From the top spot among commodity winners for this year, cocoa has been pushed to fourth place, in a span of under four weeks. Yet, as the Christmas jingle goes, December could still be “The Most Wonderful Time of the Year” for the confection-and-beverage ingredient, with strong demand likely to spare it the fate that’s befallen many markets in the space.
Cocoa Weekly Chart
At Thursday’s settlement of $2,170 per tonne in New York, cocoa returned 15 percent to investors who had bought at the end of 2017 and held since.
But as recent as November 7, that return would have been 27 percent as the commodity traded at near two-year highs of $2,397 a tonne.
Funds Selling Trims Down Cocoa Returns
Since then, selling by fund managers—plausibly cashing out their cocoa winnings to cover losses in other “soft” commodities like sugar and arabica coffee, which are down 15 percent and 11 percent respectively—has diminished returns.
Natural gas now leads commodity winners with a 57 percent return year-to-date, followed by oats, with 21 percent, and wheat, with 19 percent (desktop users, click here and go to “performance” to see all commodity returns).
For cocoa, it still a good year, considering that it ended 2017 down 11 percent, after extending a 33-percent slump from 2016. Analysts attribute this year’s turnaround to a better global economy compared to the past two years.
Year-End Festivities Hold Promise
And multiple festivities from Hanukkah to Christmas and New Year in December mean high consumption and gifting of candy and treats that bode well not only for cocoa investors and confectioners, but also for the grinders who produce the cocoa butter needed for making chocolates and ice-cream, and the cocoa powder required for baking.
Jack Scoville, senior softs analyst at Chicago’s Price Futures Group, said that, based on latest supply-demand statistics, merchants were still actively buying cocoa beans amid higher-than-usual production from Ivory Coast and other major West African producers. Said Scoville:
“If you’re a chocolate-maker, you’d have covered all of your demand for cocoa by now, as your products must be on the shelves before December. If you’re still buying actively, even if it’s for next year’s requirement, it indicates that demand is pretty good.”
Market intelligence gathered by Price Futures Group shows that cocoa prices were being supported by willing buyers for beans at West African ports, but funds were offsetting the positive impact by short selling the commodity. Scoville added:
“That’s part of the explanation for the market’s current performance. Just about every commodity right now is at support area from investor liquidation and cocoa, unfortunately, is one of them. Still, the unusual demand we’re seeing ahead of Christmas might still makes this ‘The Most Wonderful Time of the Year’ for cocoa.”
Large Production And Willing Buyers Make For A Perfect Two-Sided Trade
Shawn Hackett of Hackett Financial Advisors, an agricultural markets consultancy in Boca Raton, Florida, concurs with the strong demand outlook for cocoa projected by Scoville. Hackett noted:
“For now, we see no imminent weather threat for cocoa, which means the current large crop harvest coming out of West Africa will continue to weigh this market down while aggressive demand from Asia keeps this market well supported.”
“A great sign of this strong demand is despite record arrivals of cocoa beans from West Africa, cash price differentials have been surging, suggesting prices are too low.”
With such a “perfect two-sided trade”, any disruption in West African production could lead to a “violent upward adjustment”, he said, adding:
“For now, we remain on the sidelines, but are looking to buy this market near $2000 support when a new smart-money buy signal is triggered.”