Cocoa bulls, like commodity trader Pierre Andurand, are likely rejoicing at the news that Ivory Coast, the world’s top producer, is tightening domestic bean sales to prioritize local processors. This move restricts exports and further squeezes global supplies, and in return, could send cocoa prices above $10k a ton.

Bloomberg sheds more color on the new developments in Ivory Coast:

A huge shortage this season forced the country’s regulator to postpone contracts from the main crop that ended in March to the smaller of two annual harvests, which runs through September. But that so-called mid-crop is usually reserved for local factories that grind cocoa into products used in confectionery, so there’s been competition for beans between local processors and shippers.

Because of that, local grinders complained to the government about difficulties in securing supplies, according to people familiar with the matter who asked not to be identified. So now the regulator is telling companies and exporters that don’t have processing facilities in the country that they can’t buy beans from the mid-crop, at least until the end of this month, the people said.

Cocoa prices in New York have been on a multi-month rollercoaster, topping out at $12k in mid-April, only to plunge 44% to the $6.7k handle in mid-May. Now, prices have surged 49%, inching closer to the $10k mark. 

While Rabobank analyst Paul Joules recently told clients cocoa prices have likely peaked, Andurand, founder of Andurand Capital Management LLP, known for his oil and energy trades, recently told Odd Lots hosts that prices could surge again. 

“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 ten 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.”

The news from the Ivory Coast only suggests a further tightening in global supplies. Wait until the Biden administration explains how corporate ‘greedflation’ is responsible for ‘candyflation’ in October before Halloween.