Cocoa- A New Multi-Year High in the Soft Commodity

Andrew Hecht - Barchart - Thu Apr 27, 2023

In a March 8 Barchart article, I wrote, “The price action in the cocoa futures market remains bullish on March 8. Buying cocoa on price corrections could be optimal as it joins the other soft commodities in the current environment of higher lows and higher highs on routes to multi-year peaks.” On March 8, nearby May cocoa futures were at the $2,732 per ton level.
In the Q1 2023 soft commodities recap on Barchart, I wrote, “A move above $3,054 would end the pattern of lower highs from 2011, but it also continues the pattern of higher lows from June 2017.” May futures closed Q1 at $2,933 per ton and were at $2,991 on April 17 after probing above the $3,000 level.

As the May ICE cocoa futures contract rolled to July, the price broke out to the upside, rising to a seven-year high. The iPath Cocoa Subindex TR SM Index ETN product (NIB) tracks the price of ICE cocoa futures.

Cocoa trades above $3,200 per ton for the first time in years

On April 21, nearby May ICE cocoa futures reached $3,221 per ton.

As the chart highlights, cocoa futures have been making higher lows and higher highs since finding a bottom at $1,769 per ton in June 2017. The rose to $3,221 on April 21 put cocoa futures at the highest price since June 2016.

Tight supplies push cocoa prices higher

The Ivory Coast is the world’s leading cocoa producer.

Source: Statista

The chart illustrates that over the past three years, the Ivory Coast produced more than double the amount of cocoa beans than Ghana, the second-leading producer.

In mid-March 2023, Fitch Solutions wrote, “We expect ongoing concerns over tight supplies to continue supporting prices, with reports emerging of the Cote d’Ivoire exporters near to defaulting on contracts due to insufficient cocoa bean supply.”

The world’s leading producer restricts two top trader’s buying

Meanwhile, the writing was on the wall for higher cocoa prices as the Ivory Coast restricted new cocoa purchases from Cargill and Barry Callebaut, two of the world’s leading chocolate manufacturers. The Ivory Coast’s regulatory body, Le Conseil Café Cacao or CCC, restricted the multinational traders from additional bean purchases for exports as the country attempts to avoid a shortage. Cargill and Barry Callebaut had already reached amounts stipulated in supply contracts.

Cargill offers a range of cocoa and chocolate varieties and specialty items in its manufacturing portfolio. Barry Callebaut is a leader in high-quality chocolate products. While the Ivory Coast cut back on supplies to the two companies, it is likely doing the same to the other top chocolate manufacturers.

Upside levels to watch in the ICE cocoa futures market

Cocoa futures have been rallying over the past six years, and the trend remains higher as of late April 2023.

The chart dating back to the late 1960s highlights the bullish trend in cocoa since December 2000, when the price fell to $674 per ton. While $3,000 per ton was a psychological level, technical resistance stood at the November 2020 $3,054 high. The next upside target is $3,422, the December 2015 high, and $3,826, the March 2011 peak. The July 1977 $5,379 record high is the ultimate upside target for cocoa beans.

Cocoa production in West Africa faces the highest inflation in years, and rising input prices as producers and chocolate manufacturers address child labor and sustainability concerns, increasing production costs. Moreover, like all agricultural commodities, the weather and crop diseases can impact supplies. Political events and government stability in West Africa can cause significant logistical impediments.

NIB is the cocoa ETN product

The most direct route for a risk position in cocoa is via the futures and futures options trading on the Intercontinental Exchange (ICE). The iPath Cocoa Subindex TR SM Index ETN product (NIB) provides an alternative to the future arena for market participants looking to add cocoa exposure to their portfolios.

At $33.11 per share on April 27, NIB had $17.266 million in assets under management. NIB trades an average of 10,096 shares daily and charges a 0.70% management fee.

The latest rally in May ICE cocoa futures took the primary ingredient in chocolate confectionery products from $2,604 on March 15 to $3,221 on April 21, a 23.7% rise.

Over the same period, NIB rose from $28.02 to $34.00 per share, or 21.3%, as the ETN did an excellent job of tracking cocoa futures prices.

The trend is always your best friend in markets across all asset classes and remains higher in cocoa. The next targets are the late 2015 $3,422 high and the 2011 $3,826 peak. Supply problems in the Ivory Coast and the technical trend increase the odds of rising prices in late April 2023.

More Softs News from Barchart

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.