Commodity futures markets often exhibit what is known as carry structure or contango, which is the upward stairstep shape associated with the string of progressively later-dated futures contracts. Higher premiums are a function of the greater uncertainty that comes with time plus additional logistics, warehousing, and insurance premiums.
The expiring December (Dec-20) NY ICE cocoa contract took many traders by surprise when it “blew out” to a premium above all other months as it went into delivery. The Hershey Company, one of the largest U.S.-based confectionery companies, was said to be behind by taking physical delivery of cocoa beans graded by the exchange in an attempt to take a controlling position of physical graded stocks.
Crucially, beans that have been successfully graded and met exchange quality standards are not subject to the additional Living Income Differential (LID) offset on all beans exported from Ivory Coast and Ghana as of Oct 1. Companies struggling with the COVID-19 global pandemic and rising costs had attempted and largely failed to renegotiate the LID lower in response to these challenges. The LID, recently introduced, is a premium intended to help improve the livelihood of cocoa growers in the participating countries of Ivory Coast and Ghana, the world’s number-one and number-two cocoa growers, respectively.
The move on the exchange may be seen as a way to get cheaper priced beans that exclude the LID and trade at a 15 percent discount to regulated exports.