U.S. cocoa futures have rallied more than 30 percent in 2018 so far, sharply outperforming other core U.S. commodities on signs of improving demand and forecasts for a smaller global surplus.
Benchmark ICE Futures U.S. New York cocoa futures have rallied around 34 percent since the end of 2017 to a 16-month high at $2,569 per tonne on Monday, up from a five-month low of $1,812 in December.
This has made it by far the best U.S. performer this year to date on the 19-market Thomson Reuters Core Commodity Index . U.S. wheat is in second place with a 14 percent gain while raw sugar is the weakest, having dropped more than 16 percent.
“There is (a) shortage of cocoa beans in Ivory Coast and exporters struggle a little to fulfill export commitments,” said Carlos Mera, Rabobank senior commodity analyst, adding that “pod counts have not been great.”
Prices have been buoyed by signs of improving demand after bean grinding jumped in Europe and Asia in 2017, though it fell slightly in North America. Grinding is a traditional gauge of demand for chocolate’s key ingredient.
Adding to supply concerns, Ivory Coast’s Coffee and Cocoa Council said last week it will suspend programs that boost 2018/19 output as it aims to reduce production in the face of global oversupply. On Wednesday, No. 2 grower Ghana cut its 2017/18 cocoa crop forecast.
“The extremely high combined ratio for cocoa beans versus cocoa butter and powder have given huge incentives for grinders to maximize processing output, thereby causing a very healthy increase in global grinding demand,” said Shawn Hackett, president of Hackett Financial Advisors, referring to current high prices of cocoa butter and powder produced and sold by grinders.
“The current Ivory Coast (bean) arrivals are coming up short against expectations and that has clearly tightened up the balance sheets.”
Technical buy signals have also spurred prices higher, as the market started to recover from the 41 percent drop of 2016 and 2017.
“The market was correcting from being way oversold and far too cheap because the market wasn’t really reflective of the true cash market,” said Judy Ganes of J Ganes Consulting.
At some point, however, the buying will run out and the market will fall “even faster than it went up,” Ganes said, though she expects it to remain above 2017 lows due to improved demand.
Prior to Ghana’s revised crop forecast, the International Cocoa Organization called for a global surplus of 105,000 tonnes in 2017/18, down from 300,000 tonnes the prior year but higher than chocolate maker Lindt & Spruengli’s forecast for a surplus of 50,000 tonnes.
“(There is) growing recognition that it is likely that, even if nominal, we are likely to have a deficit in 2018/19,” a U.S. broker said.
The rally pushed New York cocoa futures above 84 on the relative strength index, the most technically overbought level in a decade as speculators switched to their biggest net long position in a year-and-a-half.
The move also coincided with the New York market holding a rare premium over London cocoa futures. It rose to around $80 last week when priced against spot sterling, the highest since 1977.