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Cocoa futures at the mercy of the dollar

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Cocoa futures have been at the mercy of the US dollar recently and have risen and fallen this week as the dollar reacted to US domestic economic news. The dollar-related moves are playing out against a wider backdrop of a tighter cocoa market however.

A better-than-expected US inflation report earlier this week caused the dollar to drop sharply, subsequently boosting cocoa prices. However, by the end of the week the dollar’s decline softened and cocoa prices notched lower, as did many other commodities.

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Tighter global cocoa supplies versus high inflation – which will win out?

In its latest Cocoa Market Report the International Cocoa Organization said that the cocoa market remains in a supply deficit for the ongoing 2021/22 season, but that issues such as inflation and currency strength are bringing in an element of uncertainty over future demand in the large cocoa and chocolate consuming regions, namely Europe, the US and China.

The ICCO’s next market report is due early next week.

Also, despite lower cocoa production levels this season the ICE Futures licensed warehouses in Europe and the United States are still holding a relatively high level of cocoa stocks compared with last year, a carryover from the pandemic when demand dropped in key consuming regions.

Over the last few months, the industrial price index of chocolate manufacturing products increased by 5.0%, while in the US the increase was even more pronounced at 7.7%. This combined with an overall higher inflation rate will start nibbling at chocolate and cocoa demand.

No supply bottlenecks

Unlike with many other commodities which face supply and distribution issues, for the moment there are no bottlenecks in the haulage of cocoa. However, problems with freight, high freight prices and transport disruptions are having an impact on fertilizer supplies used by cocoa farmers and this shortage will start being felt in next year’s crop and bean size and quality.

“Given the conducive meteorological conditions, other parameters like aging cocoa trees or cocoa-related diseases as well as poor agricultural practices could have contributed to reducing the yield of cocoa farms and subsequently lowering the level of arrivals and purchases in Côte d’Ivoire and Ghana respectively,” the ICCO said.

Producing countries raise price differentials

Ghana and Cote d’Ivoire, the world’s two largest producers, have recently pushed through higher selling prices to secure living wages for their farmers. Ghana, which produces a higher quality bean than its neighbour Cote d’Ivoire, in August decided to charge another GBP20 per tonne for beans exported to European countries and the US, raising the price differential from a discount of GBP50/t in July. Cote d’Ivoire completely removed its GBP125 per tonne discount from July and set the premium at zero.

Nigeria, the world’s fourth-largest cocoa producer, also aimed to push through a high price differential for cocoa exports but the effect of the decision has been blunted by a significant decline in exports earlier this year.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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