Why Cocoa Could Rally Ahead Of Valentine’s Day

Cocoa is an important crop consumed by billions of people every day. The crop is mostly grown in West African countries of Ivory Coast and Ghana. The final product is found in chocolate bars and other beverage making products. As the world population and economic well being has improved, the demand for the commodity has continued to rise. In 1980, the global cocoa production was more than 1.6 million metric tons. In 2017, the amount produced was more than 4.5 million tons. This was a decline from the previous year’s 4.7 million. At the same time, the annual cocoa demand has continued to rise. Global demand for cocoa grew at a compound annual rate of 2.7% from 1961 to 2014 and is expected to grow by 30%, or 5.2% CAGR by 2020.

This year, however, cocoa has become one of the worst-performing agricultural crop, with its price decreasing by almost 10%. The reason for this is that the West African weather has been better than earlier expected. The good weather has led to a bumper harvest. Since cocoa producers don’t have an organization like OPEC, they are not able to control the product that hits the market. In addition, since cocoa is not farmed in the United States, it does not experience the same macro issues as other crops.

The impact of the low cocoa prices is the higher revenues and profits from cocoa buyers. The biggest companies that buy the products are companies like Hershey and Mondelez that produce snacks and confectionary. The net profit of The Hershey Company rose to $337 million, which was higher than the $181 million a year ago. The same was true with Mondelez. However, this month, as Valentine’s day nears, there is a likelihood that the price will rise a bit as investors anticipate increased demand.

As shown below, the price of cocoa spot has continued to decline such that the price is below the short and medium-term EMAs. The RSI has continued to remain above the overbought levels. With Valentine’s day nearing, there is a likelihood that the price may see some upward momentum.

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