Cocoa futures fell after setting a new record early Tuesday, Bloomberg reported. This year's dizzying rally combined with lower open interest has made the market more vulnerable to volatility.
The most active contract in New York fell nearly 2.5 percent, erasing earlier gains to reach an intraday record of $10,324 a metric ton. Cocoa prices have more than doubled this year due to declining production in West Africa, and the market has become more volatile recently, with 60-day volatility at its highest level in about 15 years.
Meanwhile, total open interest in futures has not been this low since 2021, exchange data show.
The report also mentioned that weather reports from West Africa continue to bode poorly for the medium-term crop, with some West African farmers already struggling with the heat.
Another investment banking organization, Maxar, said that while there was some rainfall in some cocoa-producing regions over the weekend, more is needed to ease the drought facing the crop.
Meanwhile, the country's farmers will earn 50 percent more on the mid-crop cocoa crop of 1,500 CFA francs per kilogram than on the main crop, but prices are still well below the global market. Subsequent increases in cocoa prices may encourage farmers to increase cocoa crop production.
In the long run, higher wages could also prompt farmers to reinvest in their crops over the long term to increase production, and the market will continue to focus on cocoa futures prices, according to investment banking firm ArrowStream.
The cocoa market is very short-sighted at the moment, so it may be that we won't see corresponding price volatility until higher farm pricing occurs and is reflected in the market in the form of higher shipments, which has yet to happen.