Cocoa: Last Year’s Top Commodity Is This Year’s Laggard

As January trading neared its close on Wednesday, global cocoa futures were down about 10 percent on the year, settling New York trade at $2,174 a tonne and London trade at $1,582.

The beverage and confection commodity had rounded out 2018 with a 26 percent gain. This year, it has been the biggest commodities loser in dollar terms, with the market in New York ceding more than $240 a tonne in January (desktop users, click here and go to “performance” to see all relative commodity returns).

While one month of trading doesn’t make a year, cocoa’s problem is that its demand outlook doesn’t look promising in the near-term, analysts said.

Jack Scoville, vice president at The Price Futures Group in Chicago and author of its softs report, said projections for cocoa production in West Africa to Asia were instead strong. He added:

"The crop production estimates might become smaller due to Harmattan winds and hot and dry conditions that have moved into West Africa but the winds have stayed to the north of primary production areas so far this season. And conditions appear good in East Africa and Asia.”

“The main crop harvest is starting to wrap up in West Africa and the ports are said to have plenty of cocoa on offer. Ivory Coast arrivals are now at 1.31 million tons this year, up 9 percent from last year.”

Shawn Hackett, founder of Hackett Financial Advisors, a crop markets consultancy in Boca Raton, Florida, has a similar outlook on the crop.

Said Hackett:

“It is very hard to see cocoa prices breaking out to the upside from the current two-sided trade without a legitimate weather problem surfacing in West Africa.

“We do feel that this market will eventually break out as it is highly likely that we will get some adverse weather in 2019 due to El Nino. But we do not yet see a credible threat yet on the horizon.”

Meanwhile, daily and weekly price trends on the New York and London markets were weak, said Scoville, and that could delay a recovery from both the fundamental and technical perspective.

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Investing.com, meanwhile, has a “Strong Sell” for New York cocoa on its daily technical outlook after benchmark March futures hit a six-week low of $ 2,163 on Wednesday.

Investing.com’s Level 3 Fibonacci support for New York cocoa—the strongest—is at $2,157, meaning the market could lose another $20 from current levels before investors see the need for a technical buy-in.

Mike Seery, founder of Seery Futures, a technical advisory for commodity futures in Plainfield, Illinois, noted that New York cocoa futures were trading below their 20 Day- and 100 Day-Moving Averages, defining a negative trend.

Said Seery:

“I do think the downside is very limited, but there is still the possibility prices could retest the $2,000 to $2,100 level. Therefore, I'm advising clients to avoid this commodity and wait for the real breakout.”

Last year’s rally in cocoa was driven primarily by a better global economy that ended the market malaise of the previous two years, which had in turn led to a 33 percent rout in 2016 and an a 11 percent slump in 2017.

Hackett said that despite a Western African crop coming in at quality below market expectations, due to a lack of investment, cocoa remained “well bid on breaks” throughout last year. He added:

“Insider capital flows have started to improve lately but have not yet reached buy-signal levels yet. End users should be looking to buy on any breaks to the $2100 area or lower.”

Written By: Investing.com