A Bullish Surge in Cocoa: Analyzing the Rally’s Potential

Cocoa Prices

As of November 20, 2023, nearby ICE cocoa futures were trading at $4,051 per ton. Fast forward to early February 2024, and the price surged by nearly $2,000 per ton, surpassing the 1977 record peak.

Continued Momentum in Cocoa’s Rally

Since hitting a low of $1,979 per ton in June 2017, ICE cocoa futures have consistently formed higher lows and higher highs. This bullish pattern, culminated in the recent high of $6,030 per ton on February 9, with no apparent signs of deceleration, the cocoa rally seems poised to persist.

Outpacing the 1977 Peak

Cocoa’s ascent has propelled it beyond the 1977 high, marking the highest price observed in forty-seven years. A long-term chart tracing back to 1970 showcases cocoa’s remarkable trajectory, targeting the 1977 record peak of $5,379 per ton. Since hitting a low of $2,192 per ton in September 2022, cocoa futures have surged over 175%, maintaining an aggressively bullish trajectory.

Weather Challenges in West Africa Drive Prices Upward

The Ivory Coast and Ghana, major cocoa-producing nations, have been grappling with adverse weather conditions. Similar conditions in the mid-1970s had previously propelled cocoa prices to historic highs. In 2023 and early 2024, excessive rainfall led to harvest delays and heightened concerns about crop diseases, exacerbating supply shortages. Given the pivotal role of weather in agricultural commodity pricing, cocoa is witnessing a surge driven by the potential for significant supply deficits.

Anticipating a Cyclical Peak

Commodity markets are inherently volatile, often experiencing extreme price movements driven by cyclical trends. Typically, prices rise to unsustainable levels as production increases, demand wanes, and inventories expand, signaling a potential peak. While cocoa prices may continue their ascent in the near term, reaching unsustainable levels, a correction looms on the horizon. Participants holding long positions are advised to implement trailing stops to safeguard profits and capital.

Drawing Lessons from FCOJ Futures

The experience of frozen concentrated orange juice (FCOJ) futures in 2023 serves as a cautionary tale. FCOJ prices soared to unsustainable heights before undergoing a precipitous correction. A similar scenario could unfold for cocoa futures, potentially impacting demand and precipitating a significant price correction. While the bullish trend persists, prudent risk management is paramount to navigating volatile commodity markets successfully.

Navigating the Bull Market Terrain

In bull markets, the upside potential is theoretically limitless, but the risk of a sharp reversal looms large. As cocoa prices soar, the likelihood of a sharp correction increases. Bulls must exercise caution, utilizing trailing stops and exercising restraint in the face of declining prices. In volatile commodity markets, both bulls and bears can profit, but those who become greedy risk significant losses when trends reverse. Therefore, prudent risk management is essential to mitigate downside risks and capitalize on potential gains.

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