🍫Hedge Funds Push Cocoa Prices to Record Highs

🐺 Hi pack-mates,

This is Howling Markets, the exotic commodity of the financial newsletter sector!

Today we will be covering:

• Education: What Are Commodities?🛢️

• Is a Recession Still In the Cards? 📉

• Hedge Funds Push Cocoa Prices to Record Highs🍫

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What Are Commodities?

When thinking about the financial instruments that are mostly traded on the markets, it is easy to imagine stocks and bonds to take the cake as the most popular ones. However, you would be surprised to know that there are many other asset classes that gather an even higher trading volume.

On of these asset classes are the derivatives, a set of financial instruments whose price depends on the value of an underlying asset and many other factors. In the past we have looked at options and the Chinese snowball derivatives, but there are also futures, interest rates swaps and much more.

Another interesting class of assets are commodities, which are simple raw materials that distinguish themselves from traditional asset classes because they are used as inputs of production rather than a finished product.

Commodities are divided into two main categories: hard commodities and soft commodities. Precious metals, industrial metals and energy are regarded as hard commodities, whereas agricultural goods, livestock, meat, dairy and forest products are considered soft commodities.

These types of assets are not very popular among retail traders because they are very volatile and can be traded in only two ways: either buying physical goods or by trading futures contracts.

However, nowadays there are also many spot and future ETFs that track the prices of the commodities, easing the barrier that these complex financial instruments may raise to newer traders.

Is a Recession Still in the Cards?

Despite the great optimism that has been running though the market since the end of October 2023, there are still many analysts that believe a recession might still be in the cards.

Frontrunning this theory there is the famous “Bond King”, nickname attributed to DoubleLine’s Jeffrey Gundlach, who believes that the markets are as overvalued as they were in 2022, before the previous bear market.

He stated that based on P/E ratios and other fundamental indicators the market is extremely overbought and mainly pushed higher by speculative AI and tech stocks.

Additionally, he also mentioned the infamous yield curve, which is the graph that traces the yield of a given bond (usually government bonds) at different maturities. A healthy yield curve should be increasing, meaning that longer maturities pay a higher yield to compensate the bond holders for the added risk.

However, during market turmoil this behavior can vary, and the yield curve can “invert” where longer maturities offer a lower yield than shorter ones. Inverted yield curves have proven themselves over the years as an extremely reliable predictor of recessions.

If you take a look at this graph below, representing the 10 year US government bond yield minus the 2 year government bond yield, you can see that it is currently in negative territory, meaning that the 2 year offers a higher yield than the 10.

Additionally, if we also chart the SPX in orange, you can notice how 12-18 months after a dip in negative territory of the yield curve the SPX enters a bear market. Do you think that it will happen also in this case?

Today’s Howling Question

And now, it is time for our howling question!

We have talked about the prices of cocoa beans, but what about the price of other soft commodities? Do you know how much the price of corn futures has changed since the beginning of 2023?

1. -38%

2. -17%

3. -2%

4. +15%

5. +32%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Hedge Funds Push Cocoa Prices to Record Highs

The price of cocoa beans, a soft commodity, has skyrocketed by more than 105% since the start of 2023. Such a powerful move was initially sparked by a poor harvesting season in West Africa which led hedge funds and other institutional investors to jump of cocoa futures and amass an almost $9 billion dollar position on this commodity, reaching the highest ever risk exposure to cocoa beans.

In fact, despite the initial increase in price being caused by the fruits of the harvesting season, many analysts believe that the exponential growth was ultimately caused by hundreds of institutional investors jumping on this opportunity.

Because of this, the prices of cocoa futures reached an intraday high of almost $5,800 per 10 tons of cocoa on the Intercontinental Exchange (ICE). However, the price managed to fall back to $5,341 on Monday.

But how did hedge funds know that a poor harvest would have led to such a severe price spike?

Well, since the launch of the first ever cocoa futures in 1925, there had been another similar occasion where two consecutive years of poor harvests led the price significantly higher.

During the previous surge, occurred in 1977, in a matter of two years the price jumped from less than $1,000 per 10 tons to more than $4,500, setting the previous all-time high which remained unbeaten until this year’s crisis.

Equity and Debt Markets Update

And now, our daily markets update!

Today’s market recap will be extremely short as on Monday the 19^th of February the US markets remained closed due to Washington’s Birthday an American National Holliday.

Answer

The correct answer is 1) -38%

Well, despite being a soft commodity just like cocoa beans, corn did not perform nearly as well as the other commodity did. The price dropped by -38.56% in just over a year, reaching $416.4 per 5000 bushels (bu) of corn.

Howl-Worthy Memes 😂

🐺 See you next time!

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