ICE sugar futures prices rose to the highest level since 2017 in late 2021. Nearby ICE frozen concentrated orange juice futures traded to over $2.30 per pound in November 2022,  the highest price since November 2016 and less than 5 cents below its all-time peak. Nearby ICE coffee futures reached over $2.60 per pound in February 2022, a price not seen since 2011, and  ICE cotton futures at over $1.58 per pound in May 2022 also rose to an eleven-year high. 2022 has been a volatile year in the soft commodities sector, with explosive and implosive price action. Sugar, coffee, cotton, and FCOJ all have one thing in common; Brazil is a leading or top producer of the four softs. 

Meanwhile, cocoa production comes primarily from West Africa, with the Ivory Coast and Ghana producing over 60% of worldwide annual supplies. Cocoa volatility has not kept pace with the other softs, but the recent price action could signify that cocoa is about to surprise on the upside. The iPath Cocoa Subindex TR Index ETN product (NIB) moves higher and lower with cocoa prices.

A bearish pattern and a break to the upside

Cocoa has been on the sidelines as other soft commodities rose to multi-year highs. Since February 2022, cocoa futures have made lower highs and lower lows. 

The chart illustrates the bearish trend that took nearby December ICE cocoa futures from $2,817 per ton on February 10, 2022, to a low of $2,192 on September 26, 2022. The 22.2% decline came as worldwide inflation continued to rage. Cocoa had been immune to inflationary pressures. Since late October, cocoa futures have taken off on the upside, reaching $2,577 per ton, the highest price since June 2022. Cocoa broke the bearish technical trend on November 7 when the price rose above the first short-term technical resistance level at the mid-August $2,469 high. 

December futures are rolling to March- Lots of price action around roll periods

Cocoa habitually becomes highly volatile when one futures contract rolls to the next. We are currently in the period where December ICE futures are rolling to March. 

The chart of the March 2023 ICE cocoa futures price shows the same trend shift that is taking cocoa futures to a five-month high. Open interest tends to change during the roll period as longs and shorts either roll their risk positions to the next active month or abandon them. When the total number of open long and short positions declines, it tells us that risk positions are closing and market participants are not re-establishing them. On November 3, the cocoa market’s open interest stood at 319,236 contracts. On November 10, it was 16.1% lower at 267,970 contracts. Over the same period, the price rose 7% from $2,355 to $2,519 per ton. The price action and decline in open interest indicate that market participants covered short positions over the past sessions. The lack of new sellers pushed the cocoa price higher. 

The British pound influences cocoa prices, and the pound recovered

Most cocoa supplies come from the Ivory Coast and Ghana in West Africa. London has long been the hub of international physical cocoa trading because of its relative proximity to West Africa, its time zone, and London’s role as a global financial center. Since many physical contracts use the British pound as the pricing currency and ICE cocoa futures trade in US dollars, cocoa can be sensitive to moves in the British pound versus the US dollar exchange rate. A decline in the pound’s value against the dollar tends to be bearish for cocoa prices, while a rising pound has the opposite impact on the price of the primary ingredient in chocolate confectionary products. 

The chart shows the bearish pattern in the pound that found a bottom in late September. After reaching a spike low of $1.03485 on September 26, the lowest level since 1985, the pound turned higher and was trading at the $1.17843 level against the dollar on November 11, a 13.9% rise. The rising pound likely helped cocoa break higher and out of its bearish trading pattern. 

Levels to watch in cocoa futures

March cocoa futures were at the $2,519 per ton level on November 11. While the short-term chart since February 2022 has been primarily bearish before the break to the upside, a longer-term chart displays an upside bias for the soft commodity. 

The chart shows that cocoa has mostly made higher lows over the past years. After falling to a $1,769 per ton low in June 2017, cocoa made higher lows and higher highs through November 2020, when it peaked at $3,054, which is the upside target. Technical support stands at $2,192, with resistance at $2,792 and $3,054 on the continuous futures contract. 

Given the price action in other soft and agricultural commodities, the rise in the British pound, and a dock workers strike in the Ivory Coast, impacting cocoa’s logistics, cocoa prices could continue to rise as the short-term trend is now pointing higher.  

NIB is the cocoa ETN product

The most direct route for a risk position in the cocoa market is via the futures and futures options on the Intercontinental Exchange (ICE). The iPath Cocoa Subindex TR Index ETN product (NIB) provides an alternative for market participants seeking cocoa exposure without venturing into the futures arena.

At $26.96 per share on November 11, NIB had $16.098 million in assets under management and traded an average of 23,606 shares daily. NIB charges a 0.70% management fee. 

March cocoa futures rose from $2,190 on September 26 to $2,564 per ton on November 10, a 17.1% rise. 

The chart highlights NIB’s rise from $ 23.02 to $27.75 per share or 20.5% over the same period. Meanwhile, the December cocoa contract rose from $2,192 to $2,577, or 17.6%. The NIB ETN did an excellent job tracking cocoa futures prices over the past weeks. 

One of the risks of using the ETN is that cocoa trades when the US stock market is not operating during European trading hours. Highs or lows that occur before the US stock market opens are not reflected in the ETN. 

The short-term cocoa trend has turned higher, and more gains seem likely. The critical technical level to watch stands at $3,054 per ton, the November 2020 high. A move above that price would cause another higher highs since the June 2017 low and could cause cocoa prices to explode higher, as we have seen in other soft commodity markets over the past months.  

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