Why this commodity has outperformed Nvidia this year

Cocoa (CC=F) prices hit record highs this week, breaking the 10,000 level for the first time. Blue Line Futures Chief Market Strategist Phillip Streible joins Yahoo Finance Live to discuss the factors behind the surge.

Streible attributes the rise in cocoa prices to recovering demand following the COVID-19 pandemic and geopolitical tensions like the Russia-Ukraine conflict, which caused prices to "spiral out of control." According to Streible, the price increases of cocoa are "a combination of things that won't get resolved anytime soon." With demand at an all-time high, a weak crop yield, and speculation in the market, cocoa's cost will continue to surge and weaken the chocolate sector, as companies look for ways to combat the price increases.

Streible suggests that with cocoa prices surging, producers need to explore other avenues where they can save, such as labor costs or even milk prices. However, he notes that this approach could also turn into a "robbing Peter to pay Paul" scenario, which would be detrimental for companies if cocoa prices continue to rise and "squeeze profitability."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

- What's dark, sweet, and currently seeing better year-to-date returns than NVIDIA? Well, guess what? It's cocoa. You see it right there on your screen. Cocoa prices climbing once again this morning after breaking record highs earlier this week, briefly surging past a 10,000 level here. Now prices have more than doubled over the last year, following 10 years-- or three years, excuse me-- of poor cocoa harvests in two countries that produce nearly 60% of the world's cocoa.

So where do prices go from here? We want to bring in Phillip Streible, Blue Line Futures chief market strategist. Phil, it's great to see you here. So talk to us just about the massive run up that we've seen in the price of cocoa. How much of that has to do with fundamentals? How much of it has to do with some of the technical levels that we're seeing?

PHILLIP STREIBLE: Yeah, and this is a story that isn't just developing year to date being up 140%. This is something going back one year. We're up 250%. So the story really resulted in less demand from COVID-19. So the producers, they reduced the size of the crop that they planted. And then when the consumer began to come back into the playbook, and people started to spend more money and everything, the Russia-Ukraine conflict had begun. And Russia curbed their exports of fertilizer and pesticides to the Ivory Coast.

And really, what that did was it put the plant at risk. So you follow the adverse weather, the poor crops, the diseased trees, the increasing demand with the recovery in the economy, prices tended to spiral out of control and created this short squeeze. So the producers, they couldn't keep up with the demand because of the crop being so poor. So they canceled all the forward contracts that the end user really needs. So the cost just spiraled out of control, and they couldn't get a hold of the supply.

- Well, I'm curious then about what the catalyst would be for prices to get a little bit better for the end consumer here. What would that look like, and what might the timeline to that look like?

PHILLIP STREIBLE: Yeah, that's going to be a problem. And I mean, you start looking at how it's impacting different companies. So you go back to May, 2023, price of cocoa was $2,900 a ton. Now we're trading closer to $10,000 a ton. It costs more for a ton of cocoa than it does for copper, for instance. And you look at something like Hershey's stock a year ago was at $294. Now it's only at $192.

So that's really been impacted. The problem is this deficit is one of the largest since 1960. So what really needs to happen is the exchanges need to stem and curb some of the speculation that's going on in the markets. We're seeing the average price fluctuate about $400 a ton on a given day. So that's $4,000 for every contract move for a regular speculator.

So what some of the FCMs are doing and what some of the exchanges are doing is they're raising those margin requirements there. And right now, it costs about $15,000 to control one contract. So some of the speculation has got to come out of it. You need to see a better crop over in West Africa, and then you need to see some of that demand really come down. So it's a combination of things that probably won't get resolved anytime soon.

- Phil, talk to us about the impact that this is going to have on consumer, with the impact it's going to have on companies that rely heavily on cocoa. When you're talking about prices right around $10,000 per ton, what does that trickle-down effect look like?

PHILLIP STREIBLE: We were thinking about that earlier. If you're someone who produces things like chocolate bars and things, we were looking at what are the components that are going into it. You're going to have milk prices. You're going to have sugar prices. You're also going to have your labor, your debt costs, and everything else going into it. So hopefully, that some producer is maybe getting the benefit of lower milk prices.

Also labor prices have come down. But the problem is at some point in time, it's going to be you're robbing Peter to pay Paul. And when do cocoa prices continue to go up and really squeeze profitability? So that's why I think we're seeing stocks like Hershey really under pressure when you look over the last couple of years.

- Well, they're under pressure, Phil, but it's not just because of cocoa prices. There's another elephant in the room when we think about any company that's involved with snacking, and that's Ozempic. So I'm curious from your perspective, what's worse for a company like Hershey's, Mondelez. Is it cocoa prices, or is it Ozempic?

PHILLIP STREIBLE: I can tell you, I know a lot of people that are on Ozempic. They're hearing some great results out of it, and one thing that it does is it really does curb your appetite and any of those excess things. You tend to eat more like a squirrel. You're eating nuts and berries and basic things. So that's really going to take that demand down, and it won't even impact not only like cocoa but like the alcohol industry, any kind of snacks and things like that.

You're really going to see that demand come down quite a bit. So this is a play that's going to take a while to go through. So if you look at 8,500, the level on cocoa, and it's trading right around $9,700 right now. If we broke to that level, technically we would see some kind of breakdown on the charts would maybe go back to a neutral trend. But you really got to get the xx speculation out of it.