
how much the same production will go. So actually you
have some specialists, so actually we get enough data to
(12:08):
understand how.
Speaker 2 (12:09):
So what did your analysts? What did your analysts see
or how is your analyst able to see something in
the supply and demand situation that he felt and you
felt was not being identified by the analyst to cover
this closely?
Speaker 4 (12:24):
I think it's mainly an understanding of how much prices
have to move to balance the market. You know, people
sometimes people can trade that market for like twenty years.
They've been used to a range of prices and they believe, okay,
the top of the range is a high price for apple,
but they don't really ask themselves what makes that price right?
And sometimes taking a step back can help. I mean,
(12:48):
what makes the price is mainly the fact that in
the past you would have a supply repounce if prices
were going up. But if now you get you don't
get the supply repons or the supply response takes four
or five years, then you need to have a demand response.
And a lot of people look at prices in nominal terms.
So you hear people saying, oh, we're at all time
high prices in coco, but that's because they look at
(13:09):
prices in nominal terms. Previous high in nineteen seventy seven
was five five hundred something dollars a ton of nineteen
seventy seven dollars, which is equivalent to twenty eight thousand
dollars a turn of two days dollars. So we're still
very far from previous highs, and so you have to
look at a bit more history and understand in the past,
(13:30):
halgh prices reacted to a shortage, how long it took
to recover to product shortage to actually solve itself, and
what's different today. So there's there's a ratio that we
look at that most people look at. It's actually the
inventory to grinding the ratio, So it's a measure of
inventory to demand. What we call grinding is basically industrial
(13:54):
companies that take the coco bins and they want to
make chocolate with it. So it's a process and some
of them may the hand product chocolate tabacci. Some of
them sell back the product to other chocolate makers, and
so basically a typical grinder would take cocoa bins and
make cocoa butter and powder with it, and the prices
of both those elements also went up even more than
(14:15):
cocoa bins, which means that actually we probably had some
distalking everywhere on the.
Speaker 3 (14:22):
In the chain.
Speaker 4 (14:23):
So it looks like demand when we look at the
chocolate makers, the hand demand for chocolate didn't go down
at all. It looked to be flat on the year.
Grindings look to be down see three and a half
percent this year. Despite the fact that the hand demand
is the same in volume, which means that they've been
distalking cocoa bins actually, and so we had like distalking
(14:43):
everywhere at the hand chocolate level, at the cocoa bins,
at the cocoa butter and cocoa powder level. So we
had this talking everywhere on the chain. And now we
have the largest deficit ever on top of two previous
years of deficit, and you look like next year we
will have a deficit. So we're in a situation where
we might actually run out of invantries completely. I mean,
(15:06):
this year, we think we will end up with an
inventory to grinding ratio, so inventry at the end of
the season of twenty one percent. For the last ten years,
we've been between thirty five and forty percent roughly. At
the previous peak in nineteen seventy seven, we were at
nineteen percent and that's what drove us to twenty eight
(15:27):
thousand dollars a turn of two day's dollars. If we
have another deficit next year, then we might go down
to thirteen percent. So I don't think it's actually possible.
That's when you will have real shortage of cocobine, you
can't get it, and that's when the price can really explode.
And so understanding that you have to slow down demand
and we know that the demand can't will be slowed,
so that's when you can.
Speaker 3 (15:49):
Have an explosion.
Speaker 4 (15:49):
And remember that these commodity futures you need to have,
they're actually physically settled, right, so if somebody wants to
take delivery, they have to converge with the price of
the physical. If you have no physical somebody wants to
take delivery, the price can go anywhere. So it's a
dangerous commodity too short, right, if you have no physical
against it. And actually, you know, sometimes we with knew
(16:11):
that the fonts have been pushing coco prices is actually
completely untrue because the farms have been selling since February.
They actually went from a length of one hundred and
seventy five thousand lots, so that's one point seventy five
million tons of coco lands. I think it was around
like September last year in average or orbitarlier to twenty
(16:35):
eight thousand lost to eighty thousand tons at the moment,
so they sold more than eighty percent of their lands actually,
and the people who've been buying a future from the
fonts its producers because they're producing a lot less than
they expected. So what has been happening in the cocoa
market is that you had a reduction of what we
(16:57):
call the open interest, where both the longs we use
their lands and the shorts we use their shots. And
then we get into a market where you have less
liquidity because you have less exposure.
