The driver of record cocoa prices (Financial Times subscription required) is a classic supply/demand story. It's also a story of what happens to hedgers and traders when they get caught on the wrong side of a market.

On the supply side, inventories at exchange registered warehouses are at very low levels. The Ivory Coast, which supplies 40% of the world's cocoa, had a poor crop. The trees are old and disease prone, and without new investment crop production will continue to fall. Consequently, many believe that cocoa demand will outstrip supply for the fifth straight year.

If you look at commodity prices like gold, oil and grains you are seeing that prices have fallen sharply since last July. Bucking this trend is a lesser known commodity, namely cocoa, which traded at 1,820 British pounds per tonne.

The questions you are probably asking are: why is the price of cocoa so high? and what is causing this big jump in price? For the past three years and especially this year, a combination of events have come together to set this price rise in motion. First, the weather has been bad in the Ivory Coast, a leading producer of cocoa, with cold weather and heavy rains. Also there has been a disease called the black pod disease which attacks the cocoa plant. Add to this a series of strikes by farmers and finally growers used less fertilizer this year because the cost was too high. Taken together these factors caused a 40% drop in production to 251,000 tons from the Ivory Coast.. Cocoa inventories are now only 39% of global production, down 54%

If there is a lessening of demand next year, perhaps prices will level off a bit, but for now prices remain at these very high levels.