Where are cocoa prices headed next?

Cocoa prices have been on a wild ride over the past year, reflecting a combination of natural disasters, economic issues, and market dynamics. Starting at $2,467 per tonne in January 2023, cocoa spot prices surged to above $12,000 per tonne by April 2024. Recently, prices have moderated but still remain high at $8,673 per tonne as of May 28, 2024. This dramatic fluctuation has significant implications for the global chocolate industry.

Cocoa spot chart by Business Insider

Factors behind the price surge

Several factors have contributed to this sharp increase in cocoa prices. Climate change, particularly the El Niño weather pattern, has severely impacted cocoa harvests in West Africa. This region, responsible for over 60% of the world’s cocoa supply, saw heavy rains that facilitated the spread of black pod disease, leading to substantial crop losses. According to the International Cocoa Organization, the global cocoa shortfall for the 2023-2024 season is projected to be about 374,000 tonnes.

Economic challenges faced by cocoa farmers also play a crucial role. Many farmers in Ghana and Ivory Coast earn less than $1.25 a day, far below the poverty line. This low income prevents them from investing in their farms, reducing their ability to increase yields or combat the effects of climate change. The persistent poverty among farmers is exacerbated by the low prices paid by major chocolate companies, despite these companies making substantial profits.

Speculation in the cocoa market has further driven up prices. Investor activity has intensified, with non-commercial investors holding a significant portion of open interest in cocoa futures. This speculation has led to increased volatility and sharp price swings, as seen when prices soared earlier this year. Market reactions to supply concerns, such as those driven by weather forecasts and production reports, have amplified these fluctuations.

The impact of these high cocoa prices on the chocolate industry has been profound where chocolate makers have been forced to raise prices, leading to reduced consumer demand. Some companies are altering recipes to use less cocoa or shrinking product sizes to manage costs. Despite these strategies, the cost pressures remain significant, affecting both producers and consumers.

Prospects for price stabilization

Recent developments suggest some potential easing in prices. As the El Niño phenomenon transitions to La Niña, better weather conditions could improve cocoa yields in West Africa. Additionally, government efforts to increase the farm-gate prices paid to cocoa farmers may encourage higher deliveries, potentially easing the supply crunch. However, the underlying issues of climate change and economic hardship for farmers remain unresolved.

The future of cocoa prices remains uncertain. While some analysts predict a stabilization at around $6,000 per tonne, ongoing supply challenges and market speculation could lead to further volatility. With the current market dynamics and the critical role of West African production, the cocoa market will likely remain highly sensitive to any changes in weather patterns or economic conditions.

Now, let’s see what the charts have to say about where cocoa prices might be headed next. This technical analysis will provide a deeper insight into potential price movements and help predict future trends based on historical data and market indicators.

From mild to wild: Cocoa’s peak before the plunge

On the daily charts of cocoa futures, the price increase since the start of 2023 was notable but gradual, rising from around $2,500 to $4,300. However, starting in 2024, cocoa futures experienced an accelerated uptrend, surging from $4,300 to nearly $12,000 by April. This rapid ascent ended last month, with prices declining swiftly to $8,100.

Cocoa futures chart by TradingView

During this sharp decline, cocoa futures found support near the 50% Fibonacci retracement level between the previous swing low and high, around $6,900, and have since bounced back. As long as cocoa futures remain above $6,750, this rebound could continue for a few weeks, with immediate resistance at $9,468.

Despite the recent bounce-back, the medium to long-term trend for cocoa futures is bearish, making it unlikely they will reach their April highs again soon. Traders with a bearish outlook might consider shorting above $8,400 with a stop loss at $9,470. If prices drop, the next support level is around $5,900, where profits could be booked.