Outlook for cocoa continues to stay bullish

CHOCOLATE, already slightly bitter, might now leave an even more bitter taste when savoured in desserts and confectioneries. No thanks to the skyrocketing cost of the raw material – it’s no longer just an experience but a rather expensive indulgence. While signs of easing core inflation worldwide are cheered by investors, the soaring price of cocoa, one of the world’s smallest soft commodity markets, has noticeable global implications for food and candy producers and the retail industry.

Prices for the benchmark Cocoa contract at the ICE Exchange in New York rose to US$3,438 per metric tonne earlier on Jul 20, 2023, the highest since mid-March 2011. Technically, cocoa is heading straight towards relatively uncharted territory, up almost 31.46 per cent year-to-date. The historic level of US$3,500 per metric tonne is the immediate resistance and a sustained breakthrough will open the door towards another swing at a psychological level of US$3,900 to US$4,000.

Cocoa is the hottest agricultural commodity in 2023, topping charts with over 30 per cent upside swing year-to-date due to the unusual drop in harvest from key production regions. Cocoa cultivation is primarily concentrated in West Africa and Latin America, including Ivory Coast, Ghana, Cameroon, and Nigeria. Ivory Coast and Ghana reportedly export 60 per cent of global supplies of cocoa to chocolate manufacturers worldwide.

Several plantations in Ivory Coast’s cocoa-growing regions in the south-west and south-east were flooded by torrential rains between May 15 and Jul 10. Evolving El Nino weather patterns have already adversely impacted mid-year crop harvest, leaving physical markets threatened to the core. While no one can predict how strong El Nino is going to be, its turbulence is expected to bring plentiful rains to the key producing regions throughout the year. The intense rains in the Ivory Coast flooded plantations and lashed cocoa plants.

According to a Reuters report, Ivory Coast, a nation whose majority export earnings are heavily reliant on cocoa produce, has stopped selling contracts for cocoa exports for the 2023-2024 season. The suspension came as a significant blow to not only major commodity trading houses like Cargill and Olam but also to chocolate manufacturers like Hershey and Nestle. Even if exports resume, the output is expected to be significantly lower.

We are in an El Nino year, infamous for a usually weaker cocoa production. The dent in supply from the world’s top two producers, as predicted by the International Cocoa Organization, stands at a whopping 142,000 tonnes, over twice previous estimates. Escalating challenges faced by the cocoa industry include brown rot or black pod disease, a fungal disease that attacks pods and trees. It has started spreading in farms in Ivory Coast’s Aboisso as a result of the prolonged wet conditions.

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The current price of the cocoa contract has successfully stabilsed after testing the US$3,400 level and is way above the simple moving averages, adding bets towards a continued bullish trend. Oscillators indicate a neutral stance while shifting slightly towards the overbought territory. Investors are advised to follow a “buy on dips” strategy for now.

The writer is senior market analyst at Phillip Nova