- Cocoa delivered 40% return to longs this year
- Compounded gain for the 12-month rally is now above 55%
- Market looks overbought; Could fall to $3,000 though run up to $3,826 possible first
As the world agonizes over the climbing price of oil, one of the most overlooked commodities in terms of pricing is giving its believers the ride of their lives.
Cocoa — the magical ingredient that transforms coffee into mocha and makes treats from chocolate to ice cream and baked goods — has rallied non-stop in New York futures trading over the past year.
In Tuesday’s session on ICE (NYSE:ICE) Futures US, a tonne of cocoa for delivery in December hit a 12-year high at $3,697.
This year alone, those long on US cocoa have seen a return of 40%. Over a 12-month run, the rally has delivered a return of 56%. 
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Typically, cocoa sees higher pricing if demand explodes ahead of festive seasons when gifting of candy and baking is ubiquitous. The other price driver would be bad weather and its impact on the crop.
Both are happening now.
Those in the know attribute the year-long rally in cocoa to a post-COVID surge in demand for all things chocolate, especially China.
The La Nina weather phenomenon has also brought excessive moisture and disease to cocoa trees.
The huge premium racked up by the commodity could end up making us pay more for the treats we love. Already, Starbucks (NASDAQ:SBUX) has raised menu prices by 5% over a 12-month period for the quarter ended December 2022.
Sterling Smith, director of agricultural research at AgriSompo North America in Omaha, Nebraska, told Investing.com:
“It looks like we have a combination of things going. Global cocoa demand has been really sudden and improving. A lot of countries that weren’t traditional cocoa buyers are now becoming consumers and now that’s pushing things higher. There have been crop issues as well.”
He put the explosion in demand partly down to the new Chinese appetite for chocolate, despite the apparent slowdown in the world’s No. 2 economy.
“You can say there’s a post-pandemic boom for chocolate consumption and one of them is this big place called China,” Smith said. “The Chinese weren’t consuming a lot of cocoa even in the early 2000s. Now, with their population, even a small percentage gain makes a huge impact on cocoa demand.”
While the latest Chinese import data on chocolate wasn’t available, figures from 2021 provided by the trade database OEC show the country imported $518 million worth of chocolate products in 2021, becoming the 15th largest importer of such merchandise.
Jake Scoville, chief crop analyst at Chicago’s Price Futures Group, said the world’s two biggest cocoa growers — Ivory Coast and Ghana, which were both in West Africa — were facing a severe squeeze in cocoa beans.
Added Scoville in a note issued Wednesday:
“Ideas of tight supplies remain based on more reports of reduced arrivals in Ivory Coast and Ghana.”
“Talk is that hot and dry conditions reported earlier in Ivory Coast could curtail main crop production, and main crop production ideas are not strong. Mid-crop production ideas are lower now with diseases reported in the trees due to too much rain that could also affect the main crop production.”
In the case of La Nina, the cooling of the Pacific Ocean and wetter-than-average weather spawned by that was causing rotting and disease in cocoa trees in top West African producing countries Ivory Coast and Ghana.
“Ideas of tight supplies remain based on more reports of reduced arrivals in Ivory Coast and Ghana” for cocoa beans, said Jack Scoville, crop analyst at Chicago-based brokerage Price Futures Group.”
“Talk is that hot and dry conditions reported earlier in Ivory Coast could curtail main crop production, and main crop production ideas are not strong,” Scoville added. “Mid-crop production ideas are lower now with diseases reported in the trees due to too much rain that could also affect the main crop production.”
Cocoa: Technical Outlook
Cocoa seems to have reached overbought levels after the year-long rally, although there could be room for more upside, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“The monthly stochastics for cocoa have reached 96/96, an indication of overbought levels,” said Dixit. “Still, there’s room for a run higher from $3,697 onwards to retest $3,826.”
But capitulation could also await cocoa if it failed to pass muster with the test higher,
“Unless 3826 is widely accepted with stability above the resistance and supported by a weekly close, the steep rise will eventually be followed by a natural price correction,” said Dixit.
“On the way down, $3,300 would be the first major downside target for mid term, to be followed by $3,000 later over an extended period of time.”
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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically 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.