Cocoa price forecast: commodity expert sees a 150% upside

Cocoa price has tumbled hard recently as some hedge funds unwound their bullish trades. After peaking at $12,253 in May, it has moved into a deep bear market, falling by over 38% from its highest point this year. It has dropped to a low of $7,560, its lowest swing since March 14th.

Andurand is still bullish

Pierre Andurand, a well-known player in the commodity trading industry is still bullish on cocoa despite the recent plunge. He expects that the world will run out of cocoa in the coming years unless key players make the necessary investments.

In an interview with Bloomberg, Andurand noted that the supply deficit in Ivory Coast and Ghana will move to 800k tons this year. At the same time, he sees the inventory-to-grind ratio coming in at 21% this year, much lower than the 10-year average of between 35% and 40%. 

The last time the ratio was that low in 1977, the price of cocoa surged from less than $6,000 to over $28,000 on inflation-adjusted terms. He said:

Andurand believes that the cocoa price will rise to $20,000, implying gains of over 150% from the current levels. He also blames other external factors like climate change, disease, scarcity of fertilizer, and bad weather for this situation.

Another reason why cocoa could continue soaring is that it is a different commodity than other agricultural products like corn and soybeans. These commodities tend to be highly cyclical since they spend just a few months to grow and produce grains.

Cocoa, on the other hand, takes at least five years for the tree to start producing. As such, it is not easy to ramp up supply now that the price of cocoa has jumped sharply. 

All this will happen at a time when chocolate demand is rising, especially in Asian countries like China and Japan. 

Cocoa price forecast

Cocoa chart by TradingView

Turning to the weekly chart, we see that the price of cocoa peaked at $12,205 in April and has now crashed by over 38%. I think this crash is a simple shake-out, where a surging asset pulls back to get rid of speculators.

Despite the crash, cocoa remains above the 25-week and 50-week Exponential Moving Averages (EMA) while the Relative Strength Index (RSI) has moved from the extreme overbought level of almost 100 to 50. 

Cocoa is probably in the process of forming a double-top pattern, which is characterised by twin peaks. In most cases, this pattern is one of the most bearish signs in the market. 

Therefore, if this happens, there is a likelihood that cocoa will rebound and retest the resistance at $12,200, which is about 60% above the current level. This rebound will happen as investors buy the dip. More upside to Andurand’s target of $20,000 will be confirmed if it moves above that level.