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Andrew Hecht

How High Can Cocoa Prices Rise?

My Q2 report on soft commodities on Barchart highlighted cocoa as it led the way on the upside with a 13.13% Q2 gain. Cocoa was the only soft commodity posting a double-digit percentage gain in 2023’s second quarter and was second to frozen concentrated orange juice futures over the first half of this year with a 27.62% gain. 

Nearby ICE cocoa futures settled at $3,318 on June 30, 2023. On July 14, the price was higher as the bullish trend in the cocoa futures arena continued to head for its critical technical resistance level. 

The bullish trend began in June 2017

The continuous ICE cocoa futures contract reached a $1,769 per ton bottom in June 2017. 

The ten-year chart highlights the move that nearly doubled the soft commodity’s price six years later, in July 2023. Cocoa futures have made higher lows and higher highs since 2017, reaching $3,373 per ton. The bullish trend over the past years remains firmly intact. 

The highest price in eight years- Heading for a crucial technical level

In mid-July 2023, cocoa futures are on a path to challenge a critical technical resistance level. 

The twenty-year continuous cocoa futures chart shows the upside target sits at the December 2015 $3,422 per ton high. Above there, technical resistance is at the March 2011 $3,826 peak. 

The factors supporting higher cocoa prices

The bullish trend in cocoa has technical winds in its sails. The following factors support higher cocoa prices:

  • Inflation at the highest level in years has increased production costs for all commodities, and cocoa is no exception.
  • Since the U.S. dollar is the benchmark pricing mechanism for most commodities, a falling dollar tends to support higher raw material prices. The dollar index has declined from the twenty-year 114.745 high in September 2022 to the 100 level. 
  • Elevated energy prices have put upward pressure on cocoa and other agricultural commodities.
  • Combatting child labor in West Africa has caused labor shortages, increasing production costs. 
  • As of March 31, 2023, cumulative arrivals of cocoa beans in the Ivory Coast were 1.779 million tons, down 4.8% or 89,000 tons from the previous year. 
  • A cash crunch in Nigeria, the world’s fourth-leading cocoa-producing country, has caused difficulty fulfilling supply contracts. 
  • As highlighted in a late April 2023 Barchart article, tight supplies caused the Ivory Coast to restrict sales to leading chocolate manufacturers. 

Cocoa was the last soft commodity to take off on the upside. World sugar futures broke to a new twelve-year high in April 2023, rising to the highest price since 2011. Arabica coffee and ICE cotton futures reached their highest price levels since 2011 in 2022. Frozen concentrated orange juice rose to a new record peak over the past weeks around the $3 per pound level. While cocoa has been in a bullish trend over the past six years, it has not yet challenged the 2015 high. 

Bull markets rarely move in straight lines

Even the most aggressive bull markets rarely move in straight lines to the upside. Downside corrections can be swift and ugly. We have witnessed cotton futures more than halve in price from the $1.5802 May 2022 high to the 70.21 cents October 2022 low. Arabica coffee futures fell from $2.6045 per pound in February 2022 to $1.4205 in January 2023. 

The higher cocoa prices rise, the greater the risk of a significant correction. In commodities, the elasticity of demand causes consumers to purchase less as prices rise. However, cocoa could be unique as many chocoholics are less price sensitive than other agricultural products. A report from Fortune Business Insights shows the steady demand growth in the European cocoa and chocolate market from 2018 through forecast levels in 2029. 


Meanwhile, according to Market Data Forecast, the Asia Pacific Cocoa and Chocolate market is forecast to grow from $27.1 billion in 2022 to $30.3 billion by 2028. China has the leading consumer market share. 

Therefore, supply issues and rising production costs with growing demand validate the rally in the ICE dollar-based cocoa futures market. 

Meanwhile, European cocoa prices have already broken out to all-time highs. 

The ICE/EU cocoa #7 futures chart dating back to 1989 shows that prices for cocoa futures in British pounds rose to a record high in July 2023. While currency differentials can impact cocoa prices, the rise to an all-time high in pound-based cocoa could ignite a similar rally in the U.S. ICE dollar-based futures. Moreover, the fall in the U.S. dollar against the British pound supports higher dollar-based cocoa prices over the coming months. 

The only route for a risk position is the ICE futures arena 

The April 27, 2023, Barchart article recommended the iPath Cocoa Subindex ETN product (NIB) as an effective proxy for cocoa futures. However, the ETN ceased trading on June 8 because of low assets and volumes and a general lack of interest. While the ETN did an excellent job tracking U.S. cocoa futures, it is no longer an option for risk positions in the soft commodity. 

The only route for participation in cocoa is the ICE futures. Each futures contract contains ten metric tons of cocoa. At $3,350 per ton on July 14, the September cocoa contract has a $33,390 value. The original margin at $1,573 is 4.7% of the value, and the maintenance margin is slightly lower at $1,430 per contract. The exchange debits, or credits customer accounts daily based on the contract’s closing price.

The cocoa futures curve highlights relatively flat prices for cocoa beans out to May 2025 delivery, with prices above the $3,100 per ton level. The nearby backwardation, where prices for nearby delivery are higher than for deferred delivery, reflects cocoa’s tight supply-demand fundamentals. 

Cocoa is on a path to higher highs and a challenge of the 2015 peak. Since bull markets rarely move in straight lines, a selloff that pushes prices temporarily lower could be the perfect opportunity to hop on board the bull trend in the soft commodity that is working towards joining sugar, coffee, cotton, and orange juice that have already reached the highest prices since 2011. 

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.
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