Speaker 3 (17:08):
You have less longs and less less shorts, and then
the volatidity increases.
Speaker 4 (17:12):
So in the past, when when people were comfortable being
let's say, having a one hundred loss position, now because
it moves more than ten times more than in the past,
we're going to have like a ten lots position, right,
So the market became more due to the fact that
we had a massive move and we have a massive deficit,
so everybody reducing their positions, and because of the increased volatility,
(17:37):
we have less less activity and that's what makes the
point more volatile.
Speaker 1 (17:40):
That way, this is something I find fascinating. So the
way the financial markets sort of interact with the underlying
(18:05):
real commodity and how that ends up influencing price. Given
the dynamics that you just laid out, where because of
you know, structural changes in the market, both in coco
and then also in the way it's traded, This new
volatility making people maybe less inclined to short and leading
(18:25):
to decrease trading volumes. Are you still long Coco in
this environment or have you, like a lot of other people,
backed off at this point.
Speaker 4 (18:35):
Well, you have to be careful about the sizing of
your position because it's something that is clearly less liquid
than the commodities I'm used to, which are you know,
for apple oil or natural gas. So it's a lot
less liquid and in a market like that, it's a
lot more volatile.
Speaker 3 (18:49):
Right. It's not always volatile.
Speaker 4 (18:50):
But when you have a large deficit and low inventory,
it moves a lot. So you have to calibrate your
position to be able to take a fifty percent move
against you on the way right.
Speaker 3 (19:00):
So that's what you have to do.
Speaker 4 (19:01):
It doesn't mean that you have to be out completely,
because I still think that there's more upside than downside.
I think we still have the potential to go above
twenty thousand dollars a turn later this year or next year,
versus on the downside. Maybe we go from if you
look at a December contract. It's at toughly seven thousand
dollars a ton today, maybe we go back down to
five thousand, right, so you have like a two thousand
(19:24):
dollars turn downside versus thirteen to fifteen thousand dollars or
maybe more upside. So it's still worth having some lands,
you know, in terms of probability. But now I mean
it could go down. The probablity that it goes back
down is not zero. But for that you need a
lot of things need to go out. You need like
a bumper crop in West Africa next year, and it
(19:45):
means you need to have the perfect weather in West
Africa from now to the end of the year in
order to have a really good cop for next year.
And it might happen, but it might not happen, right,
You need to get extremely lucky for that to happen.
So I think the balance of probabilities are still that
we will have a deficit next year on top of
(20:06):
the very large deficit this year. We believe we have
eight hundred thousand tons deficit out of five million ton
market size, right, so it's a very large deficit. If
we have the production going back up roughly ten percent
from this year to next year, we still have a
deficit of three hundred thousand turns or so next year.
That brings us to thirteen percent stock to grinding ratio,
(20:31):
which which would be much lower than what we had
in nineteen seventy seven. So we still have I think
a high probability of having much much higher coco prices.
You know, even if they go there, we might have
big drops like we've seen the last months or so
the last two weeks, but we might make new hide
and then have big drops again and then make new
heihs or if over the next four months we realize
(20:54):
that we're going to have from all the surveys we
get every months in Ivory Coast and Ghana that the
crop next will be amazing, then the policies we'd probably
come off from here towards you know, I don't know,
five or six thousand dollars a turn, but they're not
going to go back down right away to two thousand,
five hundred dollars a ton because we need We have
(21:15):
very low inventories, so we need to rebuild stocks everywhere
in the supply chain.
Speaker 2 (21:21):
These inventories. So you've been talking about the stock inventory,
the grinding ratio or the stocks to grinding ratio within
the sort of cocoa or chocolate supply chain. Who are
the holders of the stocks and how do you get there?
Like how is that data collected?
Speaker 4 (21:36):
So basically you have the exchange. So first you have
exchange stocks, so we have weekly data in European exchanges
and the US exchanges. So in the US NAPPLE everything's
held on exchange pretty much, so everything in exchange. In
Europe only twenty percent of the the inventories on exchange.
