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Oil trader strikes gold: Pierre Andurand's risky cocoa bet pays off big!

risky cocoa bet pays off big, financial news

Pierre Andurand, a trader primarily known for his expertise in the oil market, recently ventured into the cocoa market with his hedge fund. This move was strategically timed to precede a substantial increase in cocoa prices, marking Andurand's foray into this volatile commodity market. While other speculators were pulling back, Andurand’s fund took a small yet optimistic (long) position in early March, demonstrating a divergent strategy in the face of the market's uncertainty.

The global cocoa market has been experiencing considerable stress due to several impacting factors. Changing climatic conditions and widespread crop diseases have adversely affected cocoa production worldwide. This downward trend in supply is projected to continue into the upcoming season. Moreover, the European Union, a significant consumer of cocoa, has implemented new regulations aimed at preventing deforestation. These regulations have complicated the expansion efforts of cocoa farms, especially at a time when cocoa prices are experiencing a steep rise.

Cocoa prices in New York have seen a dramatic increase, more than doubling since the beginning of the year. In early April, prices reached an unprecedented high, crossing $10,300 per ton. Although there has been a slight decline in prices since reaching this peak, the overall trend represents a significant increase in the value of cocoa.

Pierre Andurand is optimistic about the future of cocoa prices, predicting they could reach as high as $20,000 later in the year. This surge in cocoa prices is a significant development for Andurand, particularly in the wake of his hedge fund's largest recorded loss last year. While Andurand is primarily known for his activities in the oil market, this success in the cocoa market signals a noteworthy shift in his trading focus and strategy.

Andurand's analysis of the cocoa market reveals a more severe decline in global cocoa bean production than most analysts anticipate. He predicts at least an 18% drop in production on an annual basis, compared to the 10-11% decrease forecasted by others. This significant reduction in supply is expected to lead to the lowest stocks-to-grinding ratio on record by the year's end. The stocks-to-grinding ratio is an essential indicator in the cocoa market, measuring the balance between available inventory and demand.

For the 2023-24 season, Andurand's firm projects that the stocks-to-grinding ratio will fall to around 16% in their base-case scenario. This forecast suggests the ratio could drop below the record low set in the mid-1970s. When comparing past and present values, the previous low of $5,000 per ton in the 1970s, when adjusted for inflation, is approximately equivalent to $26,000 in today's market, as per Bloomberg's calculations.

Despite these optimistic projections, trading in the cocoa market is becoming increasingly fraught with risk. A decline in open interest and a rise in margin calls have contributed to more unpredictable market movements. This heightened volatility introduces a risk of failure for companies engaged in cocoa trading. According to government data, money managers are currently holding the smallest net-long positions in cocoa futures and options in over a year, reflecting a cautious approach in the market.

The Andurand Commodities Discretionary Enhanced hedge fund, managed by Pierre Andurand, operates without set risk limits and has shown a remarkable turnaround this year. After facing a substantial 55% loss in 2023, the fund has recovered significantly, posting a 25.6% gain in the first quarter of 2024. This recovery stands in stark contrast to the exceptional performance in the preceding three years, during which the fund saw a more than sevenfold increase in investor capital, highlighting Andurand’s capability to navigate and capitalize on volatile market conditions.



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