In an April 18, Barchart article on the explosive cocoa futures market, I wrote:
Cocoa will eventually reach a top, but the trend is always your best friend in all markets, and it remains bullish in cocoa in mid-April 2024. Cocoa led the soft commodities sector in 2023 and Q1 2024. Time will tell if cocoa continues to hold the bullish baton at the end of June when Q2 ends.
Nearby cocoa futures were at $10,498 per ton on April 17 after trading to a $11,206 peak. The price reached a higher high in April before correcting lower, below the $10,000 level. Meanwhile, cocoa remains substantially above its previous all-time peak, and the odds of another explosive period remain high.
Cocoa eclipsed $12,000 per ton before turning lower
Before 2024, the all-time high in nearby ICE cocoa futures was back in July 1977 at $5,379 per ton. Cocoa futures spent nearly a half-century below the 1977 high before moving to over double the price.
The long-term chart highlights the explosive move in cocoa futures, which took them to a $12,261 per ton in April 2024 before running out of upside steam. Cocoa futures were below the $10,000 level in June 2024.
A shooting star or a rest period before another new high?
Cocoa’s rise to a new record peak occurred as supply concerns gripped the market. The Ivory Coast and Ghana produce over 60% of the world’s cocoa beans annually. Poor weather conditions, crop disease, and logistical issues caused severe shortages, leading to the explosive rally.
While cocoa’s price corrected from the $12,261 high, at over $9,000 per ton, the soft commodity remains significantly above the 1977 $5,379 per ton high, now technical support.
The six-month July futures chart shows futures have been consolidating between $6,767 and $10,047 per ton since early May. Time will tell if the consolidation leads to another higher peak in the cocoa futures arena.
Fundamentals are causing the volatile price action
An April J.P Morgan research report highlights the fundamental reasons why cocoa prices have soared. The report blames a global supply shortage, “chronic” underinvestment in cocoa farms, and speculative buying for the rally.
Chocolate manufacturers worldwide are struggling with the impact of higher costs, increasing prices, and cutting portions, which is creating “shrinkflation.”
The report suggests that while the rise to over $12,000 per ton is unsustainable, the price could sink to the $6,000 level, which is still above the previous 1977 record high.
A top trader claims the world can run out of cocoa
Pierre Andurand, the founder of Andurand Capital Management LLP, a hedge fund, does not believe the cocoa rally is over. Mr. Andurand has said, “We can run out of cocoa.”
Cocoa production relies on an equatorial climate, making West African countries the ideal place for production. While the Ivorian and Ghanese economies have long relied on cocoa production, they have been running out of beans because of adverse weather conditions and severe cocoa bean disease in West Africa.
While the demand for chocolate confectionery products remains robust, supplies are challenging for the leading manufacturers.
FCOJ may be a model for future cocoa price action as bull markets rarely move in straight lines
If the cocoa shortage persists, the frozen concentrated orange juice futures market could be a model for the cocoa futures over the coming months. Before 2023, OJ’s record high occurred in 2016 at $2.35 per pound. Supply issues in Florida and Brazil propelled OJ prices to a record high in 2023 and 2024.
The chart highlights OJ’s rise to $4.3195 in October 2023. After correcting below the $3 level in early 2024, OJ futures rallied to a new $4.9525 per pound all-time high in May 2024.
If OJ is a model for the cocoa futures market, we could see higher highs over the coming months. Even the most aggressive bull markets with significant fundamental support rarely move in straight lines. Production issues in West Africa and the lack of substantial output from other producing countries to replace the Ivorian and Ghanese beans could mean even higher cocoa prices are on the horizon. Chocoholics worldwide will pay more for less to satisfy their chocolate fix over the coming years as manufacturers increase prices and decrease portions to address the shortage.
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.
