Cocoa Prices Continue to Grind Higher

Cocoa is the primary ingredient in chocolate confectionery products and a soft commodity sector member. Cocoa futures trade on the Intercontinental Exchange (ICE). While Brazil is a dominant producer of four of the five softs trading on ICE, including sugar, coffee, cotton, and oranges, cocoa beans come from equatorial climates, making West Africa the ideal producing region, and the Ivory Coast and Ghana the world’s cocoa bean suppliers. 

The iPath Cocoa Subindex TR SM ETN product (NIB) follows ICE cocoa futures higher and lower.

Cocoa continues its quiet bullish trading pattern

In my Q4 soft commodity recap on Barchart, I wrote “

The long-term cocoa chart highlights the mostly sideways trend in 2022 but the slight upside bias of higher lows and higher highs since the June 2017 low.” 

The chart shows nearby ICE cocoa futures closed 2022 at the $2,600 per ton level. At $2616 on January 26, 2023, cocoa is close to the end of December closing level. Cocoa futures fell to a $1,769 per ton low in June 2017 and reached a $3,054 high in November 2020. At the $2,600 level, cocoa is above the midpoint, and the price action has made higher lows over the past nearly six years 

A weak dollar and strong British pound have supported cocoa over the past months

The dollar index reached a two-decade high in September 2022 when it traded at 114.745. Rising U.S. interest rates pushed the dollar index higher. The index measures the U.S. currency against other world reserve currencies, including the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss frac. While the index has the most significant exposure to the euro at 57.6%, it has an 11.9% exposure to the British pound.

London has long been the hub of international cocoa trading because of the U.K.’s proximity to West Africa and similar time zones. Many physical cocoa contracts use the British pound as the pricing mechanism. Therefore, a falling pound tends to weigh on cocoa prices, and a rising pound often pushes the soft commodity higher. While the weather and logistical factors in the Ivory Coast and Ghana are the most critical factors for cocoa prices, the dollar-pound relationship can impact prices. 

In September 2022, the pound fell to $1.03485 against the dollar, and cocoa prices fell to $2,192 per ton, the lowest price of 2022 and since July 2020. The pound has rallied since the September 2022 low to above the $1.23 level, and cocoa has increased with the British currency. 

While the ten-year cocoa futures chart in U.S. dollars displays a bullish trend of higher lows the chart in British pound terms is even more bullish. 

The ten-year chart of cocoa futures in British pounds shows that the soft commodity has made higher lows, but has also made higher highs, with the price rising to a six-year peak in December 2022. 

Ivorian producers could use their dominant position to squeeze chocolate manufacturers

The Ivory Coast is to cocoa, as Saudi Arabia is to petroleum. The West African country supplies nearly 40% of worldwide cocoa bean production. With 2.2 million tons of output, the Ivory Coast’s output nearly triple second-place Ghana’s 800,000 tons.

A recent article points out that while the Ivory coast dominates world cocoa production, it receives around 4% of the chocolate industry’s annual worth of $100 billion. Since 2020, the Ivorian government has taken a leadership role with other West African producers, including Ghana, to make chocolate manufacturers pay premiums on cocoa beans, but the efforts have failed as the large companies push back on anything that eats into their healthy profit margins. In October 2022, the Ivory Coast and Ghana boycotted an industry meeting in Brussels, a sign they could squeeze the chocolate makers for a more significant piece of the chocolate bar profits. Since the two countries produce 65% of annual supplies, they are in a solid position to make demands. Meanwhile, other African producers, including Nigeria and Cameroon, could join the Ivory Coast and Ghana to create a West African cocoa cartel modeled after OPEC in the world oil market. Nigeria is already a member of the petroleum cartel. 
The African nations produce 75% of the world’s beans, with the remaining 25% coming mainly from Indonesia, Brazil, and Ecuador. 

Cocoa is the only soft that did not reach a multi-year high in 2022

In February 2022, nearby ICE coffee futures prices reached $260.45 per pound, the highest price since September 2011. In May 2022, nearby ICE cotton futures rallied to $1.5802 per pound, the highest price since July 2011. In December 2022, nearby ICE world sugar futures peaked at 21.18 per pound, a nearly six-year high. The continuous ICE frozen concentrated orange juice futures contract rose to $2.31 per pound in November 2022, just shy of the November 2016 $2.35 record peak. 

Meanwhile, the chart shows that while four of the five soft commodities reached multi-year peaks in 2022, ICE U.S. cocoa futures remained below the 2020 $3,054 per ton high, a critical technical resistance level.

NIB for cocoa’s upside

Cocoa did not keep pace with the other soft commodities last year, but 2023 could be another story. As the African producers flex their production muscles, we could see cocoa prices take off on the upside. Moreover, the weather is always the most critical factor for production, and Mother Nature has the potential to throw the cocoa market a curve ball that impedes output each crop year. At the $2,616 per ton level, cocoa is above its midpoint from the past years, and the trend is slightly bullish. An explosive rally could be on the horizon for the only soft commodity that did not reach a multi-year high in 2022. 

The most direct route for a risk position in cocoa is via the ICE U.S. or U.K. futures. The iPath Cocoa Subindex TR SM ETN product (NIB) does an excellent job tracking U.S. cocoa futures prices higher and lower. At $28.47 per share, NIB had $16.278 million in assets under management. NIB trades an average of 10,693 shares daily and charges a 0.70% management fee. The last significant rally in cocoa took the nearby U.S. ICE futures from $2,192 per ton in September 2022 to $2,699 in January 2023, a 23.1% rise. 

Over the same period, the NIB ETN rose from $23.02 to $29.35 per share or 27.5%. The ETN outperformed the nearby futures on the upside. 

Cocoa prices have been grinding higher, and the potential for a significant rally to multi-year highs is rising in early 2023. 

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