Cocoa Bull Pierre Andurand Warns Of ‘Price Explosion’ If Stock-To-Grinding Ratio Collapses

Commodity trader Pierre Andurand appeared on Bloomberg’s Odd Lots to discuss his bullish bet on cocoa markets and the future direction of physical markets amid severe droughts plaguing vast farmlands in West Africa. He’s still bullish on cocoa prices, with an upside price target of $20,000 a ton later this year or next because continued droughts will spark a “massive supply shortage this year.” 

Andurand’s discussion with Tracy Alloway and Joe Weisenthal comes after cocoa prices had two of the largest single daily declines ever in recent weeks as liquidity evaporated from the market. 

• Cocoa Crash Unfolds As “Liquidity Evaporates”
• Cocoa Market Hit With Second Crash In Weeks As Liquidity Evaporates

And Rabobank analyst Paul Joules told clients the bull rally has likely peaked. 

• After Cocoa Crash, Rabobank Says Bull Rally Likely Peaked

However, Andurand, founder of Andurand Capital Management LLP, known for his oil and energy trades, told the Odd Lots hosts that his bullish cocoa bets from March paid off when prices skyrocketed north of $12,000. He believes there is potential for further upside as extreme global deficits of the bean loom. 

“Basically, we have a massive supply shortage this year. I mean, we see production down 17% relative to last year. Most analysts out there have it down 11%, but that’s because they tend to be very conservative. You know, they have lots of clients and they don’t want to to worry the world, so they come with relatively conservative estimates,” he explained, adding, “We’re in a situation where we might actually run out of inventories completely.”

Andurand continued, “This year we think we will end up with a with an inventory-to-grinding ratio — so inventory at the end of the season — of 21%.” 

“For the last 10 years, we’ve been between 35% and 40%. Roughly at the previous peak in 1977, we were at 19%,” he said.

The International Cocoa Organization tracks inventories of unprocessed cocoa, which can serve as a cushion when there’s a shortfall in supply. However, the lower the inventory-to-grinding ratio drops, the less of a buffer there is. When the stock-to-grinding ratio crashed in 1977, cocoa prices soared to $5,500, or on an inflation-adjusted basis today, $28,000. 

Andurand warned the ratio could collapse to as low as 13%, adding, “That’s when you really have a real shortage of cocoa beans. You can’t get it. And that’s when the price can really explode.”