In a November 20, 2023, article on cocoa futures, I wrote:
Over the past years, cocoa, sugar, coffee, cotton, and frozen concentrated orange juice have risen to multi-year highs. FCOJ moved to a new record peak over the past weeks. The soft commodities sector has been on bullish fire, and cocoa joined the party with a rise to a forty-five-year high. The trend is always your best friend in markets and remains higher in cocoa. A move to challenge the all-time high is possible.
On November 20, 2023, nearby ICE cocoa futures were at $4,051 per ton. In early February 2024, the price at the high was nearly $2,000 per ton higher, eclipsing the 1977 record peak.
Cocoa’s rally continues
After reaching a $1,979 per ton bottom in June 2017, ICE cocoa futures have made higher lows and higher highs.
The chart shows the bullish pattern that has taken cocoa futures to the most recent high of $6,030 per ton on February 9. The cocoa rally shows no sign of slowing down any time soon.
The 1977 high is left in the dust
Cocoa rose above the 1977 high, the highest price in forty-seven years.
The long-term chart dating back to 1970 highlights cocoa’s ascent with the target at the 1977 $5,379 per ton record peak. Cocoa futures have experienced a parabolic rally since reaching the latest $2,192 per ton low in September 2022, as the price has moved over 175% higher, and the aggressive bullish trend remains firmly intact.
Inclement weather in West Africa is pushing prices higher and supplies lower
The Ivory Coast and Ghana are the world’s top cocoa-producing countries.
In the mid-1970s, weather conditions lifted cocoa prices to record highs. In 2023 and early 2024, inclement weather in West Africa has done the same. Excessive rain has caused harvest delays and could lead to destructive crop diseases. The weather across critical growing regions is always the most significant factor for the path of least resistance of agricultural commodities prices. Cocoa is rallying as Mother Nature and the weather have created the potential for substantial shortages, pushing prices higher.
The cyclical nature of commodity prices suggests a top could be on the horizon
Commodities are a volatile asset class, with bullish or bearish trends often taking prices to extremes on the up and downsides.
Cyclical commodity prices tend to fall to levels where producers decrease output, consumers increase buying, and inventories decline, leading to price bottoms. Conversely, they often rise to levels where production increases, buying declines, and inventories grow, leading to significant tops. While cocoa prices could continue to increase over the coming weeks and months as supply deficits widen, they will eventually rise to an unsustainable level. The correction could be fast and furious when prices run out of upside steam. Therefore, market participants holding long positions should use trailing stops to protect profits and capital.
Be careful as prices can reach levels that deft rational fundamental analysis- FCOJ futures are the model
Bullish or bearish trends often take prices to levels that defy logical, reasonable, and rational fundamental and technical analysis. Trends are always our best friends, but the potential for a cyclical high in cocoa futures is rising with the price. Picking tops in any market is dangerous, as the market learned in 2023 in another soft commodity, frozen concentrated orange juice.
The long-term frozen concentrated orange juice futures chart shows that before 2023, the highest price since 1970 was the 2016 $2.35 per pound peak. In 2023, FCOJ took out the 2016 as a hot knife goes through butter. The price rose to $4.3195 per pound in October 2023 before plunging below $2.90 in January 2024. While the price recovered to over $3.75 in February 2024, the brutal correction came as FCOJ rose to an unsustainable price, at least in the short term.
Cocoa future’s rapid rise could set the soft commodity up for a sudden plunge. Sky-high cocoa prices could impact the soft commodity’s demand, significantly correcting the price. While the trend is always your best friend and cocoa’s remains bullish in February 2024, remember that bulls and bears make money in volatile commodity markets, while pigs tend to be slaughtered when trends turn. Therefore, bulls should use trailing stops and stand aside if the price begins to decline.
There is no limit on the upside potential in a bull market, but the results can be devastating when the trend bends in commodities and other asset classes. The higher cocoa prices rise, the greater the odds of an implosive correction.
More Softs News from
- Cotton Futures Starting Strong into Friday
- Cotton Market Finished Higher on Report Day
- Cocoa Prices Extend a Parabolic Rally to Record Highs on Limited Supplies
- Sugar Prices Underpinned as Adverse Weather Threatens Global Sugar Output
On the date of publication, Andrew Hecht 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 Disclosure Policy here.
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