Most agricultural commodities have slipped this year, helped by the Russia and Ukraine shipping deal. One commodity, however, has defied gravity as its price surged to the highest level in more than four decades. Cocoa price was trading at $3,400, ~36% above the lowest level in 2022 and ~93% higher than its 2018 lows.

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Demand and supply imbalance

Cocoa prices have jumped due to the ongoing supply and demand imbalance in the industry. Demand from leading companies like Hershey and Mondelez has soared, helped by the reopening of the world economy. Demand has also jumped because of the growing middle class in Asian countries like China and Indonesia.

Supply, on the other hand, has come under pressure. While Ivory Coast is producing a record crop, output in Ghana has continued lagging. Data shows that cocoa production in Ghana dropped by 18% in the last season that ended on September 30th last year. 

Production in the two countries is expected to continue dropping in the next few years. For one, most cocoa plants are getting old while soil fertility has dropped. Unlike crops like corn and soybeans, cocoa plants take two to four years to mature. 

Another difference between cocoa and other prices is that farmers in Ivory Coast receive a fixed amount from the government. As such, they are not benefiting entity from the ongoing price surge. 

Also, companies like Mars, Mondelez, and Hershey enter into long-term buying contracts that cushion them from market prices. Climate change is also having an impact on crop production. In a note to WSJ, a Mondelez employee in Ghana said:

 

“We don’t have the forest cover we had, we don’t have the rain our grandfathers had, and the soil isn’t as fertile…Young people often leave to seek a better life in the city.”

Demand for chocolate bars is expected to keep rising in the coming years. Analysts expect that over 2 billion people consume cocoa every year and the number will keep rising for a while.

Cocoa price forecast

Cocoa chart by TradingView

The weekly chart shows that cocoa prices have been in a strong bullish trend in the past few months. It has recently moved above the important resistance point at $2,932.5, the highest point on February 2020. 

Cocoa (NIB) has jumped above the 50-week and 25-week moving averages while the Relative Strength Index and Stochastic Oscillator have moved above the overbought level. Therefore, there is a likelihood that the price will have a short pullback in the coming weeks and then resume the bullish trend.

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