Twenty percent of the European stocks are on exchange. The
(21:59):
others are really with with chocolate makers or that they
need to hold stocks directly to make the chocolate. And
then you have then you have some also obviously at
the producing regions. So and that's something that we can
see the inventories at the port in Ivory Coast and Ghana,
so the main exporters. You can actually follow the amount
(22:22):
in inventory there and then the West. What we don't
know is inferred statistically, right, so there's a bit of
noise in what that that total amount of inventory would be.
But you have some some firm that has specialized in
it that will come up with an estimate of the number,
So they'll they'll do some surveys, they'll they'll, they'll they'll
do some cost validation to make sure that the numbers
(22:43):
at are at the end.
Speaker 1 (22:44):
Out of curiosity and just widening this out to a
few other commodities, have you observed any similar dynamics in
something like coffee, which has been getting a lot of
attention recently, or orange juice. I ran into some guy
called Mortimer who was telling me that Brazil is supposed
to have a bad harvest this year.
Speaker 3 (23:04):
That's possible.
Speaker 4 (23:04):
I haven't followed orange juice. I mean, we looked at
coffee quickly. It looked less. It looked interesting as well,
because you get big losses in production from Vietnam. But
we didn't look We didn't see from far something that
was so exciting, so we didn't try it.
Speaker 3 (23:22):
Orange juice, we haven't.
Speaker 4 (23:23):
I don't know, but I would say that generally the
shift in weather patterns due to climate change are going
to bring some structural stories into soft commodities, and so we'll.
Speaker 3 (23:35):
Have to look.
Speaker 4 (23:37):
At more and more of the soft commodities because it's
not only going to be from one year to another.
You're going to have like that everything could change due
to random change in weather.
Speaker 3 (23:45):
You have this underlying climate change that.
Speaker 4 (23:48):
It's also a trend that really impact production of the time,
and so we have to identify the communities that will
be impacted by that.
Speaker 2 (23:57):
Tell to us a little bit more about Obviously we've
had you on in the past primarily talk about oil
and as you mentioned in the beginning, entering and you're
not you don't trade egg as much. There's sort of
a different space for you other than the size of
the market. And I guess you know, as you mentioned,
it's all physical delivery futures. What are the other dynamics
(24:17):
that are different when you go from trading a commodity
like oil, which is gigantic and liquid, to a commodity
like cocoa.
Speaker 4 (24:26):
Well, you have to follow the I mean cocoa I
think is less complicated than the grains because in the grains,
your weather can impact productions so quickly. But sus for cocoa,
it does impact production, but it takes you five years
to you know, when you plant a cocoa tree for
I mean three to five years for that coco tree
(24:46):
to give you cocoa beans. This is for grains, you
get it right away, so you get like a slower
production responsor. It should be when you have a big
supply issue and that you have issues due to climate change,
you should have like a.
Speaker 3 (24:59):
Large move than four coins.
Speaker 4 (25:01):
So it should make it easier in a way to
have a positions that you can hold for longer that
are a bit more structural.
Speaker 3 (25:11):
Than four coins. I would say that's my understanding at
least for now. And there's enough data too.
Speaker 4 (25:16):
I mean enough data meaning like if we we get
like a bit more more data on how the new
crops are doing many many in iboricos and cana to
have a good understanding of what the crop will be,
the production will be the following year. So I feel
like we have enough data to understand in which direction
(25:38):
we're going. Versus the grains, I feel like the grains
can they move up and down a lot?
Speaker 3 (25:43):
Then you can't. It's more complicated.
Speaker 4 (25:45):
You have to look at a lot of like tiny
details versus coco where you have many one mega major
producer and another very large one.
Speaker 1 (25:55):
Speaking of climate change, can we talk a little bit
about copper, because this is all so a commodity where
I feel like there was a lot of discussion about
it being in structural short supply as the world moves
towards electrification. But then over the past couple of years
prices went down, I guess because of concerns over the
outlook for economic growth, and just relatively recently so starting
(26:20):
sort of February of this year, prices are going up again.
What's your thesis when it comes to copper.
