Pierre Andurand Says the World Could Run Out of Cocoa Inventories

Episode Summary

Executive Summary: The episode centers on Pierre Andurand’s bullish thesis on cocoa and copper, arguing that structural supply shortages, low inventories, and inelastic demand can drive outsized price moves. The hosts and guest also discuss how climate change, disease, and fertilizer issues are tightening cocoa supply, while oil appears less exposed to major price disruption than headlines suggest.

Main Topics: Cocoa’s supply shock and bull case (Priority: 5/5): Pierre argues cocoa is in a major structural deficit driven by sharp production declines in West Africa, with inventories being drawn down and prices likely to remain highly volatile and potentially much higher. Why cocoa demand has been resilient (Priority: 5/5): The discussion emphasizes that chocolate consumption is highly inelastic because cocoa is a small share of the final product’s cost, so even large price increases may not meaningfully reduce consumption. Structural problems in cocoa production (Priority: 5/5): Weather, climate change, fungal disease, swollen shoot virus, and reduced fertilizer usage are presented as long-run constraints that limit the speed of supply recovery. How futures market dynamics amplify volatility (Priority: 4/5): Pierre explains that declining open interest, reduced liquidity, and physical settlement constraints make cocoa a dangerous commodity to short and can intensify price swings. Copper as a coming multi-year deficit story (Priority: 4/5): Pierre extends the supply-shortage framework to copper, arguing electrification, grids, EVs, renewables, and data centers will push demand higher while new mine supply grows too slowly. Oil fundamentals and geopolitical uncertainty (Priority: 3/5): The conversation concludes with oil, where Pierre sees limited impact from the US election on domestic output, but possible disruptions from stricter Iran sanctions or attacks on Russian energy infrastructure.

Key Arguments: Cocoa production is falling sharply, with West Africa driving the deficit; this is not just a temporary weather issue but also a structural one. Cocoa demand is highly inelastic because chocolate is a low-cost item relative to household budgets, so consumers are unlikely to cut back much even after large price increases. Low inventories mean the market can move violently once stockpiles are exhausted; futures prices then can overshoot because physical delivery matters. The funds are not the main driver of cocoa’s rally; Pierre says they have been net sellers, while producers have been forced to buy back futures to hedge lower output. Copper is entering a long deficit cycle because electrification-related demand is rising faster than mine supply, which takes 10-15 years to bring online. Oil prices are less likely to spike from the US election itself than from rare but severe geopolitical supply shocks, especially involving Iran or Russian export infrastructure.

Data Points: Cocoa production change: down 17% vs. last year - Pierre’s estimate of global cocoa production decline this year Consensus analyst production decline: down 11% - Pierre says most analysts are more conservative than his estimate Ivory Coast cocoa exports: down 30% year to date - Season-to-date export data cited as evidence of shortage Ghana cocoa exports: down 41% year to date - Season-to-date export data cited as evidence of shortage Combined cocoa deficit from Ivory Coast and Ghana: 800,000 tons - Pierre says these two countries alone imply a large supply shortfall Cocoa market share of world production: about 60% from Ivory Coast and Ghana combined - Used to show the importance of West Africa West Africa production share: 70% - Pierre gives regional concentration of cocoa output Latin America production share: 21% - Global production distribution Asia and Oceania production share: 5% - Global production distribution Mid-crop share of West Africa balance of season: 20% - Pierre says the mid-crop is too small to offset the deficit Global cocoa demand: about 5 million tons per year - Used in his demand/inventory calculations Average cocoa consumption per person: 1.7 grams per day - Back-of-the-envelope estimate to show demand inelasticity Cocoa cost impact at $10,000/ton: 1.7 cents per day per average person - Illustrates why demand barely responds to price Chocolate bar monthly cost impact: $2 to $5 per month - Estimated effect on reasonable chocolate consumers Stock-to-grindings ratio this year: 21% - Pierre’s estimate for end-of-season inventory coverage Typical stock-to-grindings ratio over last 10 years: 35% to 40% - Historical comparison 1977 cocoa stock-to-grindings ratio: 19% - Historical low associated with extreme prices Potential stock-to-grindings ratio next year: 13% - If another deficit occurs, Pierre expects inventories to fall further Current December cocoa price mentioned: roughly $7,000/ton - Price level referenced during discussion Potential downside in cocoa: about $5,000/ton - Pierre’s estimate of near-term downside Potential upside in cocoa: above $20,000/ton later this year or next year - Pierre’s bullish price target scenario Previous cocoa high in 1977: more than $5,500/ton nominal, equivalent to $28,000/ton in today’s dollars - Used to show current prices are not unprecedented in real terms Open interest reduction in cocoa longs: from 175,000 lots to 28,000 lots - Pierre says funds reduced long exposure substantially Open interest reduction in cocoa exposure: about 80%+ reduction - Summary of the change in fund positioning Grindings change: down 3.5% this year - Despite flat end demand, grinders appear to be destocking Copper annual demand growth: about 1 million tons per year - Pierre’s thesis on electrification-driven demand Copper supply growth by end of next year: zero to negative - He sees mine supply peaking and then flattening/declining Copper current visible deficit: 400,000 to 500,000 tons - Estimate for this year at current prices Copper deficit next year: about 500,000 tons - Pierre’s next-year projection Copper deficit by 2026: more than 1 million tons - Projected longer-term deficit Copper deficit by 2030: more than 3 million tons - Projected cumulative shortfall Oil production surprise: no major supply disruption in 2022-2023 - Pierre notes Russian output held up more than expected Iranian exports change last year: up by about one-third - Due to weaker sanctions enforcement

Pivotal Quotes: "The price can go anywhere." — Pierre Andurand: On cocoa once inventories are exhausted and the market faces a genuine physical shortage "It’s a dangerous commodity to short." — Pierre Andurand: He explains that physically settled futures and low inventories can cause explosive upside "We think that in terms of mining supply, we are peaking in about a year, like 12 to 18 months." — Pierre Andurand: On copper, describing why supply will not keep up with rising electrification demand

Implications: Listeners should expect continued volatility in cocoa and potentially copper, with prices vulnerable to outsized moves if deficits persist. For industry participants, low inventories and slow supply response mean hedging and risk management matter more than ever.