It had barely recovered from the COVID-19 itself and now the Delta variant looks set to put a tighter bear squeeze on cocoa.
The raw material for chocolates, baked goods, ice-cream and countless other delicious treats settled at $2,424 a tonne on ICE Futures US on Monday. That’s exactly 20% lower from its February high of $2,998.
Market terminology signifies that any security that loses 20% or more of its value from a recent high is technically in a bear market.
Cocoa is the second crop to find itself in such an unenviable bear situation, after soybeans—which were also down 20% as of last week from a recent high after a large upward revision in stockpiles of the grain that sent shockwaves and a selloff through the trade.
Chocolate vs COVID
Cocoa suffers a stockpile problem similar to soybeans: There’s too much supply of cocoa beans out of West Africa, where the commodity is largely grown.
It also has another issue, and a bigger one: With chocolate being a luxury product, demand for cocoa is a lot more elastic than say soybeans, which is processed into cooking oil, meal for animal feed, as well as soy milk, soy flour, soy protein, tofu and many retail food products.
Second quarter US grinding data for cocoa is due on Thursday and traders actually expect decent industry demand for the April to June stretch.
Grinding produces the cocoa butter that gives chocolates and ice-cream their smooth, velvety taste. It also turns out the powder needed for making cakes, cookies and chocolatey beverages.
In the first quarter, there were 117,956 tonnes of beans ground, about 2% above the 115,591 tonnes processed during the January to March 2020 stretch when COVID was just setting in.
There are no forecasts yet for Q2, given the dynamism of supply-demand and the competitive nature of the grinding/confection businesses.
But Jack Scoville, chief crop analyst at Chicago brokerage Price Futures Group, said some of the oversupply in cocoa beans was actually in preparation “for any increased demand.”
Added Scoville:
“Ports in West Africa are filled with cocoa right now as demand remains lackluster. The weather has had above average rains in West Africa and crop conditions are rated good."
"European demand has been slow and demand ideas in general are weak. But the next round of quarterly grind data will be released this week and the data should show a significant increase in demand.”
The spread of coronavirus variants and unequal access to vaccines threaten the global economic recovery, finance chiefs of the G-20 large economies warned on Saturday. While Southeast Asia and Australia have largely been the focus of new variants, Western capitals haven’t been spared either.
The United States, for instance, recorded the highest number of COVID cases over the weekend since May, as the highly-transmissible Delta variant became more prevalent.
Yet, US reopening from the pandemic, powered by its fully-vaccinated rate of nearly 50%, leads the world.
A Can of Permutations for Demand
For a luxury product like chocolate, that opens a can of permutations for demand.
Swiss premium chocolate maker Laderach has signed lease agreements with US mall chain Simon to open 15 stores from August through September, candyindustry.com, a trade website reported last week.
Each of those stores will feature more than 85 varieties of fresh artisanal chocolate directly from Switzerland. The stores will also include a FrischSchoggi counter, where chocolate lovers can select from varieties of Laderach’s hand-broken chocolate bark.
That’s not all. In December 2020, Laderach opened its world's largest and 100th store in the world on Fifth Avenue in New York City. Then last month, Laderach opened two stores in South Florida, including Miami's Aventura Mall.
While chocolate, the end product, may see demand beyond expectations, prices of cocoa, the crop, looks set to languish further, at least from a technical perspective.
Investing.com’s Daily Technical Outlook for ICE cocoa futures has the market trading as low as $2,248 to $2,212 per tonne at the lowest end of near-term support. That’s another drop of 7%- 9%.
However, should demand accelerate after the second-quarter US grind data due on Thursday, prices could steady at current levels and even pick up slightly, our data shows.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.