Cocoa is a soft or luxury commodity. All over the world, most people love chocolate. Once a youngster tastes the delicious treat, they become a chocoholic -- addicted for life. Cocoa beans can only grow in certain, equatorial climates. More than half the world's cocoa production comes from two countries in West Africa, the Ivory Coast and Ghana. As these nations are in an area of the world that is poor and underdeveloped, this contributes to the volatility of the commodity.
The price of cocoa traded at $795 per ton in January 2000. Since 2000, the price of cocoa beans has rallied and the bull market has resulted in a series of higher highs and higher lows. The last high on the active month ICE cocoa futures market corresponded with highs in the overall commodity bull market. In March 2011, cocoa peaked at $3826 per ton -- almost five times the price it traded in 2000. Since 2011, the prices of many commodities have moved significantly lower. During the last four years, the price of cocoa has also corrected lower, trading at lows of $1,898 per ton in December 2011. Since then, cocoa has been moving higher contrary to the action in other commodity markets. The price of sugar, another soft commodity, is trading at under to 11 cents per pound as of the middle of August 2015. Sugar is one-third the price it was at its highs in 2011 when it traded at over 36 cents per pound. The price of coffee was at around $1.40 per pound in mid August 2015, which was also significantly lower than its May 2011 highs at $3.0625.
Meanwhile, cocoa, which is around $3060 per ton, is the strongest soft commodity, its all-time highs of $3,826 still within view. Some important fundamentals support the price of cocoa these days. Those fundamentals come from both the supply and the demand side of the equation.
On the supply side, the Ivory Coast and Ghana are third world African nations. Many people in these nations are poor and many are involved in agriculture including the cocoa business. Two things can go wrong when it comes to cocoa production in these two nations, a crop can go bad or the logistics of getting that crop to port can become challenging or impossible. Over the past few months, two issues have had effects on cocoa supplies. Worries that the Ebola virus that swept across Africa would affect the cocoa crop caused a price rally in the fall of 2014. Those worries never materialized and prices fell back. More recently, Ghana reported that their crop will be 22% lower than the previous year -- this caused the rally that took cocoa from around $2700 in March 2015 to almost $3400 in July.
On the demand side of the equation, Asian demand for chocolate confectionary products has been growing for years. The population growth on the Asian continent has been explosive and at the same time, the standards of living have increased. More Asians, particularly in China, have discovered the wonders of chocolate. Demand for cocoa beans is therefore increasing. Consider the potential for an increase in global demand for cocoa beans when a population of over 1.36 billion now craves more and more chocolate treats.
While commodity markets have been in a secular bear market since prices peaked in 2011, at least one commodity stands out these days due to increasing global demand and recent supply worries. With the world economic landscape weak today, imagine what the price of this luxury commodity would have done had all other raw material prices remained firm. Even in the face of a rising U.S. dollar, cocoa has managed to maintain its value and move higher. Cocoa has been on a wild ride since the year 2000 and that ride is nowhere near over. As population increases and more chocoholics have the itch today for a sweet tasty treat, chances are the price will eventually exceed all-time highs and the price will continue to be volatile as supply and demand factors influence short-term market action. Cocoa trades, in the U.S. on the Intercontinental Exchange (ICE). Each futures contract represents 10 tons of cocoa beans.
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