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Market Pulse
Thursday, March 28, 2024

Cocoa beans are beating Nvidia, The challenge of infrastructure investing and… A small win for large merchants

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Our stories this week are:

  1. Cocoa beans vs Nvidia
  2. The challenge of infrastructure investing
  3. A small win for large merchants

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Cocoa beans vs Nvidia

With Easter around the corner, chocolate lovers are facing a bitter reality: the price of cocoa, the key ingredient for chocolate treats including Easter eggs, is sky-high. It's a tough time for chocolate makers as cocoa futures surged above an unprecedented $10,000 a metric ton in the futures market on Tuesday. Over the last 12 months, the crop’s futures have gained more even than shares in Nvidia Corp.

Harsh weather, ageing crops, and disease have hurt production in the Ivory Coast and Ghana, which together account for almost two-thirds of the global cocoa crop. Rabobank forecasts a 7% crop decline in the Ivory Coast and an 11% drop in Ghana compared to their five-year average production levels [1]. The potential for an El Niño weather event further threatens West African crops, fuelling the surge in cocoa prices.

Still, no supply/demand imbalance can justify the meteoric rise in the commodity price, which typically hovers around $2,500 per metric tonne and last reached a record of $5,000 in 1977. This suggests that the last few weeks of daily record highs are more due to financial factors than fundamentals.

To grasp the dynamics of the cocoa market, one needs to examine the interplay between bearish traders and cocoa producers who want to protect their physical cocoa holdings from price fluctuations. Despite market fundamentals suggesting strong prices, some producers opt to maintain short positions to balance their physical exposure. 

However, when cocoa prices persistently rise, these producers face margin calls that strain their cash reserves. Consequently, they're forced to close their short positions at any cost, intensifying the upward price momentum. In this context, market prices lose their rational basis and instead become dictated by the pressing need to avoid financial collapse.

Once market prices detach from their underlying fundamentals, a bull market gains momentum and often continues until a significant disruption occurs. We expect premium chocolate makers like Nestle or Lindt to pass on the raw material inflation to the end customer. However, the ongoing surge in cocoa prices has wider implications for the industry and could destabilise the entire cocoa supply chain. Simply increasing the cost of Easter eggs would be far from the worst outcome.

2) The challenge of infrastructure investing

When the Francis Scott Key Bridge opened in Baltimore on March 23, 1977, it fully complied with building codes. A few years earlier, in 1972, the Hamburg Express marked a significant milestone in maritime history by becoming the world's largest container ship at that time[2]. It had a capacity to carry 2,950 Twenty-foot Equivalent Units (TEUs) and a gross tonnage of 57,803 tons [3]. Fast forward to today, and the largest container ship, the Ever Alot, has a capacity of 24,004 TEUs and a gross tonnage of 236,228 tonnes or 4x more than the Hamburg Express [4]. 

The recent tragic incident in Baltimore harbour dramatically underscores the need to revitalise America's ageing infrastructure and highlights infrastructure investment challenges everywhere. However, balancing the urgent need for speed with a durable long-term solution will be costly, making funding the key issue.

The challenge of infrastructure investing is not new. In 2015, the World Bank and IMF grappled with an "infrastructure gap," seeking ways to attract private investment [5]. Yet, despite near-universal agreement on the value of infrastructure, securing private funding remains elusive. This is exemplified by the poor performance of S&P's global infrastructure index, which has risen marginally since its inception despite high demand for projects.

Building infrastructure is complex, especially given the pandemic's lingering effects. Returns often hinge on public sector cooperation, leaving projects vulnerable to political uncertainty. BlackRock and others rightly recognise[6] that funding must combine public and private sources, as government debt alone cannot cover the costs. But attracting private investment means guaranteeing returns—a potentially unpopular proposition with voters.

The Baltimore incident is a reminder that proactive infrastructure renewal is crucial. By embracing innovative solutions and cutting red tape, authorities can forge a path towards safer and more resilient infrastructure for the future.

3) A small win for large merchants: Visa & Mastercard Settle Landmark Lawsuit

On Tuesday, Visa and Mastercard announced their landmark settlement of the long-running merchant class-action lawsuit[7]. The key highlights of the settlement include a seven basis point (bps) interchange rate reduction for the next five years, clearer rules, and greater flexibility for merchants regarding point-of-sale surcharging. The agreement is the culmination of two decades of negotiations between the two sides over the fees, which have swelled to become a $100 billion-a-year business for the networks and the world’s biggest banks [8]. 

However, while the payments are believed to save retailers at least $30 billion in credit card swipe fees, we don’t anticipate much of an impact for Visa and Mastercard. The networks set the interchange (the fee that merchants pay on every transaction), but it’s not a revenue stream for them. Instead, card issuers (generally banks) collect it and use it to incentivise customers with card loyalty rewards programs. 

In addition, Visa estimates that small businesses comprise more than 90% of the settling merchants [9] (merchants who accept and process card payments). Small and medium businesses (SMB)- focused merchant acquirers (payment enablers) often have fixed pricing for small merchants as opposed to interchange+ pricing—a variable pricing model based on transaction fees—for larger merchants. 

This could significantly reduce the settlement's intended impact, as much of the $30 billion savings may benefit acquirers instead of small businesses.

Note: We own Visa, Nestle and Nvidia in our Flagship Strategy.


[1] https://research.rabobank.com/far/en/sectors/agri-commodity-markets/cocoa-market-update-supplies-subside.html

[2] https://logisticselearning.com/largest-container-ships-by-year/

[3] https://www.container-transportation.com/worlds-largest-container-ship.html

[4] https://www.hafen-hamburg.de/en/special/ever-alot/

[5] https://www.ft.com/content/0ac1a45e-86c8-11e5-90de-f44762bf9896

[6] https://www.blackrock.com/corporate/investor-relations/larry-fink-annual-chairmans-letter

[7] https://usa.visa.com/about-visa/newsroom/press-releases.releaseId.20506.html

[8] https://www.bloomberg.com/news/articles/2024-03-26/visa-mastercard-reach-30-billion-swipe-fee-deal-with-merchants

[9] https://www.reuters.com/business/finance/mastercard-visa-reach-30-bln-settlement-over-credit-card-fees-2024-03-26/#:~:text=The%20fee%20rollbacks%20and%20caps,wrongdoing%20in%20agreeing%20to%20settle


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