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How high can cocoa rise? — TradingView News

In a March 8 Barchart article I wrote about the parabolic rise of cocoa:

The bottom line is that chocolate prices will rise, and even if cocoa futures fall, we will pay more for these indulgent treats. When it comes to the rally in the cocoa futures space, fighting the uptrend is dangerous as prices can continue to rise. If the weather in West Africa does not improve, cocoa prices may rise further and sellers will have to limit their supplies. Expect major volatility in the cocoa futures space in the coming weeks and months.

ICE cocoa futures near the US were at $6,388 a tonne on March 8, after rising above $7,000. The parabolic rally continued, taking futures to a recent high of $11,206 per ton on April 15.

Cocoa led in softs and all commodities in the first quarter of 2024

Iced cocoa futures led the soft commodities sector in 2023 with a gain of 61.38%, closing last year at $4,196 a tonne. bar graph

The three-year chart highlights that 2024 cocoa futures soared into the stratosphere with a 132.75% gain in the first quarter, leading agricultural and commodity trading on US and UK futures exchanges

Record highs more than double the previous all-time high in 1977

Cocoa futures closed at $9,766 a tonne at the end of March, having surpassed the previous record high of $5,379 a tonne set in 1977 in January. bar graph

The long-term chart from 1971 shows the rise in agricultural commodities continuing to reach new record highs at the beginning of the second quarter of 2024. On April 15, nearby ICE cocoa futures rose to $11,206 a ton as the price was nearly double the 1977 peak.

Cocoa manufacturers are feeling the crisis

The March 8 Barchart article highlighted the impact of rising cocoa prices on Hershey Foods Corp HSY Shares at the $194.19 level. bar graph

At $181.16 on April 17, HSY shares have fallen 6.7% as critical inputs in many of the company's products have continued their parabolic upward trend.

Two other publicly traded chocolate companies are Mondelez MDLZ and Nestle SA NSRGY. MDLZ fell 7.7% from $71.85 on March 8th to $66.26 on April 17th. NSRGY shares fell 4.5% from $107.11 on March 8 to $102.34 on April 17.

As the price of cocoa rises and availability decreases, chocolate manufacturers face major challenges. Meanwhile, consumers will ultimately pay for the cocoa rally as prices rise and quantities fall – a phenomenon the Biden administration calls “shrinkflation.”

The risk of a correction increases with the price

Adverse weather conditions in West Africa and crop diseases have triggered the rise in cocoa prices, leading to a decline in supply and the creation of a market deficit. Ivory Coast and Ghana are the leading cocoa supplying countries with over half of the world's annual production. The concentration of cocoa production in two neighboring countries led to a parabolic rally and shortages.

Meanwhile, cocoa is experiencing a phenomenon common to many other commodities: price cyclicality.

Prices tend to fall to levels where production slows, inventories fall, consumption increases, and price bottoms form in bear markets. Conversely, prices often rise to levels where production increases, inventories rise, and consumers look for alternatives or cut back on purchases, leading to price peaks in bull markets.

Commodity cyclicality will ultimately impact the cocoa market, but the current crop and the possibility of failures in future crops will likely keep prices high for some time. Expect other producing countries, including Indonesia, Ecuador, Brazil, Peru, Colombia, the Dominican Republic and others, to increase production at such high historical prices. The bottom line is that cocoa prices will correct downwards at some point, but the risk of facing the current bullish freight train remains high in April 2024.

The only way to gain exposure to cocoa is through the futures market

The only way to get a risk position on the long or short side of the cocoa market is the ICE futures in the US or the ICE cocoa #7 futures in the UK. Both futures markets offer options on the futures contracts. Still, options have become extremely expensive as historical and implied volatilities have exploded with price.

Cocoa will eventually peak, but trend is always your best friend in all markets and Cocoa remains bullish even in mid-April 2024. Cocoa led the agricultural commodity sector in 2023 and the first quarter of 2024. Time will tell if Cocoa continues to hold the bullish trend at the end of June when the second quarter ends.

At the time of publication, Andrew Hecht did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. For more information, please see Barchart's disclosure policy here.

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