Speaker 4 (26:27):
I think coppers should go up a lot Bleakly. We
are going from biky Over the last let's say fifteen
twenty years, we were in a market where demand was
going about half a million turn a year and supply
was going half a million ton a year in average. Right,
if you look at long term averages, it was over
time a balance market. We had times where it was tight,
(26:50):
times where it was in a bit of a surplus,
many during the pandemic or during financial crisis, but overall
it was a balance market. Now, due to the energy transition,
we're obviously as we have to electrify the world, we
have new demand from electrification of transport, so it means
that not only to make the electric vehicles, but also
(27:15):
to supply more electricity.
Speaker 3 (27:16):
Overall in the world.
Speaker 4 (27:19):
For that energy transition, so you have to work on
the grid to have more renewable and renewables take a
lot more copper than like nuclear plants or like fossil
fuel generated electricity, so like solar panels and windmills take
a lot more copper. And also all the data centers
take a lot of copper. So we have that third
in power demand that we need a lot of copper.
(27:41):
And we're getting into a market where despite the fact
that the Chinese property market will be much weaker than
the last fifteen years in terms of growth, and we're
seeing decline in the property in the copper demand in
China for the fourthingble future, despite that, we see a
market in which we're have overall one million tons of
(28:02):
demand perier roughly of demand increased per year, and the
supply goes basically by the end of next year will
be zero to negative. So we think that in terms
of mining supply, we're picking in about a year like
twelve to eighteen.
Speaker 3 (28:18):
Months, and then we flatten and then we go down.
Speaker 4 (28:21):
So best case scenario, you get like a million tons
increasing demand against no increasing supply, so you get larger
and larger deficit deficit every year and the price hasn't
reacted yet, and that's mainly because I think there's not
enough fonts at the or companies that actually trade the
(28:41):
future's market and all positions for very long. I mean,
if you look at most of the hedgephones out there,
it's a bunch of leg pots that have.
Speaker 3 (28:49):
Very many, many.
Speaker 4 (28:50):
Teams in those big multi strategy fonts that have very
tight drawdowns, so they tend to try to trade for
the next few days or next week or so. They
count really positions for very long, and there's not a
lot of companies that can hold positions, so because the
market is not really doing its job to actually give
a price signal to solve that deficit, that upcoming deficit,
(29:11):
that's a multi year deficit. Basically, it takes, you know,
to grow supply in copper. I mean, if you bring
a new mind, is like more than ten years to
bring its like ten to fifteen years to bring a
new mind.
Speaker 3 (29:22):
And everything has been relatively well explored.
Speaker 4 (29:25):
So now the supply growth from copper is coming from
more and more dangerous countries as well, like less and
less stable countries, So you don't get that quick supply
response in copper, but the demand is now and the
demand is growing. I mean, we're going to build that
electric grid, and we're going to build all these EVAs
and also that data center. They're going to be built
(29:46):
at whatever the cost of copper. And remember that the
price of copper is a very small percentage of the
price of the end product, right, So if copper goes
up ten times, I mean your m product will go
up a little bit. It's not good to double in price.
So if you need to have a demand response, mainly
when the world is kind of obligated to go through
(30:07):
that through that energy position, then we should get to
really really large price move.
Speaker 3 (30:14):
So I think there's a long long way to go
for copper.
Speaker 2 (30:18):
I'm interested in this because you know, we have seen
this bit of a copper rally, though we're not even
I don't even think we're quite at the twenty twenty
one highs. But it's interesting. I'd love to hear you
explain further about the connection between Okay, any any fool
can look at supply and demand and say, there's this
much demand for copper out there, there's this much supply
(30:41):
coming online, there's going to be a deficit. That seems bullish,
how do you take that analysis and or take that
starting premise and then think about what does a fair
price look like? And so as opposed to just saying yeah,
this is there's more demand that supply. How do you
get to like a number that in your view or
in your analyst view, looks like a number that might
(31:01):
bring supply and demand into balance.
Speaker 4 (31:04):
I mean it's going to be you know, I don't
think it's just a price. It's like the whole path
is important, I think. So we look at it year
by yea, so we think, okay, at current prices, what
would be the supply and demand balance to current prices
have an impact on demand goes or not? Or what
is the state of the global economy. What kind of
you know, demand goes do we expect for copper and
(31:26):
what is the supply goes?
Speaker 3 (31:27):
I mean, supply goes.
Speaker 4 (31:29):
Is not going to be too dependent on copper prices
for the first few years. I mean a little bit
to scrap. You get a bit more crap scrap metals
when prices go up, so you can model for that.
