2017 has been a tough year for producers of cocoa and those who have looked to take advantage of falling prices by entering the market on the long side. However, for the world’s consumers, the primary ingredient in chocolate has been on sale.
Cocoa fell to lows of $1756 per ton on the nearby ICE futures contract during the second quarter of the year. Since then, the soft commodity has been trying to rebound, and last week the price rose once again above the $2000 per ton level. With technical support at just below $1800 and resistance around the $2200 per ton levels, $2000 has become a pivot point for the commodity that requires an equatorial climate to grow. However, over the past six months, each attempt above $2000 has failed, and the price has declined back down to the lower end of its trading range. Cocoa has been in consolidation mode lately, and while many other commodities are looking bullish these days, it is a pretty good bet that cocoa is not yet ready to break out of its trading range, at least to the upside.
The weak dollar supports the price of cocoa
Perhaps the most supportive factor for cocoa and all commodities these days is the plight of the U.S. dollar. Source: CQG
As the weekly chart of the U.S. dollar index highlights, the greenback has declined from 103.815 in early January which was the highest level since 2002, to lows of 92.68 on July 31. The dollar index has fallen by 10.7% over the past seven months. Currency markets tend to move slowly over time. A move of over 10% in the reserve currency of the world is massive. The dollar is the benchmark pricing mechanism for most commodities prices. Therefore, on a historical basis, a weaker dollar should be bullish for the price of a commodity. Over the same period that the dollar fell, the price of cocoa declined from $2291 at the beginning of January to 2070 as of the end of July, a drop of 9.6%. The decline of cocoa while the dollar was heading lower is proof of just how weak the cocoa market has been over the past seven months.
West African supplies remain abundant
Each commodity has individual characteristics that determine the path of least resistance for the price of the raw material. Perhaps the most influential factors when it comes to price direction are the supply and demand fundamentals. When it comes to supplies, 2017 has turned out to be a bumper year for cocoa production. The abundant supplies from the Ivory Coast and Ghana have weighed on the price of the soft commodity. Most recently, Nigeria has been making plans to increase their cocoa output. When it comes to the world’s leading producer, the Ivory Coast has sent 1,951 million tons to port from the start of the season on October 1 to July 30 which is 36% above the amount sent last year.
Meanwhile, some hedge funds have switched from buying grains to soft commodities which had lifted the price to above the $2000 per ton level reaching a high of 2090 on Tuesday. Expectations for a smaller crop next year because of recent rainfall in West Africa have also supported the price of cocoa beans.
Grinding data is mixed
Grinding data is one of the best ways to assess demand for cocoa and while there was an over 9% increase in Asian grinding, recent data from North America point to tepid demand. However, the weaker dollar has caused some speculators to buy cocoa after the price destruction that took the price below the $2000 level. When it comes to demand, the bottom line is that growing global population, Asia’s increasing desire for chocolate confectionery products, and the lower price are likely to cause demand to remain buoyant.
The line in the sand for the upside in cocoa
Cocoa has been trading around the $2000 per ton level which has become a pivot point for the commodity that needs an equatorial climate to thrive. Source: CQG
As the daily chart illustrates, active month September cocoa futures have been trading around the $2000 level since March. The line in the sand on the upside currently stands at $2114, the June 13 highs. Above there, the March 21 peak at $2190 is a critical level of technical resistance for the price of September cocoa futures. The price rose to a high of $2090 on Tuesday, August 01 which was a new short-term high, but it turned around and closed below the previous day’s low. The bearish key reversal trading pattern on the daily chart and momentum that has risen to overbought territory likely will lead to a return to price levels below the pivot point for cocoa futures over coming sessions.
The high odds play is that cocoa will remain in its trading range
The weaker dollar is supportive for the price of cocoa and other commodities. Abundant supplies and grinding data that is bullish in Asia but not quite as supportive in other areas of the world continue to weigh on the price of the critical ingredient in chocolate. Source: CQG
The weekly chart highlights the bearish price move that began in late 2015 and picked up steam when cocoa fell below technical support at $2731 in September 2016. Cocoa entered a period of consolidation over recent months, but the weekly chart still shows a pattern of lower lows in May and June when it comes to the active month ICE futures contract. It is likely that cocoa will need a prolonged period of consolidation where it traded in a range from $1800-$2100 per ton, perhaps for the rest of 2016, to build cause to recover significantly from the price damage done since last September. September cocoa futures closed on August 1 at $2023 per ton putting in a bearish trading pattern on the first trading session of August. While cocoa spent a few days over the $2000 level, it looks like it is once again failing and will return to probe the lower end of its trading range. I believe the high odds play is that cocoa will continue to trade in its current range and will look great on the highs and terrible as it approaches the lows. I am not looking for an imminent breakout to the up or downside in the cocoa futures market, and it is likely that range trading will dominate price action over the coming weeks and months.
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