Cocoa price forecast: beware of these two risks

Cocoa price has gone parabolic this year, becoming one of the best-performing asset. It has moved from $2,182 in 2022 to over $10,500. This trend has triggered more gains among other agricultural commodities like arabica and robusta coffee. 

Cocoa has jumped because of the soaring global demand by companies like Ferrero Group, Nestle, Hershey, and Mondelez. That demand has coincided with a major supply squeeze as key countries like Ivory Coast and Ghana have faced weather, disease, and fertilizer challenges in the past few years.

Cocoa is also jumping because of years of underinvestment in the sector as most farmers abandoned the industry because of weak returns. As a result, many cacao trees are now old and yielding lower produce.

Further, most speculators have turned extremely bullish on cocoa, as evidenced by the recent Commitment of Traders (CoT) report by the CFTC. Recent data showed that hedge funds had placed orders worth over $8.7 billion and the price will continue rising.

That is the first risk to have in mind. While speculation by hedge funds is a good thing, the situation could change rapidly when they change their minds and start taking profits. We have seen this situation happen many times in other commodities like natural gas and corn.

The other long-term risk is that agricultural products are usually cyclical, whereby a sharp increase in price leads to more production. 

There are signs that many cocoa farmers are considering moving back to the market. For example, Ecuador has pledged to increase cocoa production from 450k tons last year to over 800k tons by 2030. 

Similarly, Brazil plans to double its output to 220k by 2030. All African producers like Ivory Coast, Ghana, Nigeria, and Cameroon are working on boosting production in the coming years now that prices have jumped. Cameroon expects that its output will jump to 600k tons by 2030.

Still, the fortunate thing for cocoa is that it is different from corn and soybeans in that it takes three to four years for a new plant to start generating produce. This situation could work out in favour of cocoa prices as the supply constraint is expected to remain.

A recent report by ICO found that production in Nigeria will drop by 4% this year to 270k tons. Ghana’s output will drop to 422k this year.