Commodity traders are having a mixed year as the Bloomberg Commodity Index remains 10% below its highest point in 2023. Commodities like lithium, cobalt, nickel, and natural gas have all plunged. Cocoa price, on the other hand, has jumped to its highest point on record, becoming the best performer in the world.
Why cocoa is surgingCocoa price surged to a record high of $6,697/ton amid a lingering supply and demand mismatch in the industry. It has soared by more than 150% from its lowest point in January last year.
I have covered this remarkable rally before as you can see here and here. In these articles, I noted that cocoa’s surge is because of the ongoing shortage from key countries like Ghana and Ivory Coast because of weather and disease-related reasons.
In the recent article, I also noted that a major fire in Nigeria was contributing to this shortage. This fire affected tens of acres of cacao trees in the third-biggest cocoa-producing country in Africa.
These reasons are valid. However, the main reason why cocoa is struggling is that the industry has gone through decades of under-investment.
Unlike other commodities, cocoa is not grown by large farms or companies. Instead, most of its producers are local farmers who use their funds for subsistence.
As a result, since cocoa prices remained low for decades, many of these farmers and the government did not bother investing in it. Many farmers also uprooted their trees to focus on other profitable crops.
Now, the lack of investments and the fact that most cacao trees are over 20 years old mean that the supply pressures will remain for a while. Older trees, as in other crops, leads to low yields and high susceptibility to diseases.
It is also worth noting that farmers in Ivory Coast and Ghana are not necessarily benefiting from the ongoing cocoa price surge. These farmers rely on futures contracts, which were placed when the price was much lower.
Why cocoa prices may keep rising
Cocoa price chart
Most commodities are usually highly cyclical, meaning that higher prices lead to more output. We saw this recently with EV battery metals like cobalt and nickel. When they jumped, most producers came to the market and saturated it.
The same is true among other commodities like corn and soybeans. This, however, may not happen with cocoa, which is expected to remain in a deficit for a while.
Like orange juice, cacao trees take a few years from the time they are planted until when they start producing. As such, a tree planted in 2024 will start producing at least in 2028, meaning that it will not have any impact on supplies today.
In the meantime, demand is expected to remain at an elevated level as the middle class, especially in Asia expands. The most recent results by most chocolate companies like Mondelez and Hershey showed that sales were still accelerating.
The only viable reason why cocoa price may pull back is based on technicals since it has become highly overbought. As a result, this can trigger investors and traders to start taking profits in the coming weeks.
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