In a September 5th Barchart article, I asked, “Will cocoa leave 2011 high in the dust?” In 2011, nearby cocoa futures rose to $3,826 per ton. I wrote:
I am bullish on the outlook for cocoa prices and expect the highs of 2011 to give way to higher highs, possibly above the $4,000 per tonne level over the coming months. I am a cocoa buyer on some pullbacks as the technical and fundamental factors point to higher prices for the main ingredient in chocolate confections.
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 hit a low of $1,769 per ton in June 2017. Since then, the main 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 top in July 2023. At over $4,000 per ton on November 20, cocoa’s path of least resistance remains higher.
Decades high
Cocoa prices surged higher to a multi-decade peak in November 2023.
The 1970 monthly chart 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. Up there, the 1977 $5,379 high is the top milestone.
Cocoa may not be priced last in a rising environment
Price elasticity causes the demand for a commodity to decrease at higher prices. Meanwhile, cocoa beans may not be very price elastic as chocoholics worldwide are likely to pay more for their sweet treats.
Ivory Coast and Ghana are the main cocoa producing countries. Deliveries of beans to Ivory Coast ports are more than 15% behind the norm this season. Cocoa analysts expect a third consecutive deficit for the critical chocolate ingredient. The highest cocoa prices in nearly half a century and sugar prices since 2011 are causing cookie and candy prices to rise. Meanwhile, consumers are likely to pay more for the treats as major manufacturers raise prices. It is much easier to cut back on major purchases than the daily pleasure of delicious treats.
A pullback suggests more production, less demand and lower prices
The cocoa front curve points backwards.
The cocoa curve shows that prices for delayed delivery from March 2024 are gradually lower. The backwardation means the market’s feeling that demand will decrease at higher prices and producers will increase production, causing futures prices to decrease.
Meanwhile, with prices for May 2025 delivery above the $3,600 per tonne level, they remain at the highest level in years.
The futures are the only way to participate
After the removal of the NIB ETN product, the only way to participate in the cocoa market is through the futures and futures options on the American Intercontinental Exchange and the cocoa No. 7 futures and options on the European Intercontinental Exchange.
The size of the futures contract is ten tons. While the US 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 US 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 less than 4% of the contract value, creating significant leverage that translates into opportunities and risk. While cocoa is trending 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 major price correction.
Over the past few years, cocoa, sugar, coffee, cotton and frozen orange juice concentrate have risen to multi-year highs. FCOJ has moved to a new record high over the past few weeks. The soft goods sector was bullish, 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.
As of 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 for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.