Cocoa Beans Bounce to Six-Year High

(Wall Street Journal) – Good thing the British enjoy their tea, because after the “Brexit” vote, a cup of hot chocolate could soon be a luxury.

The market turmoil following Thursday’s surprise vote for the U.K. to leave the European Union sent prices for safe-haven gold soaring in predictable fashion. But most other commodities, including oil and industrial metals like copper, have fallen on both a strengthening U.S. dollar and expectations of weak economic performance around the world.

But at least one corner of the commodities world is cheering Brexit, and that’s cocoa. The bean is one of the last commodities to be priced in sterling, so the London-traded cocoa contract rose to a nearly six-year high on Monday as pressure on the British pound intensified on Monday with sterling its lowest level against the U.S. dollar in 31 years.

On Monday afternoon, the continuous contract surged 1.75% to £2,384 ($3,260). The contract is now at its highest price since early July 2011, when cocoa trade house and hedge fund Armajaro bought up 7% of the world’s beans, according to news reports at the time, and pushed prices to a 33-year high.

“As had been expected in the event of a Brexit vote, London cocoa prices rose sharply on Friday,” Commerzbank CRZBY -4.38 % said in a note.

The size of the post-Brexit bounce was sharp, with the contract gaining nearly £100, or 4.29%, in less than two days.

The bean is now above a previous high set in February 2011, after a bloody political conflict between the former leader of the Ivory Coast, Laurent Gbagbo, and the current president, Alassane Ouattara, resulted in an export ban, sending the bean to a high of £2,378. Ivory Coast is the source of about 40% of the world’s beans.

That surge marked cocoa as an outlier in the commodities markets. As the pound sank, the dollar gained, pushing down nearly every other commodity— including the dollar-denominated cocoa contract, which is traded in New York.

London’s bump highlighted the arbitrage between the two contracts, which are traded in different currencies and serve slightly different markets.

However, despite a sharp fall in the New York contract—which is down 0.96% on Monday in response to a stronger dollar—the spread between the two remains around £117, a gap analysts say is unusually large. A large spread typically makes the contracts more volatile.

The London cocoa contract has had a choppy year, dropping sharply in January as the commodities complex buckled, before rebounding on concerns about the impact of dry weather in West Africa, the top producing region.

But traders and analysts say that Friday’s bump was purely down to currency, and any major gains may be limited for the cocoa industry as a whole.

“It’s not actually bullish for cocoa itself, it’s actually slightly bearish,” said Jonathan Parkman, head of agriculture at brokerage Marex Spectron. The political and economic uncertainty following the vote could hurt demand for the key ingredient in chocolate, he added.