How High Can Cocoa Rise?

In a March 8 Barchart article on cocoa’s parabolic rise, I wrote:

The bottom line is that chocolate prices will increase, and even if cocoa futures decline, we will be paying more for those epicurean delights. When it comes to the rally in the cocoa futures arena, fighting the bullish trend is dangerous as prices can continue to rise. Cocoa prices can continue to rise if the weather in West Africa does not improve, and sellers must limit supplies. Expect lots of volatility in the cocoa futures arena over the coming weeks and months. 

Nearby U.S. ICE cocoa futures were at the $6,388 per ton level on March 8 after rising over the $7,000 level. The parabolic rally has continued, taking the futures to the latest $11,206 per ton high on April 15.

Cocoa led the softs and all commodities in Q1 2024

Ice cocoa futures led the soft commodities sector in 2023 with a 61.38% gain, closing last year at the $4,196 per ton level. 

The three-year chart highlights that cocoa futures took off into the stratosphere in 2024, with a 132.75% gain in Q1, leading the soft commodities and raw materials trading on futures exchanges in the U.S. and U.K. 

Record highs at over double the 1977 prior all-time peak

Cocoa futures settled at $9,766 per ton at the end of March after eclipsing the 1977 previous record high at $5,379 per ton in January. 

The long-term chart dating back to 1971 shows the soft commodities ascent that continues to make new record highs in early Q2 2024. On April 15, nearby ICE cocoa futures rose to $11,206 per ton as the price was nearly double the 1977 high. 

Cocoa manufacturers are feeling the pinch

The March 8, Barchart article highlighted the impact of rising cocoa prices on Hershey Foods Corp (HSY) shares at the $194.19 level. 

At $181.16 on April 17, HSY shares have declined 6.7% as the critical input in many of the company’s products has continued its bullish parabolic path. 

Two other publicly traded chocolate companies are Mondelez (MDLZ) and Nestle SA (NSRGY).  MDLZ fell 7.7% from $71.85 on March 8 to $66.26 on April 17. NSRGY shares dropped 4.5% from $107.11 on March 8 to $102.34 on April 17. 

As the price of cocoa rises and availability declines, chocolate manufacturers face significant challenges. Meanwhile, consumers will ultimately pay for the cocoa rally as prices rise and portions decline in a phenomenon the Biden administration called “shrinkflation.”

The risk of a correction is rising with the price

Adverse West African weather conditions and crop diseases have ignited cocoa’s price rise, causing supplies to decline and a market deficit to develop. The Ivory Coast and Ghana are the leading cocoa-supplying countries, with over half the world’s annual production. The concentration of cocoa output in two neighboring countries created the parabolic rally and shortages. 

Meanwhile, cocoa is experiencing a phenomenon that many other commodities encounter, price cyclicality.

Prices tend to fall to levels where production slows, inventories decline, consumption increases, and price bottoms form in bear markets. Conversely, prices often rise to levels where production increases, inventories increase, and consumers seek alternatives or decrease their purchases, leading to price tops in bull markets. 

Commodity cyclicality will eventually impact the cocoa market, but the current crop and potential for shortfalls in future crops will likely keep prices elevated for some time. Expect other producing countries, including  Indonesia, Ecuador, Brazil, Peru, Colombia, the Dominican Republic, and others to increase output at such high historical prices. The bottom line is that cocoa’s price will eventually correct lower, but the risk of standing in front of the current bullish freight train remains high in April 2024. 

The only route for cocoa exposure is the futures market 

The only route for a risk position on the long or short side of the cocoa market is the ICE futures in the U.S. or the ICE cocoa # 7 futures in the U.K. Both futures markets offer options on the futures contracts. Still, options have become extremely expensive as the historical and implied volatilities have exploded with the price. 

Cocoa will eventually reach a top, but the trend is always your best friend in all markets, and it remains bullish in cocoa in mid-April 2024. Cocoa led the soft commodities sector in 2023 and Q1 2024. Time will tell if cocoa continues to hold the bullish baton at the end of June when Q2 ends.