- Cocoa prices are once more trending northwards after supply concerns re-emerged. The week's poor start by the US Dollar is also helping.
Cocoa prices extended their volatile relief rally over the weekend as the market continues to navigate two competing macro drivers. Concerns over supply tightness persist, even as fears of a weakened chocolate demand following sky-high prices two seasons ago continue to cap recovery.
Macro Drivers: Supply Constraints vs Weaker Demand
Cocoa prices are primarily a function of supply and demand, with the supply component determined mainly by the top producers in West Africa, mostly in Côte d’Ivoire and Ghana, which come in as the top 2 producers. Weather patterns and crop stress from age and disease are factors currently dictating supply dynamics. These set off record prices above $11,000 per ton in 2024, which eventually curtailed demand from chocolate manufacturers.
Furthermore, the broader risk sentiment stemming from the oil shock has created a stronger US Dollar environment. There is also the factor of stymied global growth expectations as higher energy prices impact logistics costs. However, supply constraints continue to underpin prices, helping cocoa outperform other agro-commodities, especially as these constraints cannot be fixed in the near term.
On the demand side, discussions continue over how chocolate companies will adjust to the new price environment and whether retail consumption will return to levels it reached a few years ago. Many chocolate producers adjusted to the high prices of cocoa beans by reformulating their chocolate products, product package resizing and reduced purchases from producing countries. However, there is a likelihood of a demand return after cocoa prices fell below $3,000 last month. For instance, shares of Nestle India indicate price recovery in the near term for this cocoa product manufacturer.
Cocoa prices are viewed through the prism of a supply story rather than as a traditional macro-driven commodity asset. Prices will remain sensitive to the following supply metrics:
- Rainfall patterns
- Crop development
- disease, especially black pod.
- Export data from CIV and Ghana
Technically speaking, cocoa prices remain a momentum-driven commodity. Price action continues to show wide intraday ranges, and respecting identified historical support and resistance targets. This is reflective of more aggressive institutional positioning as major players reposition to take advantage of cheaper prices that have retraced 80% from the Dec 2024 highs.
Cocoa Price Action: Technical Outlook
The bounce from the 2926 price mark, the previous high of 10 February 2020, is now testing the 4500 psychological resistance and 78.6% Fibonacci retracement of the 26 September 2022 low to the 24 December 2024 peak. A break of this barrier would unlock access to the 6340 resistance, formed by the prior high on 5 January 2026. If this level is uncapped, the 7584 resistance and the base of the completed descending triangle come into play.
On the flip side, rejection at the current barrier makes a case for a push south to retest the 2926 support level. If this support fails to hold firm, a further decline towards the 26 September 2022 low at 2189 cannot be ruled out.