When prices go up, you get more crap supply that
that comes as a source of supply for copper.
Speaker 3 (31:47):
And then the demand.
Speaker 4 (31:48):
We look at, okay, what can be priced and city
what can be pushed too later or not? It's not
that much to be honest, And then we get to
a path for the demand. And then we look at, okay,
what is what do we think the supplant demand balance.
Speaker 3 (32:01):
Look looks like every year.
Speaker 4 (32:03):
So for Apple this year, at current pri set, we
think we're going to get about like four hundred to
five hundred thousand tons deficit, and we had less than
that in terms of visible stocks at the beginning of
the year, so it means that we could actually run
out of visible inventories by the end.
Speaker 3 (32:18):
Of the year.
Speaker 4 (32:19):
Now there is some extra inventories, mainly the strategic reserve,
what we call the SRB in China, but if they
know that we're going to we're at the beginning of
a multi year deficit, they're not going to sell their
strategy reserve in the first year. So then we look
at the following year. We think for next year, we
also have half a million ton deficit, and actually we
can't cover that with a level of inventory, so we
(32:40):
need and then assuming we had enough inventory, we go
to in twenty twenty six to invent like deficit that
are more than a million tons and eventually more than
three million tons in twenty thirty, and that obviously those
deficits accumulate and we don't have enough inventries to actually
you know, go through.
Speaker 3 (32:59):
The first year.
Speaker 4 (32:59):
So it means that we're going to have really large
pricing is sooner than later to slow demand, and I
don't know how much it would have to go by. Yeah,
So basically on copper, what I mean that we're going
to have to have nonel in our move sooner than
later because of the large deficit we think we're going
to have this year and if not this year, next year,
(33:21):
and we don't have enough inventories to meet that deficit.
So we need to slow down demand relatively fast. And
we think that demand is also very in elastic due
to the fact that the price of copper as a
percentage of the end product is very low, and we
need to go through the energy transition regardless of the
price almost so I think that's why prices can move
(33:44):
a lot for copper. So at the end, like we
don't know exactly how high they can go to we
go to I think they could go up four times
over five year five year horizon. But does it mean
that we go up from ten thousand to fifteen thousand
this year and then twenty two thousand next year. I
don't know, but I think that the kind of twice
moves that I'm expecting, you know, like this that multiple
(34:06):
in twice, not to twenty percent increase. The twenty percent
increase doesn't change anything to your suppreme demand balance on
a two to three highs.
Speaker 1 (34:30):
So Joe asked you how you come up with the
price thesis for something like copper and how you see
it play out. And you know, we're mostly focusing on
time scales there, but there was one commodity that I
wanted to ask you a similar question on which is oil.
And oil it feels to me is facing a very
(34:51):
uncertain year in many respects. We have the upcoming US
presidential election, and it feels like things could go in
very different paths depending on whether Trump or Biden get
the presidency. Not necessarily in terms of US oil production,
which is already quite high and I think has surprised
(35:11):
a number of people, including possibly yourself, but maybe in
terms of things like the response from OPEC or what
happens with Russia Ukraine can you walk us through how
you in such an uncertain moment, how you even begin
to come up with a short term thesis for the
price of oil over the next year or so.
Speaker 4 (35:32):
Yeah, So when you look at all the potential supply
disruption that we could have had at the end of thing,
we didn't get any supply disruption. So if you look
at in twenty twenty to twenty twenty three, we're all
expecting to see at least some decline in the Russian
production due to sanctions, so due to issue within Russia,
and at the end, there was no supply responsor at all.
Speaker 3 (35:55):
I mean, there was no subplate disuption.
Speaker 4 (35:57):
Last year in twenty twenty three, we've got to sell
in Iranian exports due to the fact that the sanctions
on Iran were not really.
Speaker 3 (36:05):
Enforced, I would say.
Speaker 4 (36:07):
So we had relative to expectations, we ended up having
like a lot more Russian production and Iranian production. And
also last year US supply grew up more than expected
for the beginning of the month of the year. So
for the last four months, for five months four months,
I would say US production has been disappointing. So it's
(36:27):
been a bit lower than people expected. And that the
first time in a long time. Obviously, four months is
not enough to grow a trend, but it's something to
watch out for. I mean, is US shel production about
to peak or not.
