When I was approached to delve into the world of cocoa, it wasn’t due to my prior writings on the subject (which date back nearly a year) or my interactions with market aficionados like Myra Saefong of MarketWatch. No, it was the undeniable sizzle surrounding cocoa that sparked the request. A quick perusal of the Barchart news page reveals a flurry of recent articles on the topic. What stands out isn’t the content itself, but the amusing game of pinning authors to a particular ideology. Some blame Biden and inflation for the rally while others point fingers at global warming. The truth, as always, likely lies somewhere in between.
Similar to other agricultural commodities, cocoa is a primary producer of weather derivatives. To decipher the cocoa conundrum, we must focus on two critical aspects: the primary cocoa-producing regions worldwide and the prevailing weather conditions in these areas. By aligning these facts, we can uncover the core question: Is cocoa being propelled by supply constraints or a surge in demand?
But what sets a supply-driven market apart from a demand-driven one? A supply-driven scenario often invokes images of a “weather market,” where short-term supplies face jeopardy due to adverse weather conditions. Such situations typically trigger a temporary price spike that fizzles out post-harvest when fresh supplies flood the market.
On the flip side, a demand-driven market sees new demand surging amidst stable to growing supplies. This results in a lasting shift in price expectations compared to the transient nature of short supply scenarios. A prime example of a demand-driven market transformation can be observed in the corn sector post the US Energy Policy Act of 2005, which introduced new renewable fuel standards and revolutionized the ethanol industry, propelling corn prices to unprecedented highs.
So, where does cocoa stand as we head into late March? Let’s lay the foundation with two key facts:
- Approximately 60% of global cocoa production emanates from West Africa, specifically Cote d’Ivoire and Ghana.
- The recent climate phenomenon El Nino, which brought relief to South America impacting commodities like coffee and orange juice, led to higher temperatures and humidity in West Africa.
In my research, I stumbled upon an enlightening article penned by Rich Asplund, which provided comprehensive insights into the raw supply and demand dynamics of West African cocoa trade. The crux of the matter is that, primarily due to weather-related factors, supplies are struggling to keep pace with the burgeoning demand. Although such weather events have occurred in the past, Asplund notes that the current supply-demand imbalance is the most severe in over 40 years.
In terms of demand, my exploration led to no groundbreaking revelations regarding novel applications for cocoa beyond traditional uses. While cocoa isn’t being converted into fuel, its allure remains intact among consumers worldwide who indulge in its delights with unwavering enthusiasm, albeit with growing concerns over escalating prices, particularly evident as Easter approaches.
The verdict: Cocoa appears to be riding the wave of a supply-driven market at present. While the longevity of this trend remains uncertain, it’s challenging to envision a sustained appetite for the nearby May futures contract breaching the $8,800 mark witnessed early Friday morning. As seen in the recent past with orange juice, coffee, and sugar markets, a shift in weather patterns could swiftly bring cocoa prices back down to earth. However, given the unpredictability of West African climates, the notion of another scorching growing season cannot be discounted.
[i] A ubiquitous phrase ceaselessly invoked in diverse contexts, rendering it devoid of substantive meaning and reduced to a mere punchline.
[ii] An oft-repeated claim that has metamorphosed into a recurring joke, akin to “Why did the chicken cross the road? Global warming!”
[iii] Noteworthy is the price range remaining consistent, hovering around $1.50, albeit shifting upwards over time.
[iv] Several title suggestions for this piece were mooted, such as “Easter Comes at a Price” and “The Easter Bunny Drives an Armored Truck”.
More Weather News News from Barchart
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
