In an August 24 Barchart article, I suggested that the pullback in cocoa futures prices was a buying opportunity. Active month December cocoa futures were trading at the $3,446 per ton level on August 24 when I wrote:
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.
December ICE cocoa prices did not fall from the August 24 level, and they were near $3,700 per ton on September 5.
A higher high and a continuation of the bullish trend- OI starts to build
After nearby ICE cocoa futures reached a $2,192 per ton bottom in late September 2022, every dip has been a buying opportunity.
The chart highlights the over 64% rally that has taken cocoa futures to over the $3,600 per ton level in August 2023.
In the August 24 Barchart piece, I highlighted how the total number of open long and short positions in the cocoa futures market dropped from over 360,000 contracts in late July to below 272,000 contracts on August 17 as the September futures contract rolled to December. I wrote, “The significant decline likely occurred as market participants liquidated long risk positions and took profits instead of rolling to the next active futures contract.” The bullish price action since August 24 came alongside a rise in open interest to 287,689 contracts as of September 1. Rising prices and increasing open interest tend to validate a bullish trend.
Clear sailing to the 2011 high could be on the horizon
The longer-term cocoa futures chart displays a technical breakout with the next upside target at the 2011 peak.
The twenty-year chart shows the most recent $3,652 per ton high in August 2023. The next technical stop stands at the March 2011 $3,826 high. From a long-term perspective, cocoa futures have made higher lows and higher highs since June 2017, when the price found a bottom at $1,769, the lowest price since August 2007.
El Nino and Chinese demand- A bullish cocktail
The cocoa market has moved into a deficit where demand outstrips supplies. An early September Confectionery News article outlined the bullish factors pushing cocoa prices higher:
- The West African cocoa crop is “one of the worst in recent memory…A combination of fertilization problems a year ago means that farmers did not take care of their groves as well as they normally do. Now you have cocoa rotting in parts of the fields of Ghana and perhaps a bit in the Cote d’Ivoire.”
- The present El Nino event and record global warm ocean temperatures are reasons prices are rising.
- “Global coca demand has been really sudden and improving. Many countries that weren’t traditional cocoa buyers (such as China) are now becoming consumers and pushing things higher.”
Supply problems and new demand verticals create a bullish cocktail for the soft commodity.
Passing higher prices onto the consumer where demand is inelastic
While many commodities are price elastic, meaning prices rise to levels where demand falls as consumers turn to substitutes, there are few alternatives to chocolate for the world’s many and growing numbers of chocoholics. Even if the price of chocolate confectionery products doubles, many consumers will pay higher costs for the delicious treats.
The Confectionery News article quoted Jim Roemer, a Commodity Trading Advisor specializing in meteorology, who said, "sharply higher cocoa prices due to weather are a net positive for large chocolate brand owners who have the power to pass on costs to consumers.” Meanwhile, over the past year, some of the world’s leading chocolate manufacturers have run into problems securing extra cocoa beans to meet the rising demand from the Ivory Coast, a sign of supply tightness in the cocoa market.
The levels to watch as the price continues to work higher
Cocoa’s critical upside target at the 2011 $3,826 peak is only $174 away from the most recent continuous contract high. The technical resistance level could give way before the end of 2023 as the bullish technical trend reflects the soft commodity’s strong supply-demand fundamentals.
Since bull markets rarely move in straight lines, corrections can suddenly cause downdrafts in the cocoa futures market. The first critical technical support stands at the November 2020 $3,054 high. Cocoa broke above the late 2020 high in April 2023, turning the resistance level into technical support.
The only route for a risk position in cocoa is via the ICE futures and futures options. The iPath issuer delisted the former NIB ETN product that tracked cocoa prices. These days, the futures are the only game in town for market participants looking for cocoa exposure.
I am bullish on the prospects for cocoa prices and expect the 2011 highs to give way to higher highs, perhaps above the $4,000 per ton level over the coming months. I am a buyer of cocoa on any pullbacks as the technical and fundamental factors point to higher prices for the primary ingredient in chocolate confectionery products.
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.