Speaker 3 (36:40):
We don't know. We'll only know it.
Speaker 4 (36:41):
After the fact, But so far it looks like US
production is actually not growing too much, I mean, or
at least over the last four months. With the tensions
in the Middle East. In terms of what scenario we
could have to really lose supply, I would say it's
only if we get an attack on Iranian oil facilities,
(37:02):
but I don't think the US would want that, so
I don't think Israel would do it, because if they
were to do it, then the Uranians would probably try
to blow at the Saudi facilities or close the straight
of Hormoved and then we.
Speaker 3 (37:13):
Get into really huge toppled disruption.
Speaker 4 (37:16):
But it's a low probability event, right, It's very unlikely,
but it's not impossible. But if the conflict stays between
Israel and Gaza, I mean, there's no oil there, it
has no impact at all all supply. So where we
could have supply disruptions is coming from the Ukrainian attacks
on Russian oil infrastructure, and when you look at what
(37:37):
they've been doing for the last six months, they have
many attacks Russian behind with and that's really to try
to hurt the war reforts in Russia in the SPS,
not actually with it so much financially, it's more for
them to not have the white amount of fuel to
make enough rockets and all that, and for the Russian
people to feel like they're also there's something going on,
(38:00):
and it's not just in a sub a whyland, But
the Ukrainioans have not attacked pipelines and ports yet. I
think if they really wanted to impact the revenues of Russia,
they should attack the ports and the pipelines, bringing Frudel
to the port and keep on blowing up pipeline and
then that would really have a big impact in the
(38:20):
revenue that Russia would get. But that would also have
an impact on all places. And the US don't want
to have millions in an election year. They don't want
to have the Biden adiministration is very very paranoid about
having high gasoline prices before the election. So they're putting
pressure on the Ukrainians to not attacks, to not attack ports.
But if we get into a situation where the Ukrainians
(38:41):
become more desperate I need.
Speaker 3 (38:44):
More help than they might attack ports.
Speaker 4 (38:45):
So that's where we could potentially have supplied disruptions.
Speaker 3 (38:49):
In terms of yes, sorry, I just.
Speaker 2 (38:51):
Real quickly, how much do you think that pressure from
the ADMIN not to attack oil infrastructure is hampering the
war effort for you?
Speaker 3 (39:00):
Right?
Speaker 4 (39:01):
Well, at the end of the day, like if that
no help from the US, they would attack the old
facilities in Russia. But the fact that depending on US
weapons obviously they have to, right, you know, to listen
to what the US say. I mean as far as
they're helping. If the US stop helping, then of course
they will they will go. They will go for the
old facilities.
Speaker 3 (39:17):
I think.
Speaker 4 (39:20):
And in terms of the elections, you're asking, like Trump
versus Biden, does it change anything for oil? I mean,
I think it's quite marginal or nothing, I would say
for US supply because despite all the talks, US productions
searched under Biden, So I don't think that Trump would
make it search more. I mean, it's just a question
of geology and money. Actually, more than anything, I think
(39:42):
we can't be too far from peak in US productions.
Speaker 3 (39:45):
So you know, I don't think the.
Speaker 4 (39:48):
US supply grows as the potential of many millions of
barrels the extra So I think I think it's quite
marginal for US production. But where there could be a
bit of an impact for oil would I would expect
Trump to and force the sanctions on Iran more Titi,
so we might lose some oil from Iran, and that's
(40:08):
but again that we probably get a bit more oil
from the Saudist So.
Speaker 3 (40:12):
I'm not sure. I don't think.
Speaker 4 (40:13):
I don't think Trump versus Biden have a big impact
on oil prices.
Speaker 1 (40:18):
All right, Well, Pierre, we're going to leave it there.
Thank you so much for coming back on all lots
and walking us through all these various soft commodities and
oil as well. Really appreciate you coming back on pleasure.
Speaker 3 (40:30):
Thanks very much, thanksolling you opportunity.
Speaker 2 (40:32):
Thank you Joe.
Speaker 1 (40:47):
That was super interesting. I really liked hearing someone's conception
of the cocoa market when they haven't necessarily been in
it that much, and like how they formed that thesis
and decided to actually put on the trade totally.
