Cocoa-related exchange traded notes surged Monday as the El Nino phenomenon fueled abnormal weather patterns across the globe and added to crop concerns in top cocoa growers across the Ivory Coast.
On Monday, the iPath Bloomberg Cocoa Subindex Total Return ETN (NYSEArca: NIB) gained 3.8% and iPath Pure Beta Cocoa ETN (NYSEArca: CHOC) rose 3.3% as cocoa futures jumped 3.9% to $2,868.0 per metric ton, its largest single-day jump in three-and-a-half years.
Cocoa prices rose as a week of hot conditions and dry winds across the Ivory Coast growing region risked stunting the development of the upcoming mid-crop harvest, Reuters reported.
The sudden surge in cocoa prices Monday may also be attributed to oversold conditions after cocoa futures declined 14% over the past month, NIB 14.8% lower and CHOC down 13.9%.
“Cocoa’s rallying today on short-covering and the weak dollar,” Nick Gentile, managing partner of commodity trading advisor NickJen Capital, told Reuters. “I think the market was a little shocked that there wasn’t more liquidation in the New York COT (Commitment of Traders report).”
Investors with heavy short positions are forced to cover, or buy back, their shorts in the event of positive reports that result in a share appreciation. Consequently, the additional buying momentum from short sellers covering their options contracts helped bolster prices even further.
Over the long-term, fundamental factors may continue to support higher cocoa prices. For instance, demand for cocoa is rising at a long-term rate of 2% per annum, according to Mineweb. Urbanization and the rising middle class in developing economies has bolstered global demand for chocolate. Additionally, Ghana, a major producer of cocoa, is expected to see a decline in arable land as the region converts to gold mining.
iPath Bloomberg Cocoa Subindex Total Return ETN
Max Chen contributed to this article.