The U.S. ICE cocoa market recently rolled from September to December futures. The September contract reached a twelve-year high of $3,652 on August 7, while December futures rose to $3,618 per ton. The price corrected since the early August high, but the bullish trend remains intact, with December futures at over the $3,440 per ton level on August 24.
In a July 14, 2023, Barchart article, I asked How High Can Cocoa Prices Rise? September ICE cocoa futures were at $3,353 per ton on July 14 after reaching a $3,373 high. As cocoa approached a breakout level in dollar terms, at $3,422, I pointed out that cocoa #7 had already reached a record peak in 2023, surpassing the 2010 high.
Cocoa futures took a hiatus from the bullish price action as the September contracts in the U.S., and U.K. rolled to December futures. However, the path of least resistance remains higher, and buying futures on dips could be the optimal approach for market participants looking for exposure to the primary ingredient in chocolate confectionery products.
U.S. futures remain in a bullish trend
The continuous cocoa futures chart displays a bullish trend since the price found a bottom at $2,192 per ton in September 2022.
The chart highlights the pattern of higher lows and higher highs since the September 2022 low. Nearby ICE U.S. cocoa futures rose 66.6% to the latest high at $3,652 per ton in August 2023. Cocoa futures reached their highest price since 2011 when the nearby futures peaked at $3,826. At over the $3,440 level on August 24, cocoa remains closer to the high than the September 2022 low and is in a bullish trend.
U.K. futures are not far under the record high
While U.S. cocoa futures remain below the 2011 high, U.K. cocoa #7 futures reached a new record peak in July 2023.
The chart shows the rally to the recent 2,873 British pounds per ton high. While currency differentials have caused the price in British pounds to reach record territory, cocoa in pounds and dollar terms remain bullish in late August 2023.
Cocoa farmers face inflationary pressures
West Africa is the world’s leading cocoa-producing region, as the equatorial climate supports cocoa crops. The Ivory Coast leads in output, while Ghana is the second-leading producing country. While Indonesia is third, Nigeria and Cameroon are fourth and fifth, rounding out African cocoa production domination.
Supply chain issues and rising inflation have been a global problem since the 2020 worldwide pandemic. The highest inflation in decades has caused output costs to rise, putting upward pressure on prices. Cocoa is not the only soft commodity to rise to multi-year highs since 2022. Coffee, cotton, and sugar futures prices have traded to the highest levels in over a decade. Frozen concentrated orange juice, the fifth and most illiquid soft commodity, recently rose to a record high price.
As farmers face higher input and labor prices, and transportation costs have increased, agricultural commodities prices have increased.
Does price elasticity matter for chocolate consumers?
In the world of commodities, the cure for high prices tends to be those high prices as producers tend to increase output, demand declines as consumers refuse to pay more, and prices peak and turn lower. Meanwhile, cocoa could be unique as the world’s chocoholics may not be as price sensitive as in other consumer markets. Chocolate confectionery products provide pleasure to people worldwide as it is a guilty pleasure. Therefore, cocoa may be less price elastic than other consumer goods, allowing the price to rise if the increases are slow and steady. Meanwhile, sudden violent upside price spikes can lead to commensurate corrections. The elasticity of demand in the cocoa market is a function of the trajectory of price increases.
Futures are the only investment and trading route
The trend is always your best friend in markets, and the path of least resistance in the cocoa futures arena remains higher in late August 2023. The weather, crop diseases, and logistical issues in West Africa will influence prices most over the coming weeks and months.
The most recent correction in December futures that took the price 4.8% lower from $3,618 on August 7 to $3,445 on August 24 came as the September futures rolled to December. Rolling from one active month to the next tends to distort agricultural commodity prices. In cocoa, the total number of open long and short positions declined over 23% from over 360,000 contracts in late July to 276,631 as of August 23. The significant decline likely occurred as market participants liquidated long risk positions and took profits instead of rolling to the next active futures contract.
Higher production costs, steady chocolate demand, and potential logistical issues in West Africa could keep the bullish trend of higher lows and higher highs intact. Buying cocoa on the current dip could be the optimal approach but leave room to add at lower levels if the correction becomes deeper. Technical support stands at around the $3,000 per ton level. A scale-down buying approach could be optimal. Unfortunately, no cocoa ETF or ETN products exist, as the NIB ETN was delisted earlier this year. The only investment or trading route for cocoa is the futures and futures options contracts offered by the Intercontinental Exchange.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