Speaker 2 (41:02):
I thought that was fascinating. I mean just hearing him
like walk through all of the different factors, whether it's
climate change, whether the two diseases.
Speaker 1 (41:11):
Fertilizer was one that I hadn't heard that much about.
Speaker 2 (41:14):
Before totally, but makes total sense. Like when you think
about it, and when he brings it up, some of
the metrics he looks at. I'm also interested in just
this point, which is obvious, but I hadn't really thought
about it, that you could have a quadrupling in the
price of cocoa, and even if that translates into a
quadrupling of the price of a cocoa bar or a
chuckolate bar that you buy that in a commodity that
(41:37):
ultimately is just not that big of a monthly expense
or weekly expense for people, you might not get much
of a demand response. If you had a quadrupling of
the gasoline prices, you might expect carpooling or people to
take less trips or you know whatever, or subway rides.
You're just not going to get that same effect the market.
Speaker 3 (41:55):
That's small.
Speaker 1 (41:55):
Yeah, and it was kind of interesting to hear a
similar dynamic in copper as well.
Speaker 3 (42:00):
Well.
Speaker 1 (42:00):
The one other thing I was thinking about, just to
push the an inelasticity point a little bit more, I
wonder sometimes if all the headlines about cocoa prices going up,
if everyone rushes out to buy chocolate in the same
way I do, maybe you get like even a bit
of a demand boost in those scenarios.
Speaker 2 (42:18):
Or a bullwhip, right, because then everyone buys it, and
then they're pulling demand from the future. And also whatever
you have in your pantry, Tracy, is probably you know,
it's it's hidden inventory, right, Like the statistical agencies can't
see into that, so then there's more cut. Who knows
whether that's an but it is a It is an
interesting question.
Speaker 1 (42:36):
Yeah, no one knows about my strategic chocolate reserve, Tracy.
Speaker 2 (42:39):
And I never tell you about the time that I
was at the top of the Patronas towers in a
nightclub and I talked to a palm oil magnate.
Speaker 1 (42:47):
Yes, yes, you have in Malaysia, right, yeah.
Speaker 2 (42:49):
Yeah, Malaysia.
Speaker 3 (42:50):
Yeah.
Speaker 2 (42:50):
But it was It's interesting too because he was talking
about the fact that, like palm oil is a tree
based commodity, obviously, and he was describing very different market
dynamics versus a field based crop, in which a field
based crop you just have one person on a tractor,
are combine to the whole field, the labor intensivity, the
difficulty of automation when it comes to a tree based
(43:11):
commodity versus field based commodity. There aren't many robots that
can climb trees yet as far as I know. So
it's interesting think about the market structure of some of
these different commodities and how different they are just depending
on the growing conditions, how labor intensive, how prone they
are to automation scale, et cetera.
Speaker 3 (43:29):
Things like that.
Speaker 1 (43:29):
We should have asked Pierre about palm oil.
Speaker 2 (43:31):
We'll have to have them back for that.
Speaker 1 (43:32):
Yeah, all right, shall we leave it there.
Speaker 2 (43:34):
Let's leave it there.
Speaker 1 (43:35):
This has been another episode of the Oudlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (43:40):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our guest Pierre on Durant. He's at on Duran Pierre.
Follow our producers Kerman Rodriguez at Kerman Ermann dash Ol
Bennett at Dashbot, and Kilbrooks at Kilbrooks. Thank you to
our producer Moses on Them. For more Oddlots content, go
to Bloomberg dot com slash odd Lots, where we have
transcripts of lag and a newsletter, and you can chat
(44:02):
about all of these topics twenty four to seven in
the discord with fellow listeners Discord dot gg, slash outlock.
Speaker 1 (44:08):
And if you enjoy Odd Lots, if you like it
when we do deep dives into the price of Coco
and the way the market works, then please leave us
a positive review on your favorite podcast platform. And remember,
if you are a Bloomberg subscriber, you can listen to
all of our episodes absolutely ad free. All you need
to do is find the Bloomberg channel on Apple Podcasts
(44:28):
and it will allow you to connect your Bloomberg account
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without ads. Thanks for listening.
Speaker 3 (45:00):
No
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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