In a September 5 Barchart article, I asked, “Is cocoa going to leave the 2011 high in the dust?” In 2011, nearby cocoa futures rose to $3,826 per ton. I wrote:
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.
The nearby December ICE cocoa futures contract moved higher than the 2011 peak in late October; the soft commodity took out the $4,000 per ton level in November.
Cocoa’s rally continues
Cocoa futures reached a $1,769 per ton low in June 2017. Since then, the primary ingredient in chocolate confectionery products has made higher lows and higher highs.
The ten-year chart shows the bullish pattern that broke out to the upside in July 2023. At over $4,000 per ton on November 20, cocoa’s path of least resistance remains higher.
A multi-decade high
Cocoa prices exploded higher to a multi-decade peak in November 2023.
The monthly chart dating back to 1970 shows the rally that took the nearby ICE cocoa futures to $4,110 per ton. Cocoa futures eclipsed the 2011 $3,826 peak and rose to the highest price in forty-five years. In 1978, cocoa futures peaked at $4,142, the next technical target. Above there, the 1977 $5,379 high is the upside milestone.
Cocoa may not be price elastic in a rising environment
Price elasticity causes the demand for a commodity to decline at higher prices. Meanwhile, cocoa beans may not be very price elastic as chocoholics worldwide will likely pay more for their sweet treats.
The Ivory Coast and Ghana are the leading cocoa-producing countries. Bean deliveries to Ivorian ports are over 15% behind the norm this season. Cocoa analysts expect a third consecutive deficit for the critical chocolate ingredient. The highest cocoa prices in nearly a half-century and sugar prices since 2011 are causing cookie and candy prices to soar. Meanwhile, consumers will likely pay more for the treats as the leading manufacturers increase prices. It is much easier to cut back on major purchases than the daily pleasure from tasty treats.
A backwardation suggests more production, less demand, and lower prices
The cocoa forward curve displays a backwardation.
The cocoa curve shows that prices for deferred delivery from March 2024 are progressively lower. The backwardation signifies the market’s sentiment that demand will decrease at higher prices and producers will increase output, causing future prices to drop.
Meanwhile, with prices for May 2025 delivery above the $3,600 per ton level, they remain at the highest level in years.
The futures are the only way to participate
After delisting the NIB ETN product, the only way to participate in the cocoa market is via the futures and futures options on the U.S. Intercontinental Exchange and the cocoa #7 futures and options on the European Intercontinental Exchange.
The futures contract size is ten metric tons. While the U.S. contract is priced in dollars per ton, the European contract uses British pounds as the pricing mechanism. The futures involve margin. While the value of one U.S. cocoa futures contract is $40,000 at $4,000 per ton, original and maintenance margin levels are $1,650/$1,500 per contract. The initial margin is under 4% of the contract value, creating significant leverage that translates to opportunities and risk. While cocoa’s trend is higher in late 2023, even the most aggressive bull markets rarely move in straight lines. The higher prices rise, the greater the odds of a significant price correction.
Over the past years, cocoa, sugar, coffee, cotton, and frozen concentrated orange juice have risen to multi-year highs. FCOJ moved to a new record peak over the past weeks. The soft commodities sector has been on bullish fire, and cocoa joined the party with a rise to a forty-five-year high. The trend is always your best friend in markets and remains higher in cocoa. A move to challenge the all-time high is possible.
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.
