Whether it’s the 300 naturally-occurring chemicals in chocolate that result in happiness or its snort-able legal powder that produces an endorphin rush, cocoa has a way of putting one on a sweet high. And that’s exactly what market bulls who backed the commodity through this year’s roller coaster ride feel as it cruises toward one of its biggest annual gains.
At Wednesday’s settlement of $2,311 a tonne, cocoa’s most active December contract on ICE Futures US promised a 22 percent return for anyone who had bought in at the end of 2017 and held since. With investors and tacticians projecting highs in the $2,400-$2,500 range next, the confection-and-beverage material could remain the second best performing commodity through the third quarter—if it doesn’t usurp the top spot held by wheat, that is.
While believing in cocoa’s resilience was a prerequisite for investors who weathered steep losses earlier this year, some admitted relief, even surprise, with the market’s ability to come back from a 13-percent drop in May and a 14-percent plunge in July.
Lucky Bet For Some
“We got lucky,” said James Cordier of Optionsellers.com in Tampa, Florida, who correctly called a $200 rebound for cocoa just after the July selloff that brought it down to $2,153 a tonne. Cordier told Investing.com:
“We think cocoa is pretty close to fairly priced right now, with a little bit more upside left...We see it at between $2,450 and $2,500 in the fourth quarter, partly because of supply scares. It’s not clear how easy it will be to get cocoa out of certain parts of West Africa going forward. We’re going to have to add $50 to $100 a tonne just for that.”
Peter Mooses of RJO Futures in Chicago concurred.
“Supply/demand news has been volatile but there is very little chance that production numbers will recoup enough to pressure the market,” Mooses, who trades cocoa and other soft commodities, wrote in a commentary.
Supply And Weather Concerns Aid Highs
“If transportation blockage starts to affect key growing areas’ ability to move their cocoa, prices may reflect this short-term,” he said.
Although cocoa was technically overbought, there were enough fundamental concerns to convince market bulls to add to positions, said Mooses. “Weather premium may also be added to the equation this time of season. Look for $2,400 to be the next target.”
Shawn Hackett, the founder of Hackett Financial Advisors, an agricultural markets consultancy in Boca Raton, Florida, agrees that weather will be the market’s driver in coming months. “Whether an El Nino-driven drought can cause production hiccups will make all the difference” to cocoa prices, he said in a recent note.
Cordier of Optionsellers says he places more faith on cocoa grinds, which were expected to continue improving in the second half, supporting higher prices. Grinding produces important primary products from cocoa, such as the powder used for baking goods and the butter that gives chocolates and ice cream their velvety texture.
Grinds Figures Mixed
Cocoa grinds in Europe produced about 6 percent better results in the first half of 2018 versus the same period a year ago, while those in Asia were about 10 percent more productive, on the back of stronger economic growth. North American grinds, in comparison, turned out about 2 percent less products.
But cocoa grinds can also play out differently when economies slow, Cordier said. While there’s little correlation between cocoa demand and anemic growth in the US, there’s a definite impact in poorer countries, where chocolate is a luxury. He added:
“If there’s a contagion of sorts in emerging markets or if trade negotiations and sanctions don’t ease up in the relatively near future, it will start taking its toll on more than just currencies or the stock market.”
Some Caution Too
Investing.com’s own daily technical outlook has a “Buy” recommendation on cocoa, with sell only triggered at the 100-day moving average of $2,456. “I think cocoa bottomed out at the $2,100 level and I don’t think it’ll go any lower,” said Mike Seery of Seery Financial in Plainfield, Illinois.
“We’re heading into Halloween and the holiday season after this, where there’ll be high demand for chocolate. There are very few commodities now that I’m bullish on, and I’m bullish cocoa.”
But sweet high or not, some are cautious about betting on a further upside in cocoa. Hackett, for instance, said:
“We would expect that the next decline in prices would in fact produce that important buy signal and give us the basis for recommending purchases...Right now, we do not see that on the horizon just yet and we will wait patiently."