Proactive Investors - Cocoa now costs more per tonne than copper, parents can tell their children when they hand over a smaller Easter egg this weekend.
Futures prices for cocoa today bubbled up above $10,000 per tonne for the first time, following a 130% increase so far this year - more than Nvidia (NASDAQ:NVDA)'s 95% gain.
The main ingredient in chocolate started the year at below $4,3000 per tonne, but has surged on the back of a dry harvest in key growing areas in West Africa.
Chocolate makers including Cadburys owner Mondelez International Inc (NASDAQ:MDLZ, ETR:KTF) and Hershey Company (NYSE:NYSE:HSY, ETR:HSY) have warned that the soaring cost of cocoa would hit earnings.
Harvests in West Africa have been poor recently due to prolonged dry weather and traders fear the El Nino will mean another bad year ahead.
"It now costs more for a tonne of cocoa than a tonne of copper," said analyst Kathleen Brooks at XTB.
"Chocolate is the new luxury good in town, and we expect that sweet treats will see their prices surge in response to this massive price rise."
It led to shares in chocolate makers melting, with Mondelez down 1.7% and Hershey falling 1.2%.
Both supply and demand have driven the price of cocoa higher this year, said Brooks, as well as financial market dynamics.
"Reduced supply from West Africa, the main cocoa growing region, along with a boost in demand is putting upward pressure on the price of cocoa. However, the massive $1,500 rally since Friday suggests that momentum and something other than fundamentals are also driving the cocoa price," she said.
Cocoa traders who hold long physical positions tend to hedge their risk by using financial markets to take short positions on the price.
"The hope is that any losses made from the hedge is covered by the price increase in the physical position," said Brooks.
"However, if the cocoa traders are buying their cocoa to hold, and the market is going up almost vertically and setting record highs on a daily basis, then margin calls on the short market positions start to add up.
"For those who can’t service their margin calls, they need to close their short cocoa positions, which adds further upward pressure to cocoa prices.
"Thus, agricultural trading firms that trade in cocoa could also be struggling on the back of this massive rally."
The largest cocoa traders include Touton, Cargill and Olam, according to Bloomberg, with traders likely to keep an eye on closely for any warnings that could exacerbate the price action in cocoa even more.
Although cocoa futures pulled back from the $10,000 level, Brooks there is a chance that this is a "structural shift" higher in the price of cocoa, one that might not be alleviated quickly.
"Although a weak crop yield in west Africa has lowered supply, EU regulations that ban the use of commodities that cause deforestation means that the key European chocolate market now needs to find compliant sources of cocoa, which could add costs to the system.
"This regulation comes at the same time as the supply deficit has reached a record high of more than 400,000 tonnes.
"Thus, the high price of cocoa could be here to stay, and chocolate treats in the future may be considered a luxury and a lucky-to-have, rather than an affordable must-have product. For some of us chocoholics, that is a very depressing thought."