The primary input in chocolate confectionary products enjoyed worldwide is the cocoa bean. Growing cocoa requires a tropical and equatorial climate, making West Africa the leading producer. The Ivory Coast leads the world in cocoa output, and neighboring Ghana typically produces the second-largest annual crop. Cocoa futures trade on the Intercontinental Exchange (ICE) in the soft commodities sector. 

In an April 27 Barchart article, I highlighted the new $3,221 high on the nearby ICE cocoa futures contract. In May, cocoa futures rose to a higher high. The iPath Cocoa Subindex TR SM Index ETN product (NIB) tracks ICE cocoa futures prices higher and lower. 

New highs and a pullback

In May 2023, nearby ICE cocoa futures reached another new multi-year peak. 

The ten-year continuous futures contract reached $3,279 per ton in May, the highest price since December 2015, when nearby cocoa futures traded at $3,422, the highest price since 2011. 

Since then, cocoa prices have pulled back but remained above the $3,000 per ton level on June 8. 

Cocoa remains bullish at over the $3,000 per ton level

The July ICE cocoa futures chart highlights the bullish pattern of higher lows and higher highs since the September $2,192 low.

The chart illustrates the bullish price pattern that took July futures to a $3,153 high on June 8. Since early May, cocoa futures had consolidated around the $3,000 per ton level before resuming the bullish trend. 

The forward curve provides fundamental clues

The forward curve in any commodity can provide supply and demand clues. A backwardation or progressively lower prices for deferred delivery indicates a nearby shortage, assuming producers will increase output at higher price levels, resulting in lower futures prices as new supplies eliminate the deficit. 

A contango, or progressively higher prices, often tells us that current price levels are low enough that producers will curtail production, leading to higher future price levels. Moreover, contango also reflects the cost of capital or financing as producers borrow funds to grow or mine for commodities. The forward curve in ICE cocoa futures as of June 6 displays the following price structure:

While the forward cocoa futures curve is in a slight backwardation, prices remain above the $2,900 per ton level out to May 2025 delivery. The slight backwardation and high deferred prices indicate supply issues in West Africa, but the high level of prices in 2024 and 2025 mean the market expects supply tightness to continue.

In the April 27 Barchart piece, I highlighted that tight supplies are causing the world’s leading producer, the Ivory Coast, to restrict wholesale consumer buying.  

Levels to watch in the cocoa futures market

As the bullish trend in the cocoa futures arena continues, technical levels are critical for trading and investment risk positions. 

The ten-year chart shows the October 2021 and February 2022 highs at $2,792 and $2,790 that were technical resistance in 2022 and early 2023 are now the technical support level. Resistance stands at the continuous contract $3,279 high from May 2023 and the December 2015 $3,422 peak, which could be a gateway to a test of the 2011 $3,826 high.  

NIB provides an alternative to the futures

As the bullish trend of higher lows and higher highs continues, the most direct route for a risk position in cocoa is via the ICE futures and futures options. The iPath Cocoa Subindex TR SM Index ETN product (NIB) provides an alternative for those looking to participate in the cocoa market without venturing into the leveraged and margined futures arena. At $36.29 per share on June 8, NIB had $13.473 million in assets under management. NIB trades an average of 9,027 shares daily and charges a 0.70% management fee. 

July cocoa futures rose 20.7% from $2,613 on March 15, 2023, to $3,153 on June 8. 

Over the same period, NIB rose from $28.02 to $36.29 per share or 29.5%, as the ETN outperformed the price action in the July contract. Meanwhile, the continuous futures contract rose from a $2,586 March low to $3,279 in May, a 26.8% increase. NIB’s return was closer to the continuous contract rise over the past months. 

Cocoa was the last soft commodity to take off on the upside. In 2022 and 2023, coffee, cotton, sugar, and FCOJ have all risen to multi-year highs, with OJ reaching a new record peak. NIB is a product that allows market participants with a standard stock market investment account to participate in the cocoa market, as the consolidation at the $3,000 level gave way to higher highs and the prospects remain bullish for he coming weeks and months. In a market trending higher, buying on dips tends to be the optimal approach, as even the most aggressive bull market rarely moves in a straight line. 

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